Monopsony and collective action in an institutional context

Recent empirical research has documented a dramatic change in government’s role in regulating employer–employee relations, a collapse in workers’ collective action, and low wage growth contributing to rising inequality. To better understand the theoretical connections between these variables, we construct a monopsony-wage-model that integrates intertemporal strategic interaction between workers and employers in the wage setting process into an institutional context. We show that workers’ collective action reduces rents to firms. However, workers face multiple obstacles from engaging in collective action. In an environment that does not support workers, as is currently the case, it is maximizing for employees to engage in very little collective action, and, as a result, wage inequality is exacerbated.