Case Study 1 — Monopsony in Millbrook: Why Riverside Foods Can Pay Less Than the Competitive Wage

Riverside Foods employs about 800 production workers at its Millbrook plant. The average production wage is $22/hour — which is above the current minimum wage but below what a competitive labor market would pay for similar work in a larger metropolitan area.

This case study applies the monopsony framework from §21.4 to explain why Riverside pays what it pays, why it's able to sustain wages below the competitive level, and what policy responses might look like.

The labor market around Millbrook

Millbrook is a small city (population ~85,000) in a predominantly rural county. The major employers are MSU (5,200 employees), Walden County Medical Center (3,100), Walden County government (1,400), Riverside Foods (1,100), several mid-size manufacturers (3,000 total), and a retail/service sector that employs the balance.

For production workers — people who can operate processing equipment, work on a line, and do physical labor — the realistic options in Millbrook are: - Riverside Foods: $22/hour, benefits (health insurance after 90 days, 401k match after 1 year) - Other manufacturers: $18–24/hour, variable benefits - Walden County Medical Center (for non-clinical workers like housekeeping, food service, transport): $16–19/hour, good benefits - Retail/food service: $14–18/hour, limited benefits - MSU (for custodial, maintenance, grounds): $17–20/hour, good benefits

For a production worker in Millbrook, Riverside is one of about 5–8 realistic employers. This is not a perfectly competitive labor market with "many" employers. It's an oligopsony (a few buyers) verging on monopsony (a dominant buyer) in the segment of production labor.

How monopsony affects wages

In a perfectly competitive labor market, the wage would equal the MRPL. If a Riverside production worker produces $30/hour of value (based on the value of the frozen vegetables they process), the competitive wage would be close to $30/hour.

In a monopsony, the employer can pay less than $30/hour — because the worker's alternatives are limited. The worker's next-best option might be $18/hour at a different manufacturer or $16/hour at the hospital. The worker accepts $22/hour at Riverside not because that's the competitive wage but because it's better than the alternatives.

The gap between the competitive wage (~$30, based on MRPL) and the monopsony wage ($22) is the monopsony markup — roughly $8/hour that the employer captures because of its labor-market power.

Evidence of monopsony in Millbrook

Several pieces of evidence suggest monopsony power:

1. Wage compression. Riverside pays all production workers within a narrow band ($20–24/hour), regardless of experience or productivity differences. In a competitive market, more productive workers would earn more (because other employers would bid for them). The lack of wage differentiation suggests that no other employer is actively bidding for Riverside's workers.

2. Low turnover despite below-market wages. Riverside's annual turnover rate for production workers is about 15% — lower than the manufacturing average of about 25%. If the labor market were competitive and workers felt they were underpaid, more of them would leave. Low turnover despite below-competitive wages is a hallmark of monopsony.

3. Long commute distances. Workers who commute to Riverside drive an average of 25 minutes. Workers at competitive-wage employers in larger metros typically commute less. The willingness to commute suggests that local alternatives are limited.

4. Slow wage adjustments. When the tight labor market of 2022–2023 raised wages nationally, Riverside's production wages rose only modestly ($20 to $22 over two years). In a competitive market, wages would have risen faster. The slow adjustment suggests market power.

What a minimum wage would do

Suppose Walden County implements the proposed $14/hour minimum wage (from [Chapter 7](../../part-02-how-markets-work/chapter-07-government-intervention/index.md)). For Riverside production workers earning $22/hour, this has no direct effect — they're already above $14.

But suppose a state minimum wage of $18/hour were enacted. Now:

In the competitive model: the $18 wage is below both the current Riverside wage ($22) and the competitive wage (~$30). No effect on Riverside workers.

In the monopsony model: the $18 minimum is below the current monopsony wage ($22), so it has no effect on Riverside either. But it does affect the workers at the lower-paying employers (hospital non-clinical at $16–19, retail at $14–18). Those employers must raise wages to $18, which improves those workers' alternatives. With better alternatives, some workers would leave Riverside for now-comparable jobs at other employers. Riverside might then need to raise wages further to retain workers — potentially pushing the wage closer to the competitive level.

This is the indirect effect of a minimum wage in a monopsony setting: it improves workers' outside options, which constrains the monopsonist's wage-setting power.

What other policies could help

1. Strengthening worker bargaining power. If Riverside production workers unionized, the union could negotiate wages closer to the competitive level. Union-negotiated wages in manufacturing are typically 10–20% above non-union wages for comparable work.

2. Improving worker mobility. Better public transit in Walden County would expand workers' geographic range of employment, reducing Riverside's monopsony power. A worker who can easily commute 45 minutes has more options than one who can only commute 20 minutes.

3. Transparency. Requiring employers to post wage ranges for open positions (as some states now mandate) reduces information asymmetry in the labor market and makes it harder for employers to underpay.

4. Attracting more employers. Economic development efforts that bring new employers to Walden County would increase competition for workers and push wages up. The proposed Millbrook Innovation Hub (Chapter 35) could help if it creates jobs at competitive wages.

Discussion questions

1. Riverside pays $22/hour while the MRPL is estimated at $30/hour. Is the $8 gap "exploitation," or is it a normal feature of a less-than-perfectly-competitive labor market?
2. Low turnover can indicate satisfied workers OR workers with no alternatives. How would you distinguish between the two?
3. Would unionization help Riverside production workers? Apply the monopsony framework. What might the employer's response be?
4. The case study suggests that better public transit would reduce monopsony power. Why? What other infrastructure investments would have the same effect?
5. Apply the Millbrook labor-market analysis to a city you know. Does it have monopsony features? For which types of workers?