Timing “Disturbances” in Labor Market Contracting: Roth's Findings and the Effects of Labor Market Monopsony

Abstract

This paper addresses Alvin Roth's findings of market contracting at times earlier than optimal for market participants, which Roth describes as market "unraveling," a market failure he proposes to solve by designing centralized buyer-seller matching programs. This paper shows that, while Roth's engineering solutions are ingenious, the early contracting phenomena derive from labor market monopsony. Under monopsony, price is unavailable to clear the market; time of contract becomes the currency for working out market forces. Roth's matching serves to shore up the monopsony and would be unnecessary if the monopsony were removed; a superior solution is to end the monopsony. (c) 2010 by The University of Chicago. All rights reserved..