Supply Chain and Logistics

What’s the truth? Some experts say that terminals must be able to handle giant ships and therefore few customers, or fail.  Olaf Merk (of the OECD) says it looks like a ‘monopsony’; a port has only one or very few customers. Actually according to Alan Manning [1], who ‘wrote the book’ on monopsony, a monopsony simply means that there is little elasticity of supply (of incoming containers i.e. ships) for the port.

The classic monopsony situation occurs in labor supply; the ‘company town’. It used to be seen in mining and very early, in manufacturing.  In a company town, if you want to work, you have to work for the one employer.  The firm must raise wages for all employees if it needs more than are available at the town. If it needs fewer employees, it can drop wages.  Manning’s book defines labor monopsony as any case in which the labor supply (of workers) is inelastic (relatively vertical supply curve) while labor demand by the employer is elastic (downward sloping demand for labor).

What makes for inelastic labor supply? In the company town it happens because workers feel they don’t have mobility flexibility– it’s too far to the next place to work. But monopsony can happen for lots of reasons– discrimination, for one, can limit workers’ ability to get a different job.  In fact, any condition that prevents workers from seeking other work, and thereby constricting individuals’ market for jobs, suffices. Examples include safety on the job, or most recently in the news, forcing truck drivers to lease their trucks through a drayage firm.  The huge lease obligations pin the drivers to the job, and they lose control of work conditions and in the case of trucking, pay scales as well, since the drayage work in US ports is often piece work rather than (often unionized) pay by the hour.

In the port example the port is the labor supply– if the port is forced to upgrade to support ULCC ships in the 17-20KTEU range, it will be captive to those carriers that wish to run those big  ships to it. These consume so much port capacity that the port will not be able to solicit other jobs from smaller ships.  If it does, congestion will result.  The very few carriers calling there with their ULCCs will demand lower prices to land, and the port ‘wage’ will decline. That naturally also affects their profitability.

And the ports that don’t adapt to the large ships will not be able to get work at all, or nowhere near as much. It’s like the people living too far from the company town (on the remote farms) who will fall out of the labor market for that firm.

Such fun employing economic analysis to ports.

Source: Some box terminals are facing ‘catastrophic economic failure’, warns analyst – The Loadstar

[1] Alan Manning (2003) Monopsony in Motion