Antitrust Law Might Help You Get the Bigger Paycheck You Deserve | Eric Posner
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The spectacle of the antitrust challenge to Big Tech has been riveting. But a far more consequential transformation in antitrust law has largely escaped notice — the movement to use antitrust law to address wage suppression and inequality caused by the power of employers in labor markets.
Economic theory says that when a pool of workers has only one potential employer, or a small number of potential employers, those workers will be paid below-market wages. Without the credible threat to quit and work for a competitor, workers lack leverage that could allow them to secure a raise and better conditions. This situation is sometimes called +monopsony, and it is similar to +monopoly in the market for goods. When buyers have no choice among sellers, a monopolist can charge high prices; when workers have little choice among employers, the employer can “charge” low wages.[1]
cites LABOR MARKET MONOPSONY: TRENDS, CONSEQUENCES, AND POLICY RESPONSES | Council of Economic Advisors, October 2016
Over the past several decades, only the highest earners have seen steady wage gains; for most workers, wage growth has been sluggish and has failed to keep pace with gains in productivity (CEA 2015, Ch. 3). Though the slowdown in wage growth is partly due to a slowdown in productivity growth since the 1970s, the share of income accruing to labor has also been falling. Over the past 15 years, while profits rose, the decline in labor’s share of national income accelerated, reaching its lowest level ever since World War II. And though this trend has begun to show signs of reversal since mid-2014, labor’s share of income is well below the 2000 year level (Figure 1).
At the same time, labor income itself has become increasingly unequally divided. Researchers have focused on the divergence between worker skills and employer needs—a challenge brought about by technological change and a trend in educational investments that, while rising, has not kept pace with demand, which has risen even faster (Autor 2014; Katz and Murphy 1992; Goldin and Katz 2007). Others have examined more institutional hypotheses, including the erosion of the minimum wage (Autor, Manning, and Smith 2015), the decline of unionization (Card 2001), and changes in the structure of employment (Weil 2014).
There is also growing concern about an additional cause of inequity—a general reduction in competition among firms, shifting the balance of bargaining power towards employers (Furman and Orszag 2015). Such a shift could explain not only the redistribution of revenues from worker wages to managerial earnings and profits, but also the rising disparity in pay among workers with similar skills. These trends also have broader implications for the economy as a whole: instead of promoting growth, forces that undermine competition tend to reduce efficiency, and can lead to lower output, employment, and social welfare.
A growing literature has documented several indicators of declining competition in the United States, and economists have begun to explore the links between these trends and rising income inequality (Furman and Orzag 2015). While recent discussions have highlighted rising concentration among producers and monopoly pricing in sellers markets (The Economist 2016), reduced competition can also give employers power to dictate wages—socalled “monopsony” power in the labor market. While monopoly in product markets and monopsony in labor markets can be related and share some common causes, the latter has some distinct causes and policy implications.
This issue brief explains how monopsony, or wagesetting power, in the labor market can reduce wages, employment, and overall welfare, and describes various sources of monopsony power. 1 It then reviews evidence suggesting that firms may have wage-setting power in a broad range of settings and describesseveraltrends in recent decades consistent with a growing role for monopsony power in wage determination. It concludes with a discussion of several policy actions taken by the Obama Administration to help promote labor-market competition and ensure a level playing field for all workers.
Monopolies result in sluggish economic growth as well as high prices because in order to raise prices, monopolists make fewer goods or provide less in services. Companies that use their market power to suppress wages do something similar: They hire fewer workers, and this leads to unemployment and low growth as well. And because employers push down wages by reducing employment, they supply fewer goods, causing higher prices to consumers even though labor costs are reduced. A business might have monopoly power (over goods it sells), monopsony power (over workers), both or neither. If a small town has one newspaper, the newspaper has both a monopoly over local news and a monopsony over journalists. If the town has a single automobile manufacturing plant, that business will have a monopsony over the relevant skilled workers but not a monopoly over cars, which are sold into a national market where there are competitors.
Economists have understood these things since Adam Smith, who famously called wage-fixing by employers “the natural state of things, which nobody ever hears of.” But economists did not take this risk very seriously until recently, instead usually assuming that employers compete vigorously for workers. As a result, though the logic for using antitrust law to address market power is the same for monopsony as it is for monopoly, the legal community did not embrace the possibility that antitrust law should be brought to bear against employers, except in unusual cases.[2]
But in recent years, thanks to the remarkable work of a diverse group of mostly young economists, this conventional wisdom was shattered. Exploiting vast data sets of employment and wages that had become available, they discovered that concentrated labor markets — that is, with one or few employers — are ubiquitous. In one paper, José Azar, Ioana Marinescu, Marshall Steinbaum and Bledi Taska found that more than 60 percent of labor markets exceeded levels of concentration that are regarded as presumptive antitrust problems by the Department of Justice. Numerous papers have made similar findings.
cites Concentration in US labor markets: Evidence from online vacancy data | José Azar, @Ioana Marinescu, Marshall Steinbaum and Bledi Taska
Highlights
This paper estimates employer concentration in labor markets for the entire US.
It uses a database of online job vacancies from Burning Glass Technologies.
Labor markets are defined according to geography and occupation.
The average labor market is highly concentrated at 4,378 HHI.
Approximately 16 percent of workers work in concentrated markets.
Labor market concentration is correlated with lower earnings.
Labor market concentration is a good index of employer power in labor markets.
Abstract
Using data on the near-universe of US online job vacancies collected by Burning Glass Technologies in 2016, we calculate labor market concentration using the Herfindahl-Hirschman index (HHI) for each commuting zone by 6-digit SOC occupation. The average market has an HHI of 4,378, or the equivalent of 2.3 recruiting employers. 60% of labor markets are highly concentrated (above 2500 HHI). Highly concentrated markets account for 16% of employment. Labor market concentration is negatively correlated with wages, and there is no relationship between measured concentration and an occupation’s skill level. These indicators suggest that employer concentration is a meaningful measure of employer power in labor markets, that there is a high degree of employer power in labor markets, and also that it varies widely across occupations and geography.
In highly concentrated labor markets, wages fall — as economic theory would predict. For example, Elena Prager and Matt Schmitt examined hospital mergers and found that when hospitals expand through mergers and gain significant market power, the wage growth of employees declines. Notably, this decline affected skilled health care professionals like nurses — but not administrators and unskilled staff members like cafeteria workers, who could easily find jobs outside hospitals.
The work on labor market concentration has been supplemented by growing evidence that employers collude with one another and engage in other anticompetitive practices. Evan Starr and his co-authors have found that agreements not to complete — where employers block workers from moving to competitors — are extremely common (as many as nearly 40 percent of workers have been subject to one) and are associated with lower wages. Alan B. Krueger and Orley Ashenfelter found that nearly 60 percent of major brand-name franchises — companies like McDonald’s and Jiffy Lube — subjected franchise employees to [00 knowledge/concepts/+no-poaching agreements|no-poaching agreements], which prevented them, even within the same franchise system, from quitting one employer to join another.
As a result, many workers, especially in rural areas and small towns — areas subject to high unemployment and economic stagnation — are squeezed by employers and underpaid. For example, when farm equipment manufacturers merge, they close dealerships, and so a mechanic who used to be able to get a good job as several dealers competed for his work must accept a less-appealing job from the single place in the area or drop out of the labor market.
Antitrust law applies to “restraint of trade,” and courts agree that when employers enter cartels to suppress wages, they violate the law. Yet until a few years ago, there were hardly any antitrust cases against employers. The major exception was a 2010 case against Big Tech after Google, Apple and other companies agreed not to solicit one another’s software engineers. This was potentially criminal behavior, but the Justice Department slapped them on the wrist. (A subsequent lawsuit secured more than $400 million in damages for the workers.)
But it was the academic research, not the tech case, that finally woke the antitrust community from its torpor. In the past year, the Justice Department has brought several criminal indictments against employers for antitrust violations (the first ever). The Federal Trade Commission is pondering a rule to restrict +noncompetes (see). State attorneys general brought cases against franchises and other employers that used +no-poaching agreements and +noncompetes. Congress is holding hearings next week on antitrust and the American worker. Private litigators have joined in as discoveries of abusive wage practices have piled up. For example, “ºBig Chicken” companies face lawsuits not only for fixing the prices of chicken but also for fixing the wages of their workers.
If the academic research on labor markets is correct, then millions of Americans are paid thousands or even tens of thousands of dollars less than they should be paid. Labor monopsony affects people at all income levels, but it is a particular problem for lower-income workers and people living in stagnant rural and semirural parts of the country. In his recent executive order on antitrust, President Biden became the first president to commit government resources to ensure that the antitrust laws are used to help workers. Let’s hope he follows through.