U.S. Labor Markets Aren’t Truly Free

(Bloomberg Opinion) -- Karl Marx didn’t necessarily have 21st-century America in mind when he offered his dire assessment of the future of capitalism, predicting that workers’ pay would get squeezed to the point where the system would break down. Yet lately the U.S. has seemed to be heading in that direction. Companies are getting bigger and more powerful, and wages aren’t growing like they have in the past — a pattern that is fueling popular dissatisfaction even as the economy enters the tenth year of a steady expansion.

Not for the first time, capitalism might need a bit of help. The right response, though, isn’t to oppose vigorous market-based competition. It’s just the opposite.

For much of the past century, American companies and their workers prospered together. As productivity increased, employees received a big piece of the gains. More recently, however, that relationship has weakened. The benefits of tax cuts and rising sales are going primarily to shareholders in the form of profits. As a result, the share of national income accruing to labor is hovering around record lows.

U.S. Labor Markets Aren’t Truly Free

What’s driving the change? Economists have offered various explanations, including labor-saving technology, weakened unions, and growing competition from lower-wage countries such as China. More recently, though, they’ve identified another: The job market has become less free. The consolidation of American business has left people with fewer places to work, shifting the balance of power to employers.

Picture a town with a single employer of, say, coal miners, and suppose that the miners are unable to change jobs or move elsewhere. The company would be able to set wages well below what a competitive market would demand — a situation that economists call monopsony (similar to monopoly, but affecting the prices of inputs rather than outputs). A degree of monopsony power can also exist if the labor market is controlled not by a single firm but by a small group.

In recent decades, monopsony power has been growing in the U.S. Successive waves of mergers and acquisitions have left industries more concentrated, and workers are getting less mobile. A recent study estimates that one measure of employer concentration, known as the Herfindahl-Hirschman Index, exceeds 2,500 in a majority of the country’s commuting zones (which account for 17 percent of total employment). That’s the equivalent of domination by four companies — and the threshold beyond which the Department of Justice and the Federal Trade Commission see anti-competitive behavior as a serious concern.

U.S. Labor Markets Aren’t Truly Free

The evidence strongly suggests that employers do exercise their power to hold down wages. Studies using different data sources, labor-market definitions and methods all find that pay in highly concentrated markets is lower. One — using job postings and focusing on commuting zones — estimated that it can be as much as 25 percent lower for the same types of jobs. Another — using Census data for manufacturing industries — concluded that the effect is greatest where unions are weak and where companies face competition from China. (This lack of market discipline might explain why some studies have found that higher minimum wages have little negative effect on employment: If pay is already artificially low, raising it won’t reduce demand for workers.)

Companies also engage in practices that limit workers’ freedom. One study found that in 2016, more than half of major franchises employed no-poaching agreements in which franchisors agreed not to hire one another’s workers (some, including McDonald’s and H&R Block, recently agreed to stop the practice). In a recent survey of workers, almost a quarter of respondents reported that they were or had at some point been subject to a non-compete clause, in which they agreed not to work for rival companies — meaning that they couldn’t change jobs for better pay. Such arrangements apply not only to executives, but increasingly to blue-collar and even low-paid service workers. For a while, fast-food franchise Jimmy John’s required employees to agree not to work for any other company involved in “selling submarine, hero-type, deli-style, pita and/or wrapped or rolled sandwiches.”

Until recently, the government largely ignored such anti-competitive behavior in the labor market. This wasn’t because it lacked authority to intervene: No-poaching agreements, for example, have long been illegal (except within franchises). But enforcement was patchy — with the notable exception of a 2010 case in which the Justice Department charged six tech companies, including Google and Apple, with agreeing not to hire each other’s engineers. Employees sometimes filed civil complaints, but the personal cost could be high. In one case involving wage collusion among eight Detroit hospitals, the nurse plaintiffs reportedly faced retribution at work.

For the most part, both government and private actions served less to change the practices than to illustrate how widespread they were.

Meanwhile, the Justice Department and the FTC have refrained from using the most effective tool to limit monopsony power: the authority to review mergers. Even where product markets are concerned, they have arguably erred on the side of allowing too much concentration, potentially undermining the dynamism and innovation crucial for longer-term economic growth. But the effect on labor markets hasn’t even been on their radar.

Consider the case of rail equipment suppliers Faiveley Transport and Westinghouse Air Brake Technologies Corporation. While investigating a proposed merger, Justice found evidence of no-poaching agreements. For the labor market, this should be a red flag: Such deals indicate that the employers compete for the same workers, and that they dominate the market — otherwise, they would run too great a risk of losing employees to competitors. Yet the government allowed the merger to go ahead in 2016, only later extracting a promise from Wabtec not to enter further no-poaching pacts.

What to do? One partial solution is to redefine the market. If workers found it easier to move geographically or to change occupation, they would be less likely to get trapped in a single area or line of work. To that end, the government must remove barriers to mobility.

Zoning rules, for example, are often designed to prevent construction of the kind of low-income housing that workers seeking opportunity need. Government benefits such as Medicaid and housing subsidies are administered locally, meaning that people typically have to re-register — and lose some benefits — when they move. Occupational licensing requirements, which apply to more than one in five U.S. jobs, make it harder than it should be to switch careers. All 50 states, for example, require a license to become a barber.

Even if some workers become more mobile, though, many will remain tied to their local labor markets. So the demand side needs addressing, too. For one, this requires the Justice Department to be more active in addressing no-poaching agreements — something that Assistant Attorney General Makan Delrahim has pledged to do. Beyond that, Congress could help by expanding the no-poaching ban to franchisors and clearly outlawing exploitative non-compete clauses. The latter might make sense in cases where companies invest significant resources in training, but imposing them on low-wage employees serves only to limit freedom of choice. In one positive sign, at least eight states have already moved to limit the use of non-competes. Illinois, for example, has rendered them “illegal and void” for workers making $13 an hour or less.

Still, if companies have monopsony power, they will find ways to use it. As Adam Smith put it more than two centuries ago, employers “are always and everywhere in a sort of tacit, but constant and uniform combination, not to raise the wages of labour above their actual rate.” Containing this tendency will require a different approach to assessing mergers — one that considers their effect of on workers as well as consumers. Nothing in the relevant antitrust statutes, such as the Clayton Act, prevents the government from doing so.

For a start, authorities could subject mergers to added scrutiny if they result in a labor-market concentration that exceeds the threshold that Justice and the FTC have developed for product markets (specifically, an HHI index of 2,500). Note that this would be a conservative approach: There’s good reason to believe that the threshold should be lower for workers, who differ from consumers in crucial ways. It’s inherently easier, for example, to buy a different brand of beer than it is to get a different job — the beer is there for the taking, while hiring requires the agreement of both parties.

Granted, there’s always the danger of unintended consequences.  In many cases, companies must consolidate — and wages must fall — for the U.S. to remain globally competitive. Enforcers and regulators should keep this is mind and weigh it against the potential for damage, as they do in all antitrust cases. That said, some highly concentrated labor markets are in non-tradable sectors — such as food service and nursing — where there is no competition from abroad. In such cases, it’s hard to see what benefits could outweigh the negative effect on wages. And more broadly, given the ample evidence of market power and the complete lack of focus on labor markets to date, a bias toward greater scrutiny is warranted.

For far too long, government policy has operated on the false premise that labor markets are free. To move America toward the kind of capitalism in which prosperity is broadly shared — and in which people’s talents are put to their best uses — they’ll need to be a lot freer.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Mark Whitehouse writes editorials on global economics and finance for Bloomberg Opinion. He covered economics for the Wall Street Journal and served as deputy bureau chief in London. He was founding managing editor of Vedomosti, a Russian-language business daily.

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