Antitrust Law Gets a Chicago School Makeover

(Bloomberg) -- In the last half-century, the most innovative work in antitrust law came from the University of Chicago. According to the Chicago School, led by the legendary economist Aaron Director and promoted by law professor Robert Bork, the goal of antitrust law should be to increase consumer welfare, not to combat bigness as such. 

Chicago School proponents often argued in favor of government restraint. In their view, uses of the antitrust law to prevent mergers, or to break up large companies, often do more harm than good. Their arguments have had a major influence on both regulators and courts, frequently promoting a “hands off” attitude in the face of growing concentrations of economic power.

Members of the Chicago School have rarely focused on the welfare of workers. Nor have they explored the possibility that big companies (like Apple or Google) might use their market power to hurt employees.

There’s a New Chicago School in town. Roll over, Aaron Director, and tell Robert Bork the news.

The most ambitious antitrust essay in recent years, and potentially the most important, comes from Chicago’s Eric Posner, along with Microsoft’s E. Glen Weyl (long associated with Chicago as well) and Columbia’s Suresh Naidu. Their central argument is that in the United States, many labor markets are not competitive. Employers have a ton of market power. They use it to suppress wages, often harming low-income workers in particular.

One result is to reduce economic growth. Because wages are artificially low, qualified workers refuse to take jobs. Instead they exit the workforce and rely on government benefits. (This problem should interest the Trump administration in light of its promising recent effort to move workers from welfare to work.) Posner and his co-authors estimate that the economic power of employers is reducing overall output and employment by a whopping 13 percent — and labor’s share of national output by 22 percent. 

Their driving idea is “monopsony,” which arises when corporations have market power in their purchases of goods and services, including labor. As a result, employers may be able to drive down wages and benefits and to provide poor (and unsafe) working conditions.

In the labor market, as in the market for consumer products, there can be serious barriers to competition. An important one consists of “search frictions”: Workers have to spend time and effort to find new jobs. For many low-income workers in particular, those costs can be high or even prohibitive, especially when they need to find suitable transportation and a new place to live.

An additional barrier involves market concentration: a small number of employers. In some domains, only a few employers can survive, perhaps because of “network effects,” which arise when the value of a good or a service increases if a lot of people use it (think of Google or Facebook). Posner and his co-authors point to a lot of evidence of labor market concentration.

Direct evidence of such concentration comes from research showing that when jobs are more than 10 miles away from a worker’s residence, application rates fall dramatically. An overview finds that in many labor markets, there is a great deal of concentration in the U.S. — and that because employers have monopsony power in such markets, and do not have to compete much for workers, wages are 15 percent to 25 percent lower than they are elsewhere. 

If Posner and his co-authors are right, labor market concentration leads to a trifecta of ills: lower economic growth, worse deals for workers and greater inequality. While antitrust law has rarely been used to challenge anti-competitive behavior in labor markets, Posner and his colleagues want that to change.

There is some low-hanging fruit here: no-poaching agreements, by which employers agree not to try to hire each other’s employees. Not long ago, six high-tech companies, including Google and Apple, used such agreements, which reduce workers’ employment options. That’s illegal, and they were sued by the Justice Department. 

In 2010, the companies settled and agreed to stop. Right now, McDonald’s forbids its franchisees from hiring each other’s workers. That ought to end.

The most important questions raised by labor market concentration come from mergers, which might create monopsonies. After a merger, some companies are in an excellent position to increase their power in the labor market — and thus to reduce wages and employment. 

To counteract that risk, Posner and his co-authors argue for systematic use and adaptation of the Justice Department’s Horizontal Merger Guidelines, which are usually applied on behalf of consumers rather than workers. The authors suggest that the department’s officials should focus directly on the effects of mergers on worker welfare.

Under the influence of the Chicago School, antitrust law seemed to run out of steam over the last few decades. It seemed to be regulation’s madwoman in the attic. But growing evidence demonstrates that in many areas, product and labor markets are far less competitive than they should be. As a result, consumers, employees and the American economy are worse off. 

Democrats have recently expressed serious concerns about the harmful effects of mergers. In some cases, the Trump administration has agreed. Going well beyond both sides, Posner and his co-authors have just put a bright spotlight on the risk that labor market concentration is hurting American workers.

For economists and lawyers in the Justice Department, a pressing question is now on the table: What, exactly, are you going to do about that problem? 

©2018 Bloomberg L.P.

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