How Powerful Companies Might Hold Back Growth

(Bloomberg Opinion) -- There’s a pretty good argument that U.S. companies are using the power that comes with increasing size and market dominance to hold down workers’ wages. But is this phenomenon also holding back the entire economy?

Judging from data on industrial production, that’s a distinct possibility.

Imagine a world in which everyone works for the same company. That single employer would be able to set wages well below what a free market would dictate, because the employees would have nowhere else to go. Such “monopsony power” can also exist when a few companies dominate a labor market — a situation that is common in the U.S., and has probably helped drive workers’ share of national income near record lows.

There’s more. Theory suggests that the exercise of monopsony power should also stunt aggregate economic growth. If wages are artificially low, fewer people will choose to work. As a result, companies won’t run at full capacity, because in their efforts to pay less they will also depress the supply of labor.

So what’s actually happening? Well, U.S. industrial companies are still operating well below capacity, even though the economy is in its tenth year of expansion. Specifically, the Federal Reserve estimates that as of October, capacity utilization stood at 78.4 percent, 1.4 percentage points below the long-term average. Here’s how that looks:

How Powerful Companies Might Hold Back Growth

No less interesting are the reasons companies give for operating below capacity — a question that the Census Bureau has been asking since the late 1990s. Within that time frame, fewer than ever are citing a lack of demand, while more than ever are saying that they can’t get enough workers.

How Powerful Companies Might Hold Back Growth

To be sure, monopsony isn’t the only possible explanation. Maybe the long-term unemployment wrought by the last recession permanently impaired the labor supply. Maybe workers don’t have the skills companies need. Or maybe lagging productivity growth has made labor, rather than industrial capacity, the binding constraint on the economy.

Still, monopsony power over wages deserves attention – particularly on the part of the federal authorities who, by allowing mergers to render markets increasingly concentrated, helped make it an issue in the first place.

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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