The paper – which can be found here – criticises the historic imbalance between product and labour market antitrust enforcement, which has no basis in economic theory: from an economic standpoint, the dangers to public welfare posed by product and labour market power are exactly the same. It is argued that antitrust agencies should take more seriously the danger that mergers may lead to labour market power as well as product market power.
The paper is organised as follows:
The introduction tries to explain why antitrust has traditionally ignored labour markets. Four explanations are advanced: (i) while economic theory treats product and labour markets similarly, legal theory has placed more emphasis on product markets as a result of a focus on consumer welfare; (ii) it was assumed that labour markets are reasonably competitive, and that labour market power was not an important social problem; (iii) the traditional legal approach to protecting workers, which took place “outside” antitrust law, may have seemed sufficient to policymakers and competition enforcers; (iv) antitrust litigation against employers in the US is more difficult than antitrust litigation based on product market concentration, because no worker can hope to obtain damages in an antitrust action—even with the treble damages rule—that would compensate her for the cost of litigation.
The authors then explain how the consensus that labour markets are reasonably competitive fell apart. First, a number of non-poaching agreements in Silicon Valley emerged. Second, it was found that non-compete agreements are extraordinarily common and frequently applied to low-wage workers, which raised suspicions that they were being used by employers to exploit their labour market power. These covenants were generally illegal under state laws, but they had an in terrorem effect on workers who could not afford to consult lawyers. Third, economists began investigating – and finding – monopsony in labour markets. Fourth, beginning in the 1970s, and accelerating in the 1980s and 1990s, a wave of industry consolidation has given employers greater bargaining power in labour markets, at the same time as public policy turned against labour and employment law.
The following section provides the legal and economic background to the current concerns about labour market concentration. It begins with a description of the development of labour markets throughout the ages, before moving to the economic theory of ‘monopsony’ and looking at evidence of increasing market power in labour markets.
This section of the email will focus on the economic theory of monopsony and will be a bit long, because it is the best explanation I have seen of the issues that applying antitrust to labour market raises. Feel free to skip it.
In a competitive labour market, firms equate the going wage of workers to their “marginal revenue product,” i.e. the amount of additional revenue the worker can generate. If an employer hires an additional worker, it will have to raise the prevailing level of wages for all its existing workers, which will increase its overall labour costs. But if a labour monopsonist lowers wages, it will lose some workers but it will also lower its wage bill on the workers that remain in employment. As in a monopoly, a monopsonist will not internalize this effect on workers and will choose an “absolute markdown” of wages below the marginal revenue product – even if this reduces its total output.
While labour markets and product markets are similar, there is reason to believe that labour markets are more vulnerable to monopsony than products markets are to monopoly. The reason is that in labour markets, unlike in product markets, the preferences of both sides of the market affect whether a transaction is desirable. This dual set of relevant preferences means that labour markets are doubly differentiated both by the idiosyncratic preferences of employers and of workers. In some sense this “squares” the differentiation that exists in product markets, naturally making labour markets thinner than product markets. These matching frictions both cause and reinforce the typically long-term nature of employment relationships compared to most product purchases, leading to significant lock-in within employment relationships. This is further compounded by the more geographically constrained nature of labour markets when compared to product markets.
When measuring market power, one could rely on residual labour supply elasticity as a proxy. This refers to the sensitivity with which workers react to changes in wages at a particular firm – i.e. if the firm lowers wages, whether employees would be likely to leave. If residual labour supply elasticity that a firm faces is high, then the labour market from which a firm draws its workers is competitive, and the firm cannot “exploit” workers. If it is low, workers will usually need protection.
As regards the economic effects of labour market power, it redistributes from workers to employers by lowering wages. This creates waste or deadweight loss, as some workers that would have been willing to work for the employer if they had been paid their full marginal revenue product will quit if they are paid the marked-down wage the monopsonist offers. Labour market power may also raise prices for consumers, since firms that employ fewer workers will produce less output, which will result in higher prices whenever the product market is not perfectly competitive. This last point, while counterintuitive, is a consequence of the costs of a firm hiring workers actually rising as a firm continues to hire – because the employees still in the market will usually be more expensive, and because a firm will usually have to pay the same wage to all workers doing the same job. As such, if a labour monopsonist is able to lowers wages to workers, it will hire fewer workers and reduce output – but, given the reduction in labour costs, its profits will increase, exactly as in a product monopoly situation.
Part II focuses on the application of antitrust to labour markets. It begins with the observation that competition law applies to monopoly and monopsony alike – and that most monopsony cases involve allegations that buyers have tried to monopsonise or cartelize markets for goods and services. A handful of such cases involve buyers who have tried to monopsonise or cartelize the labour market. However, antitrust litigation based on anticompetitive behaviour by employers in labour markets has historically been quite rare, and mostly involved naked cartels in narrow and idiosyncratic settings like sports leagues or hospitals. In recent years, there has been greater activity in this field, including a case against no-poaching agreements between major high-tech firms concerning each other’s employees.
The authors then focus on mergers and on their impact on labour markets. They try to develop a number of tools, borrowed and adapted from the analysis of product markets, to enforce antitrust in labour markets. In particular, they develop two approaches:
- A Market Definition and Concentration (MDC) approach. This approach requires markets to be defined by applying a small but significant and non-transitory decrease in wages (SSNDW) test. Market concentration should then be measured by reference to the HHI index. The effects of increased concentration on labour markets can then be analysed by reference to the same principles that apply in the analysis of product markets.
- A Downward Wage Pressure (DWP) test. This test, which parallels the adoption of Upward Pricing Pressure tests in product markets, likewise builds on two terms that correspond roughly to: (i) market concentration and (ii) the increase in concentration caused by the merger. The term to measure market concentration is the ‘markdown’, i.e. the percent by which the wage falls below the worker’s marginal revenue product, or the amount of additional revenue that employing that worker generates. The term to measure the increase in market power is the ‘diversion ratio’, i.e. the fraction of workers who would quit and join the other merging firm (rather than joining a non-merging firm or dropping out of the labour market) if their employer lowers its wages. The DWP index for Employer A is the markdown of the relevant employer, multiplied by the diversion ratio from that employer to the other merging party.
- While the authors focus on merger control, because it is the best-developed area of antitrust law, many other areas of antitrust have strong analogs in labour markets.
Hence in Part III, the paper discusses other areas for antitrust enforcement in labour markets, such as: (i) non-compete covenants, which could be subject to rules similar to those applicable to exclusive dealing; (ii) supplier wage suppression, which may occur when large retailers require their suppliers to pay workers below some firm-imposed cap to reduce competition for workers among the suppliers. This would enable those suppliers to obtain some labour cost savings, which could then be passed on to the retailer. It is suggested this practice could be treated under the same principles applicable to resale price maintenance; (iii) agreements preventing franchisees from competing for workers, which may be a form of prohibited collusion inasmuch as the single economic entity doctrine does not preclude antitrust intervention; and, more speculatively, (iv) predatory hiring, when an employer raises its wages to a level that prevents an entrant from entering the market before bringing those wages down again.
Comment: This article is very much in line with the two papers reviewed in the posts immediately above, but it benefits from being written by distinguished economists and lawyers – which allows it to cover in detail the relevant economic theories, and how they might apply to antitrust enforcement.