Some Peculiarities of Labor Markets: Is Antitrust an Answer?

Some Peculiarities of Labor Markets: Is Antitrust an Answer?

Timothy Taylor 18/03/2019 2

Labor markets are in some ways fundamentally different from markets for goods and services. A job is a relationship, but in general, the worker needs the relationship to begin and to last more than the employer does/ John Bates Clark , probably the most eminent American economist of his time, put it this way in his 1907 book, Essentials of Economic Theory.

"In the making of the wages contract the individual laborer is at a disadvantage. He has something which he must sell and which his employer is not obliged to take, since he [that is, the employer] can reject single men with impunity. ... A period of idleness may increase this disability to any extent. The vender of anything which must be sold at once is like a starving man pawning his coat—he must take whatever is offered."

In the last few years, an idea has emerged that the same government agencies that are supposed to be concerned about monopoly power--that is, when dominant firms in an industry can take advantage of the lack of competition to raise the prices paid by consumers--should also be concerned about "monopsony" power--that is, when dominant firms in an industry can take advantage of the lack of competition to reduce the wages paid to workers. Eric A. Posner, Glen Weyl and Suresh Naidu offer a useful overview of this line of thought in "Antitrust Remedies for Labor Market Power," published in the Harvard Law Review. (132 Harv. L. Rev. 536, December 2018). My own sense is that their discussion of the power imbalance in labor markets is fully persuasive, but it also seems to me that antitrust is at most a very partial and incomplete way of addressing these issues. 

Here's a nice explanation from Posner, Weyl, and Naidu of why workers have reason to feel vulnerable to the monopsony power of employers in labor markets (footnotes omitted):

But there is reason to believe that labor markets are more vulnerable to monopsony than products markets are to monopoly, thanks to a different literature in economics. This literature, for which Professors Lloyd Shapley and Alvin Roth were awarded the Nobel Prize, emphasizes the importance of matching for labor markets.The key point is that in labor markets, unlike in product markets, the preferences of both sides of the market affect whether a transaction is desirable. 

Compare buying a car in the product market and searching for a job. Both are important, high-stakes choices that are taken with care. However, there is a crucial difference. In a car sale, only the buyer cares about the identity, nature, and features of the product in question — the car. The seller cares nothing about the buyer or (in most cases) what the buyer plans do with the car. In employment, the employer cares about the identity and characteristics of the employee and the employee cares about the identity and characteristics of the employer. Complexity runs in both directions rather than in one. Employers search for employees who are not just qualified, but also who possess skills and personality that are a good match to the culture and needs of that employer. At the same time, employees are looking for an employer with a workplace and working conditions that are a good match for their needs, preferences, and family situation. Only when these two sets of preferences and requirements “match” will a hire be made. 

This two-sided differentiation is why low-skill workers may be as or even more vulnerable to monopsony than high-skill workers, despite possibly being less differentiated for employers. Low-skill workers may have less access to transportation, well-situated housing markets, child care options, and job information, and be more dependent on local, informal networks, all of which make jobs less substitutable and employers more differentiated. 

This dual set of relevant preferences means that labor markets are doubly differentiated by the idiosyncratic preferences of both employers and workers. In some sense this dual set of preferences “squares” the differentiation that exists in product markets, naturally making labor markets thinner than product markets. This relative thinness means that the cost of entering a transaction — in relation to the gains from trade — is on average greater in employment markets than in product markets because people are not as interchangeable as goods. 

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. They are also reinforced by the more geographically constrained nature of labor markets. In our increasingly digital and globalized world, products are easily shipped around the country and world; people are not. While traveling is easier than in the past, and telecommuting has become more common, labor markets remain extremely local while most product markets are regional, national, or even global.Most jobs still require physical proximity to the employer, greatly narrowing the geographic scope of most labor markets, given that many workers are not willing to move away from family to take a job. Two-income families further complicate these issues because each spouse must find a job in the area in which the other can, further narrowing labor markets. Together these factors naturally make labor markets highly vulnerable to monopsony power, much more vulnerable than most product markets are to monopoly power.

To what extent might antitrust be a remedy for these kinds of issues? There are certainly situations where it seems appropriate. For example,  the authors discuss "the revelation that high-profile Silicon Valley tech firms, including Apple and Google, entered nopoaching agreements, in which they agreed not to hire each other’s employees. This type of horizontal agreement is a clear violation of the

Sherman Act. The firms settled with the government [in 2018], but the casual way in which such major firms, with sophisticated legal staffs, engaged in such a blatant violation of the law appears to have alarmed antitrust authorities. The government subsequently issued guidelines to human resources offices warning them that even implicit agreements not to poach competitors’ employees are illegal." 

Another set of examples involve the growth of "non-compete" agreements, in which a worker is required to sign an agreement to not to work for a competing firm for some period of time (for additional discussion, see "The Economics of Noncompete Agreements," April 19, 2016). It's also true that about 25% of the US workforce is now in jobs that require a government license, and these licenses often appear to be at least as much about limiting competition in a certain area of the labor market--for example, blocking movement across state lines-- as ensuring quality and information for consumers

One can also imagine that standard merger investigations might take labor market effects into account. For example, say that three hospitals in a local area propose a merger. The standard analysis would look at the reduction in competition that is likely to occur, along with the possibility of higher prices for consumers, and then balance that against whether the merger is likely to produce efficiency gains or synergies that would benefit consumers. This analysis might also take into account not just effects on consumers, but whether the monopsony power of the merged hospitals might push down labor wages in that local market.

But at least for me, it's not clear that there are a lot of standard merger cases, focused on product market competition and effects on consumers, where including the labor market effects would alter the outcome. Perhaps more to the point, conventional antitrust doesn't seem likely to do much at all about the deeper pecularities of labor markets, like the issues pointed out above of two-sided differentiation, moving costs, two-earner couples looking for a job in the same place, and so on.

Perhaps one answer is to expand our notion of how the competition authorities might address the issue of labor market power of large employers. The authors write in a somewhat speculative tone:

Our present business landscape exhibits a number of extremely powerful employers as a result of the neglect of mergers and other anticompetitive behavior in labor markets. While a more detailed examination would be needed to draw any firm conclusions, antitrust investigations into massive employers (such as Compass Group, Accenture, Amazon, Uber, and Walmart), as well as platform-based firms that receive vast flows of valuable data services without any compensation (such as Facebook and Google), seem warranted. It may be that some of these firms have achieved such powerful monopsonies that they should be broken up.

Again, the argument here is not that consumers would benefits from breaking up these firms, but that it should be considered on behalf of workers, with the belief that if these firms operated with more competitors, they would need to pay higher wages. I'm open to more evidence on this point, but I'm unpersuaded by the existing evidence. It seems to me that the more direct approach to addressing the generalized power imbalance against workers is to pursue various "active labor market policies" that provide assistance with job search, relocation, and retraining, as well as doing whatever we can to run a "high pressure" economy where unemployment rates are low, so that workers are both in demand and have some plausible alternative options if they want or need to switch employers.

Postscript: For a discussion of how an economist and a classics scholar came up with teh terminology of "monopsony" back in 1933, see Thornton, Robert, J. 2004. "Retrospectives: How Joan Robinson and B. L. Hallward Named Monopsony." Journal of Economic Perspectives, 18 (2): 257-261.)

A version of this article first appeared on Conversable Economist

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  • Steven Carter

    Excellent article

  • Jonathan Rowles

    Brilliant piece !!!

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Timothy Taylor

Global Economy Guru

Timothy Taylor is an American economist. He is managing editor of the Journal of Economic Perspectives, a quarterly academic journal produced at Macalester College and published by the American Economic Association. Taylor received his Bachelor of Arts degree from Haverford College and a master's degree in economics from Stanford University. At Stanford, he was winner of the award for excellent teaching in a large class (more than 30 students) given by the Associated Students of Stanford University. At Minnesota, he was named a Distinguished Lecturer by the Department of Economics and voted Teacher of the Year by the master's degree students at the Hubert H. Humphrey Institute of Public Affairs. Taylor has been a guest speaker for groups of teachers of high school economics, visiting diplomats from eastern Europe, talk-radio shows, and community groups. From 1989 to 1997, Professor Taylor wrote an economics opinion column for the San Jose Mercury-News. He has published multiple lectures on economics through The Teaching Company. With Rudolph Penner and Isabel Sawhill, he is co-author of Updating America's Social Contract (2000), whose first chapter provided an early radical centrist perspective, "An Agenda for the Radical Middle". Taylor is also the author of The Instant Economist: Everything You Need to Know About How the Economy Works, published by the Penguin Group in 2012. The fourth edition of Taylor's Principles of Economics textbook was published by Textbook Media in 2017.

   

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