Are labour markets becoming less competitive?

“MASTERS 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.” Nearly 250 years after Adam Smith wrote this in “The Wealth of Nations”, President Joe Biden has sworn to tackle a lack of competition which he says is squashing wages for workers. Why have labour markets become an antitrust target? And are workers really getting a raw deal?

The Economist Today

Hand-picked stories, in your inbox

A daily email with the best of our journalism

Just as a sole seller can exert market power over buyers, known as a monopoly, so a sole buyer can exert market power over sellers. A sole buyer is said to have “monopsony power”, a term first used by Joan Robinson, a British economist, in a book about competition economics in 1933. (She used the concept to provide one of the first explanations of the gender pay gap.) Like any market power, monopsony is a matter of degree. A small group of buyers (called an “oligopsony”) can also exert power over sellers, and may increase that power through collusion. British supermarkets have long been accused of using their power to drive down prices paid to farmers, for example.

Monopsony power is relevant in labour markets. When there are few employers competing for workers, wages might be suppressed. But it is unclear whether power in Western labour markets has indeed become concentrated in the hands of fewer firms. Work by Kevin Rinz, an economist at the US Census Bureau, finds that higher concentration in a local labour market does reduce earnings. But Mr Rinz also finds that local labour markets in America have actually become less concentrated in the past 40 years. A paper looking at Britain by Will Abel, Silvana Tenreyro and Greg Thwaites (economists at the Bank of England, London School of Economics and University of Nottingham) finds a similar result in recent decades.

But measures of concentration (the number of firms) are only part of the story. Firms can collude, explicitly or tacitly, without merging. And firms gain market power from anything which makes it harder for workers to move, including the effort involved in searching for jobs, applying for them and relocating. An estimated one in five jobs in America now is covered by a “non-compete” clause, which restricts the rights of workers to move to rival firms. These cover unskilled jobs as well as those with insider knowledge. Mr Biden has criticised these, saying that the “incredible number of non-compete clauses for ordinary people were done for one reason: to keep wages low.”

It is hard to be sure whether non-compete clauses have become more widespread over time. Alan Manning, a labour-market expert at the London School of Economics, argues that firms have always had significant potential market power over their workers. What has changed in the past few decades is the weakening of collective bargaining, which allowed workers to coordinate and go head-to-head with powerful firms in wage negotiations. Since the 1980s, politicians have been freeing up one side of the labour market in the name of competition—by restricting the power of trade unions—but doing very little about the power of firms. Mr Biden may not be right when he says that American workers are victims of too much concentration. But unfair competition is always a worthy target.