A new report from the Biden administration lays out ways to increase competition in US labor markets. Will they work?
A Biden administration report, published earlier this month by the Department of the Treasury, argues that a lack of labor market competition lowers worker wages by about 20 percent. In a sweeping survey of the academic research, the report concludes this is due to rising labor market power: the ability of employers to lower wages below the value their workers create. The report proposes a forward-looking policy agenda to increase labor market competition, ranging from renewed antitrust enforcement to progressive legislation. In this article, we review empirical evidence and establish that some proposals are likely much more practical than others.
Combating Concentration
The Treasury report recommends using antitrust enforcement to combat employer concentration, a popular indicator of labor market power. Intuitively, when fewer firms compete over workers, there’s less pressure to keep wages high. Under the Clayton Act, the Department of Justice uses concentration indices to screen mergers that might substantially lessen competition, but current enforcement neglects concentration in labor markets.
The latest research documents a decline in employer concentration since the 1970s, suggesting that labor market power actually decreased. However, Traina’s research on the US manufacturing sector finds employer concentration is not a primary driver of labor market power, indicating other explanations like technological change play a bigger role. A case study of hospital mergers corroborates this finding: With few exceptions, mergers do not lower wages.
Even if employer concentration was relevant for competition, stronger antitrust enforcement would struggle with correctly measuring it in the first place. This is because labor markets have porous boundaries, as workers can change occupations and commute to other areas. For example, a farm equipment mechanic facing low wages in a single-employer market might switch to repairing rail cars for better pay. Because of the sensitivity to market definition, it’s no surprise that estimates of typical levels of employer concentration vary wildly in the academic research, ranging from not concentrated to highly concentrated. Taken together, we view increased antitrust enforcement targeting employer concentration as relatively ineffective.
Restricting Non-Compete Agreements
The report also advocates restricting non-compete agreements, which can reduce worker bargaining power. Around 60 percent of major franchisor contracts have clauses that prevent within-chain hiring, and around 18 percent of the US workforce works under some type of non-compete agreement that limits worker actions following job separation.
It’s currently difficult to enforce laws that target anticompetitive agreements, and the Biden administration wants to change that. The report proposes passing legislation that makes it easier to form class-action lawsuits against employers, and enforcing rules that protect whistleblowers who call out bad behavior.
Yet, even an outright ban of these agreements would likely have small effects. For example, when Oregon banned non-compete agreements, wages rose by around 2-3 percent, a far cry from the Treasury report’s claim that labor market power lowers wages by 20 percent. Non-compete agreements also allow firms to invest in their employees: recent research shows some forms of non-competes are associated with better employee outcomes, and their alternatives, like fixed-term contracts, may be worse. Overall, we view non-competes as a small source of labor market power. We believe laws curbing their use won’t do enough to raise wages.
“we view increased antitrust enforcement targeting employer concentration as relatively ineffective.”
Raising the Minimum Wage
Raising the minimum wage is a popular policy outside the antitrust framework, and the Biden administration supports increasing it to $15 per hour. A lower bound on wages can directly limit the amount of wage suppression due to a lack of labor market competition. Critics contend that this could lead to fewer jobs overall.
Around 14 percent of the workforce would be directly affected by the proposed increase. Aggregating over one hundred minimum wage changes in the US, recent research finds no significant negative employment effect from raising minimum wages. These wage gains would likely be offset, as employers and other parts of the economy adjust to the new wage regime. Affected employers may switch to less labor-intensive production technologies, or raise prices. Other evidence implies raising the minimum wage results in higher housing costs and increased evictions for low-wage workers.
Yet, minimum wages may have other benefits. For example, historically, minimum wages have also reduced racial earnings inequality. Though raising the minimum wage may not adequately combat labor market power, we view the proposal as worth exploring on equity grounds.
Empowering Unions
Recent research argues that waning union threat explains the slowdown in wage growth, and that high union density is associated with decreased income inequality. These analyses support the view that unions reduce the negative effects of labor market power on workers. Unions might also have additional benefits, like reducing racist attitudes.
Other arrangements to increase worker power provide promising alternatives to unionization. Firms in Germany and Finland invest more when workers have a seat on corporate boards, otherwise known as co-determination.. Sectoral bargaining, where wage floors are set through collective, sector-wide bargaining, raises wages without depressing employment.
The Biden administration’s proposed legislation, including the Protecting the Right to Organize (PRO) Act and the Public Service Freedom to Negotiate Act introduce several avenues that we believe are encouraging. For example, the PRO Act expands labor rights and makes it easier to form a union through the presentation of signed cards from a majority of a firm’s workers (otherwise known as a “card check”).
Well-publicized unionization efforts at Starbucks and Amazon warehouses have brought renewed attention to the US organized labor movement. Unions, alongside other institutional arrangements that enhance the bargaining power of workers, remain promising tools to correct labor market distortions, particularly in low-wage labor markets.
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