Why the FTC Should Focus on Labor Monopsony

Economic theory tells us that firms are more likely to exploit labor market power than product market power in the United States today. And it tells us that the government should devote more resources to labor market litigation than to product market litigation.

 

 


Editors’ note: In the last few weeks, the Federal Trade Commission has been holding a series of public hearings to discuss whether competition enforcement policies should be updated to better reflect changes in the US economy, namely market concentration and the proliferation of new technologies. The FTC hearings, which will be held throughout the fall and winter, cover topics as varied as privacy and big data, the consumer welfare standard in antitrust and labor market monopsonies. In order to provide ProMarket readers with a better understanding of the debates, we have asked a number of selected participants to share their thoughts on the topics at hand.


 

“The Tournament of To-day – a Set-to Between Labor and Monopoly” by Frederick Graetz. From Puck magazine, August 1, 1883.

The US government takes anticompetitive behavior far more seriously when it occurs in product markets than when it occurs in labor markets. The Horizontal Merger Guidelines, for example, direct the government to review mergers for their product market effects and say nothing about evaluating mergers on the basis of their labor market effects.

 

The Department of Justice and the Federal Trade Commission have launched countless investigations into product market mischief, and have historically ignored labor market abuse. Only in the last decade has labor monopsony flashed onto the government’s radar screen. In 2010, the DOJ sued a group of high-tech companies that had agreed to refrain from poaching each other’s employees. In 2016, the DOJ and FTC wagged a finger at human resources departments, warning them against no-poaching and wage-fixing agreements. Earlier this year, the DOJ announced its first enforcement action pursuant to this guidance. But while these new efforts are welcome, they are paltry compared to the enormous amount of resources that has been put into antitrust enforcement on the product market side.

 

This raises a question. Why has the government devoted fewer resources to patrolling labor markets than product markets? One possible answer is that the government should focus on product market competition—either because more harm occurs there, enforcement is more effective there, or both. That is probably the answer that a government official would have given a few years ago if anyone had asked him or her. However, this answer is surely wrong.

 

Since Adam Smith, economists have understood that profit-maximizing firms have strong incentives to obtain and exploit market power, and that they will be indifferent between exploiting labor market power and product market power. If a firm can charge a monopoly price, it will; and if it can pay a monopsony wage, it will. That also means that if antitrust enforcement is oriented toward product competition, then firms will be naturally driven toward exploiting opportunities on the labor side—and capital will flow toward the firms that face those opportunities. So economic theory tells us not only that firms will exploit labor market power. It tells us that firms are more likely to exploit labor market power than product market power in the United States today because the expected sanctions are so much lower in the first case than in the second. And it tells us that the government should enforce antitrust laws in product markets and labor markets.

 

The evidence suggests that firms are quite aware that they can make profits by obtaining and exploiting labor market power. Recent studies have shown that many labor markets are concentrated, and that wages, as one would predict, are lower in concentrated labor markets than in competitive labor markets. Moreover, concentration is far more serious in labor markets than in product markets; wage suppression is much more significant than price inflation. Studies have also revealed that firms will frequently use a covenant not to compete in settings where it is probably anticompetitive and illegal, and that the number of workers subject to a non-compete has been growing. Anecdotal evidence suggests that firms have used no-poaching and similar arrangements to minimize labor market competition, while the rise of no-poaching agreements within franchises has been documented statistically.

 

There is also a more far-reaching debate over whether the rise of market power explains many of the ills of our era, including stagnating economic growth rates, rising inequality, and political conflict. However this debate is resolved, it should not distract us from the simple point that labor monopsony, wherever it occurs, is a problem, and one that the FTC and the DOJ should urgently address.

 

There is another reason why the government needs to provide leadership: Private antitrust litigation against monopsonistic behavior is extremely rare. To provide a rough sense of the numbers, I searched the Westlaw database of antitrust cases for judicial opinions that included the words “labor market” and various standard antitrust terms (like “exclusionary”), and for opinions that included “product market” along with the same standard antitrust terms. The figure below shows the results:

 

 

There are hardly any labor market cases; indeed, the handful of cases that antitrust lawyers know about—the class action nurse litigation, the high-tech litigation, and older cases involving sports leagues—virtually exhaust the supply.

 

These data are important because they tell us that the government failure to challenge monopsonistic practices is not offset by private litigation. Asymmetric enforcement in product and labor markets, both private and public, is even worse than we thought.

 

Why has there been so little private litigation? It might be tempting to argue that the lack of private litigation just tells us that labor monopsony and monopsonistic practices are rare. But the empirical studies tell us that labor monopsony is not rare, and it would require a strange theory of managerial behavior to claim that while firms eagerly engage in anticompetitive behavior on the product market side, generating hundreds of cases and enforcement actions, they refrain from doing so on the labor market side. Thus, the answer must lie in the incentives and practicalities of private litigation. Several factors come to mind.

 

First, labor market litigation is more difficult than product market litigation because of the commonality requirement of class actions. Judges certify classes only when the members of a proposed class are sufficiently similar in terms of the factual and legal predicates of the lawsuit. Most product market class actions involve commodities, and class counsel can easily persuade courts that consumers are similarly situated with respect to the commodities except in minor ways that can be addressed in damages calculations. For example, some consumers might have received discounts, or bought different quantities of the commodity, or received different warranties, but the damages algorithm can take account of these differences. In contrast, employment relationships vary across many dimensions. Some employees have more seniority than others; some have different terms in their contracts, for example, covenants not to compete; some have different responsibilities and tasks; and so on. Such variation does not rule out a class action, but it does increase the risk that class certification will be denied.

 

Second, classes of workers will, on average, be smaller than classes of consumers. Similarly situated workers will typically be found in a single geographic market, defined for example by county lines or commuting distance, while nationwide consumer class actions are common. Because class sizes for workers are smaller, damages will also tend to be smaller, which means that worker class actions will frequently not be financially viable for the lawyers who fund them.

 

Third, price information for products is usually public—for commodities and many services (for example, airline ticket prices), it is always public. This means that the price increases are immediately detected, and hence litigation is easily commenced. Wage information is not normally public information, and employers frequently discourage workers from sharing information about wages.

 

Fourth, product market litigation often involves a natural corporate plaintiff that is willing to finance a lawsuit. For example, when manufacturers raise prices, the immediate victims may be distributors who can bring an antitrust lawsuit. In contrast, there is rarely a natural corporate plaintiff for litigation against labor monopsonists. Only occasionally, a firm might claim that another firm has erected a barrier against entry by tying up workers with covenants not to compete and long-term contracts. Such lawsuits exist but are rare.

 

Fifth, there may be doctrinal problems special to labor market cases. In product market cases, the methods for defining markets are well understood, and because consumer goods are often fungible or nearly so, courts accept product market definitions based on broad classes of goods. In contrast, the definition of labor markets is subject to controversy in the economics profession, and courts have rarely weighed in. Because employees are not fungible, change occupations from time to time, and vary in their toleration of commuting times, labor markets can be hard to define with the precision required for adjudication.

 

These barriers to private antitrust litigation against labor monopsonists help explain why such litigation is so much rarer than product market litigation. They also justify an increased role for the FTC and the DOJ. Indeed, they suggest that the government should devote more resources to labor market litigation than to product market litigation. Such efforts would not only improve competition in the labor markets on which the government focuses. They would also, by establishing new laws and ferreting out currently hidden anticompetitive practices, enable follow-on private litigation that would enhance competition in other markets.

 

Eric A. Posner is the Kirkland and Ellis Distinguished Service Professor at the University of Chicago Law School. His many books include The Twilight of Human Rights Law and Climate Change Justice (Princeton). His latest book is Radical Markets: Uprooting Capitalism and Democracy for a Just Society, co-authored with E. Glen Weyl.

 

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