Labor Market Monopsonies and the Decline of the Labor Share: Q&A with Sandra Black

Sandra Black, member of President Obama’s White House Council of Economic Advisers, expands on the growing evidence of labor market monopsony.

 

 

Sandra Black
Sandra Black

On March 7, 2007, the late Steve Jobs sent an email to Eric Schmidt, who was at the time Google’s CEO and still a member of Apple’s board of directors: “Eric, I would be very pleased if your recruiting department would stop doing this. Thanks, Steve.”1)Mark Ames, “Newly Unsealed Documents Show Steve Jobs’ Brutal Response After Getting a Google Employee Fired.” PandoDaily, 2014.

 

“This” was a cold call from a Google recruiter to an Apple engineer trying to convince the engineer to move to Google. The next day, Schmidt sent the following email to Google’s HR department: “I believe we have a policy of no recruiting from Apple and this is a direct inbound request. Can you get this stopped and let me know why this is happening? I will need to send a response back to Apple quickly so please let me know as soon as you can. Thanks, Eric.” Shortly thereafter the recruiter was fired.

 

This exchange between two of the most powerful people in the tech world—and definitely in Silicon Valley—was one of the pieces of evidence in a 2010 antitrust lawsuit by the DOJ against Adobe, Apple, Google, Intel, Intuit, Lucasfilm, and Pixar (US v. Adobe Systems Inc., et al.). The DOJ claimed that the defendants entered into an illegal “no cold call” agreement, thus limiting their respective employees’ career options.

 

The DOJ used harsh words in its complaint: “Defendants’ concerted behavior both reduced their ability to compete for employees and disrupted the normal price-setting mechanisms that apply in the labor setting. These no cold call agreements are facially anticompetitive because they eliminated a significant form of competition to attract high tech employees, and, overall, substantially diminished competition to the detriment of the affected employees who were likely deprived of competitively important information and access to better job opportunities.”2)You can find the full complaint here.

 

The DOJ and the defendant companies proposed a settlement on the same day that the suit was filed. Although the DOJ was not timid in the way it described the defendants’ conduct—and although it was definitely a high-profile case that was not just well-covered by the press but also followed closely by corporate executives—the outcome was only moderately impactful: in the settlement that was approved by the court, the companies agreed to broader limitations on the recruitment practices for a period of five years. The settlement included no compensation for the employees. However, a class action resulted in Adobe, Apple, Google, and Intel paying $415 million, Pixar and Lucasfilm paying $9 million, and Intuit paying $11 million.

 

What was unusual about the suit was that, while the vast majority of antitrust cases are focused on monopolizing product markets, this one was not.

 

While the U.S. antitrust laws are understood—and indeed researched, discussed and litigated–to be related to monopolies as suppliers of products and services, they are in fact relevant to more ways in which entities command market power.

 

One such way is a monopsony. While monopolies are sellers, monopsonies are buyers. And as monopolies have power over the prices of the products they sell to the market, monopsonies have power over the price they pay for the products and services they buy from the market. The case against the tech companies claimed that they acted as monopsonies in the labor marketthe biggest market they face as buyers.

 

Monopsonies, specifically monopsonies in the labor market, are the focus of an October 2016 issued brief, titled “Labor Market Monopsony: Trends, Consequences, and Policy Responses,” issued by the three-member White House Council of Economic Advisers (CEA).

 

The issue brief contains a chart that shows that labor share of income decreased from about 65 percent in the 1940s and 1950s to about 58 percent in 2016. The sharpest decline occurred since the turn of the century.

 

sandra figure1

 

But this chart hides a deeper issue: the rise in income inequality. “Over the past several decades,” the brief says, “only the highest earners have seen steady wage gains; for most workers, wage growth has been sluggish and has failed to keep pace with gains in productivity.”

 

Under perfect competition in labor markets, employers and employees are all price takers–in this case, wage takers. When wages fall behind rises in productivity—the phenomenon the issue brief points to—this is one sign that could point to wage-setting power by employers.

 

The brief points to other evidence on labor market monopsony. One is collusion cases that were tried; the two most notable examples being the cases against hospitals in Arizona and Michigan and the case against the Silicon Valley giants.

 

Another type of evidence on labor market monopsony is the extensive use of non-compete clauses in employee contracts, even though in many cases the employees have no possession of trade secrets and in some cases such clauses are unenforceable. The brief cites a survey that has evidence that suggests that as much as 18 percent of the total labor force is covered by non-compete clauses. The issue brief also says that the minimal effect of minimum wages on employment levels suggests that firms have wage-setting powers and points to discrimination, especially against women, as evidence. The brief also states that rising concentration in the product market may lead to wage-setting powers.

 

Employer-sponsored health benefits tie employees to specific employers (“Job Lock”), mainly because insurers in new workplaces may demand higher premiums for pre-existing conditions or refuse to insure altogether. This also improves employers’ abilities to set wages.

 

Some measures have already been taken to address these issues, such as a DOJ and FTC campaign to educate HR professionals on what constitutes collusion, how to spot it, and how to report it. And, of course, the Affordable Care Act, which provides new options for individuals who may not have access to employer-sponsored insurance to buy coverage and requires insurers to accept applicants regardless of pre-existing conditions.

 

Two of the most efficient tools to fighting labor market monopsonies are setting minimum wages and encouraging collective bargaining. According to data cited in the issue brief, since 1968, the real value of the federal minimum wage has fallen 24 percent, hurting mostly those employees who have the least options. While in 1955 about a quarter of employees were members of unions, the current rate is 10 percent (7 percent in the private sector). The issue brief points to research that suggests that declining unionization accounts for between a fifth and a third of the increase in inequality since the 1970s.

 

sandra figure6

  

In fact, the issue brief finds signs that wage-setting by employers is rising, mainly because of increased product-market concentration and what seems like a decrease in labor market dynamism—the degree of worker migration between different employers.

 

Following the issue brief, we discussed labor market monopsonies and other types of market concentration with Professor Sandra Black, a member of President Obama’s CEA and the Audre and Bernard Rapoport Centennial Chair in Economics and Public Affairs at the University of Texas.

 

Guy Rolnik: Having read Neil Irwin’s piece in The New York Times about the predistributionist philosophy,3)Neil Irwin, “A New Movement in Liberal Economics That Could Shape Hillary Clinton’s Agenda.” The New York Times, November 2016. I wanted to ask if we should see the brief that you wrote as part of an idea that is being incubated or promoted in the CEA regarding the role of concentration in what’s happening in the U.S. economy over the last few decades?

 

Sandra Black: It is part of the broader theme. We were excited about doing this brief, specifically because while people talk about product market concentration all the time, there’s much less discussion of wage-setting power on the labor side. It was really important to us to make sure that was part of the conversation.

 

GR: Can you explain, in more detail, how this brief fits into the overall theme of concentration and its influence on the U.S. economy?

 

SB: The issue brief really isn’t about just product market concentration. In fact, part of the point is to say that while economists often focus on product market concentration, there are a number of different possible sources of wage-setting power and monopsony. When we use the word “monopsony,” in labor we’re speaking more broadly of firms that have wage setting power.

 

Product market concentration is one way that firms might be able to gain wage-setting power through behaviors such as collusive wage-setting. That would be one example. But there are a number of other ways that firms could have wage-setting power, even in the absence of product market concentration.

 

For example, one of the reasons that we did this was to highlight the extensive use of non-compete contracts that many workers are being forced to sign when they have no trade secrets whatsoever. Workers who make sandwiches are often asked to sign non-compete agreements, which then limits their mobility.

 

It gives the firm a certain amount of wage-setting power, even when there may be no product market concentration. Even when there aren’t external factors, firms could have wage-setting power because workers have limited mobility and aren’t able to easily change jobs. For example, because of geography, family obligations, or some other force, they need to be in a particular area, so firms in that area might have power over them to set wages lower.

 

GR: Can you give specific examples of industries or regions where you would expect to see monopsony power in the labor market, and not necessarily product market monopoly?

 

SB: Any time search is costly, or mobility is costly, we would expect to see firms having wage-setting power. We see evidence of this in the declining dynamism in the labor marketwhen workers are moving less often. I don’t know that there are particular examples of a specific locality, but, clearly, when transportation costs are higher, workers are less able to move.

 

GR: When you say “declining dynamism in the labor market,” can you point to specific industries, or perhaps level of education, where we can expect to see it?

 

SB: I believe that it’s relatively widespread. The work by Raven Malloy, Chris Smith, and Abigail Wozniak documents this declining dynamism.

 

GR: Do you think we can point to particular industries where we already see evidence, or expect to see monopsony power on labor playing out more significantly?

 

Sandra Black: The easiest examples are the cases of wage collusion that we’ve seen. This takes the form of illegal agreements among companies not to hire one another’s workers, or coordination to suppress wages below market rates. We have limited examples of cases that have been brought against companies for wage collusion. For those we do have, it’s clear that the impacts on workers can be meaningful.

 

To give an example, starting in 2006, registered nurses in five metropolitan areas filed antitrust class action lawsuits alleging that local hospitals colluded in order to depress their pay. In those cases, the plaintiffs’ attorneys estimated that nursing wages fell upwards of $5,000 short of where they should have been set. At the same time, we see cases in Silicon Valley.

 

To address this, and this is one of the policies that the Obama Administration announced, the Department of Justice and the FTC released guidance for HR professionals on how to spot and report collusion among competing employers that may violate antitrust laws.

 

More generally, we might expect firms to have more market power where there’s limited worker mobility, due to regulations, licensing, or higher transportation costs.

 

GR: The case of Silicon Valley is very interesting, because you’d expect that people employed there, who are highly-skilled and educated, would find it easier to search and therefore display more mobility. Yet some of the biggest firms in Silicon Valley engaged in an illegal activity, colluding not to hire them. Do you think that the problem was a lack of deterring enforcement by the DOJ?

 

SB: I don’t comment on the enforcement by DOJ. I do think it’s interesting that while high-skilled workers in Silicon Valley may have a lower cost of search, they may have had very specific, industry specific, human capital. Mobility, in that case, may not have been easy if all the firms that you want to work for—where you have the most value—are colluding.

 

GR: Do we have any magic numbers or areas so that we can say, for example, if the number of players in a given market falls below a specific threshold then it would be easier for them to collude in the labor market?

 

SB: I don’t think we know enough yet about the dynamics of market power across all markets to point to a specific number, beyond that it could exist.

 

GR: Economists who deal a lot with concentration have been focusing most of the time on efficiency, and specifically prices in the product market—the competition in the product market. Do you think that, since they don’t research other important issues that may be more harmful to the economy, the result is that we might have failed in understanding all the harms done by concentration?

 

SB: The important thing that we’re trying to highlight is that it’s really not just about concentration. The reason that we were so excited to do this was because I think people don’t really pay as much attention to wage-setting power in the labor market.

 

Industrial economists have spent a lot of time talking about product market concentration and market structure. In labor, when you’re taught basic economics, you’re taught the perfectly competitive market. You think about everything from that baseline. When you’re taught monopsony, the default is to think about the perfectly competitive situation. The goal of our issue brief was to really highlight that this may not be the right default to be thinking about, that there are a lot of reasons beyond just market concentration where firms can have power over workers, and as a result use that power to set wages lower.

 

We think that, given the decline in unionization and decline in labor’s share of income, this is really an important issue, and one that we don’t think was being talked about enough. Our goal was to make people talk about it.

 

GR: I used to give my students your paper on rent-sharing in the banking sector, where you showed that banks shared their regulation-fostered rents with their employees, mainly with men.4)Sandra E. Black and Philip E. Strahan, “The Division of Spoils: Rent-Sharing and Discrimination in a Regulated Industry,” The American Economic Review No. 4 (2001): 814-831. I used your paper to show them why competition is important in labor discrimination and that competition can correct discrimination in labor. We know that many times, monopolies tend to share the rents with employees. It is also demonstrated in the paper by Jason Furman and Peter Orszag on super-normal returns.5)Jason Furman and Peter Orszag, “A Firm-Level Perspective on the Role of Rents in the Rise in Inequality.” Presentation at “A Just Society,” Centennial Event in Honor of Joseph Stiglitz at Columbia University (2015). But while on the one hand, we’re saying monopolies and concentrated industries share rents with employees, on the other hand you’re saying this can also work in reverse, and they can suppress labor costs. 

 

SB: Yes. The key point that is important to make is that monopoly is not the same thing as monopsony. It is certainly the case that monopolies sometimes share rents with workers, especially in the case of strong unions, although as you know from my own paper, we have also sometimes seen that the absence of unions. That could be happening, but when we’re talking about monopsony power, we’re not talking about product market concentration. When we talk about product market concentration in the issue brief, we focus on how firms could use it to collude and pay workers lower wages. It’s not the key point that we’re trying to make. It’s that firms can have wage-setting power, even in the absence of colluding or direct action by the firms, and that it’s important to recognize that that’s something that may be going on at the same time.

 

GR: What are the most important measures that we should consider or explore to deal with monopsony power in the labor market, in your opinion?

 

SB: Understanding where it’s coming from is a key factor. That’s something that we’re still working on. One of the trends that research uncovered is the extensive use of non-compete agreements, even when it seems completely unjustified by any theoretical argument. It’s very hard to argue that sandwich makers have very specific trade secrets that should preclude them from moving to a different firm.

 

Making sure that these kinds of measures are not being used to prohibit workers from moving across firms is one step we can take. Being aware of what’s going on, trying to understand it, doing more surveys—all of these things are really important, going forward and can help policymakers better assess the best way to respond.

 

GR: In terms of policy, is this something that people at the Department of Labor should consider, and not people in the antitrust division at the DOJ?

 

SB: It’s broader. For wage collusion, that often raises a direct antitrust issue. For non-competes, many of the relevant policy tools exist under the Department of Labor. A lot of this is state level;  non-competes are regulated at the state level. What we’ve done is a call to action for states to be aware and to make sure that non-competes are being used appropriately and are being enforced appropriately in their specific state.

 

Some of this isn’t work that the federal government can do so much as the state level. In those instances, we’re trying to make them aware and help facilitate their legislation.

 

GR: When we talk about non-compete, you provide some evidence of the percentage of workers whose contracts contain non-compete clauses. Do you have any evidence regarding how many times this is really enforced by companies and by the courts?

 

SB: I don’t have those statistics. One of the considerations that is really important is that there is likely a deterrent effect. Even if non-competes are not necessarily enforced, or workers don’t see them being enforced, they could dissuade the workers from searching for new jobs or considering a job change.

 

An example is that in California, there’s a large fraction of low-wage workers signing these non-compete agreements even though they are unenforceable. To the extent that workers think that these are binding, it will inhibit their mobility.

 

Disclaimer: The ProMarket blog is dedicated to discussing how competition tends to be subverted by special interests. The posts represent the opinions of their writers, not those of the University of Chicago, the Booth School of Business, or its faculty. For more information, please visit ProMarket Blog Policy. 

References   [ + ]

1. Mark Ames, “Newly Unsealed Documents Show Steve Jobs’ Brutal Response After Getting a Google Employee Fired.” PandoDaily, 2014.
2. You can find the full complaint here.
3. Neil Irwin, “A New Movement in Liberal Economics That Could Shape Hillary Clinton’s Agenda.” The New York Times, November 2016.
4. Sandra E. Black and Philip E. Strahan, “The Division of Spoils: Rent-Sharing and Discrimination in a Regulated Industry,” The American Economic Review No. 4 (2001): 814-831.
5. Jason Furman and Peter Orszag, “A Firm-Level Perspective on the Role of Rents in the Rise in Inequality.” Presentation at “A Just Society,” Centennial Event in Honor of Joseph Stiglitz at Columbia University (2015).

5 comments

  1. It is not clear to me how you can assess the decline in the wage share without considering the effect of capital investment on labor productivity. Even considering that capital share has also declined, is it not feasible that lower amounts of capital investment can generate increases in labor productivity that are not rewarded through higher wages?

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