For years, economists have puzzled over a question crucial to the well-being of American workers: Why does the law of supply and demand no longer apply to the U.S. labor market? Employers keep hiring, pushing the unemployment rate to record lows. Yet wages have refused to rise as quickly as they have in the past.
Researchers are converging on an answer: The labor market isn’t free. If they’re right, it’s a problem that needs to be addressed, or else millions of Americans will fail to reap the full benefits of economic growth.
Government policy generally takes it for granted that the U.S. has a large, efficient labor market, in which many companies compete for workers’ services across the nation as a whole. If that was ever the case, it isn’t now. Americans move a lot less than they used to, so in most cases markets are local, limited to a single commuting zone. And industries are a lot more concentrated – so much so that in many places and professions, there are only a few relevant employers.
As a result, companies hold greater sway than before over their respective labor markets. Economists call this “monopsony power” – that is, the ability to hold the price of inputs, such as labor, below what a free market would dictate. One 2017 study estimated that pay for the same jobs was as much as 25 percent lower in commuting zones with high employer concentration. Another found that the effect is strongest in places where unions are weak and where foreign competition is strong.
In addition, companies have found other ways to strengthen their bargaining power. As of 2016, an estimated 58 percent of major franchisers used “no-poaching” contracts that forbid franchisers to hire each other’s employees (a practice that is illegal among separate companies – and that some franchisers, such as McDonald’s and H&R Block, recently agreed to stop). And employers increasingly require workers to sign so-called noncompete agreements that prevent them from seeking better pay at rival firms.
Part of the remedy is to expand workers’ options by breaking down barriers to mobility. That requires reforming needlessly onerous licensing requirements, fragmented government-benefit programs and exclusionary residential zoning rules – all of which make it harder for workers to change occupation and seize economic opportunities.
Equally important, Congress should outlaw no-poaching agreements more thoroughly, and the Justice Department should enforce the existing law more aggressively. Noncompetes are defensible in some circumstances – such as when companies have made big investments in their employees’ skills, or where proprietary information is at risk – but they shouldn’t apply to workers earning low wages. Federal legislators ought to follow the example of California and other states that have limited their use.
Finally, the government should do more to stop companies building monopsony power in the first place. Regulators ought to consider the effect of mergers on workers, as well as on consumers. The need to maintain competitiveness might still justify the merger, but deals that press down on wages without providing that benefit ought to be modified or rejected.
Capitalism succeeds when its benefits are broadly distributed. At the moment, it’s falling short. Freeing up the labor market would help.
Bloomberg View editorial.
