Monday, November 7, 2016

Rising business concentration and labor market failures

I have blogged earlier about the trend of decreasing returns to labor. To the growing list of possible contributors - globalisation, skill-biased technologies, automation, stagnant minimum wages, reduced power of unions etc - comes the latest, reduction in competition among firms. 

There is a growing body of evidence, especially from the US about the increased concentration of market power - loan market share of top ten banks rose from 30% to 50% in 1980-2010 period; share of revenues held by top four firms increased in 1972-2002 in eight of nine agricultural industries; hospital market concentration increased by about 50% since early 1990s to 2006 etc. 

In particular, a briefing paper by the US White House economists points to the disturbing trend of labor market monopsony arising from decreased competition across industries. It shifts the bargaining power towards employers, leaving employees as effectively price takers in the labor market. It points to certain trends that highlights rising employer discretion over wages - rising market concentration accompanied by declining "business dynamism" (or entry of new firms); declining "labor market dynamism" (or frequency of job changes by employees) due to rising regulatory barriers and lower geographic mobility; and decline in union membership; and decreasing real federal minimum wage. 

Its suggestions go far beyond antri-tust enforcement and are reminiscent of a clearly centre-left agenda,
Additional important policies include those that facilitate job search, increase worker options, and directly counter the wage-setting power of employers... Promote Equal Pay... Policies that support minimum benefits are therefore an important complement to minimum wage and overtime laws to counter the market power of employers... Reform Unnecessary Occupational Licensing Requirements and Increase Portability across States... reform land use regulations to make housing affordable... Support Workers’ Right to Collective Bargaining and Concerted Activity... modernise overtime regulations to protect workers who are not eligible for overtime but who have relatively low salaries... raise the minimum wage.
In a recent speech, Jason Furman the Chairman of Council of Economic Advisors, pointed to seven macroeconomic trends, largely similar to those outlined above, related to this environment of decreased competition. He suggests four policy areas for addressing this - patent and intellectual property rights reforms that strike a balance between the need to promote innovation and the dangers of granting excessive monopoly rights; policies that increase the bargaining power of workers; reforms to occupational licensing which has grown from covering under 5% of US workers in 1950s to over 25% in 2008; and reforms to land-use regulations to increase housing supply. 

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