Monday, June 4, 2018

Anti-trust action in labour markets?

The case for anti-trust action is evident for most people except the American regulators and regulated entities.  

The latest evidence comes from Eric Posner, Glen Weyl, and Suresh Naidu, who demonstrate labour market concentration and monopsony power exercised by corporations over workers in several labour markets in the US. They argue that it lowers economic growth, raises prices, disadvantages workers, and widens inequality. Here is Cass Sunstein on their work,
Their central argument is that in the United States, many labor markets are not competitive. Employers have a ton of market power. They use it to suppress wages, often harming low-income workers in particular... Posner and his co-authors estimate that the economic power of employers is reducing overall output and employment by a whopping 13 percent — and labor’s share of national output by 22 percent. Their driving idea is “monopsony,” which arises when corporations have market power in their purchases of goods and services, including labor. As a result, employers may be able to drive down wages and benefits and to provide poor (and unsafe) working conditions.
Posner and colleagues show that anti-trust regulators generally ignore labour market power while evaluating mergers and confine themselves only to product market power, even though the latter invariably leads to the former. In fact they find that increased business concentration and attendant firm power leads to a compression of labour share of national income by upto a fifth. They write,
Employment, we calculate, is 5 to 18 percent less than it would be in a competitive market... Given the way our economy works historically, labor’s share of economic output should be about 74 percent if labor markets were perfectly competitive. Because of employers’ power to drive down wages, labor’s share of economic output falls to somewhere between 51 and 64 percent. This transfer significantly increases income inequality.
To put this into more concrete terms, consider the market for nurses. The median wage for a nurse is about $68,000. Given what we know about the labor market power of medical institutions, the true competitive wage for a nurse would be at least $90,000, possibly as much as $200,000. However, because most areas have few hospitals, they can suppress nurses’ wages without worrying that nurses will move to a rival hospital. Some nurses will drop out of the labor market entirely, but the hospital still earns a greater profit by shrinking its operation and cutting wages dramatically.

For the labor market as a whole, the median annual compensation is $30,500. If markets were competitive, we estimate that this amount could rise to $41,000, and possibly to as much as $92,000. If labor market power reduces employment and wages, then it must also reduce government’s revenue from taxes... Our calculations suggest that revenue declines by 20 to 58 percent as a result of labor market power.
In sum, growing labor market power may well be a significant explanation of the host of maladies that have beset wealthy countries, notably the United States, in the past few decades: declining growth rates, falling labor share of corporate earnings, rising inequality, falling employment of prime-age men, and persistent and growing government fiscal deficits... Many conservative economists blame high taxes for these problems. But inordinately high taxes cannot explain these trends, because tax rates have been cut several times during this period. Nor can globalization and automation. Globalization and automation can help explain why inequality has increased but not why economic growth rates have stagnated: On the contrary, globalization and automation should have increased economic growth (by expanding markets and by reducing the cost of production), not reduced it.
They argue that a labor market is confined to a few sq km area, in so far as people are reluctant to go beyond that in search of jobs. And in most localities business concentration means that some businesses have come to exercise significant labour market power. Non-compete clauses which prevent workers who leave a job from working for a competitor, cover nearly a quarter of all workers. 

Adding to their work, Jose Azar, Ioana Marinescu, and Marshall Steinbaum, write about labour market concentration,
Using data from the leading employment website, we calculate labor market concentration for over 8,000 geographic-occupational labor markets in the US. Based on the DOJ-FTC horizontal merger guidelines, the average market is highly concentrated. Using a panel IV regression, we show that going from the 25th percentile to the 75th percentile in concentration is associated with a 15-25% decline in posted wages, suggesting that concentration increases labor market power.
The problem is so evident that even the Economist has argued in favour of greater bargaining power to workers, or more and stronger unionisation!

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