Antitrust Remedies for Labor Market Power

By Naidu, Suresh; Posner, Eric A. et al. | Harvard Law Review, December 2018 | Go to article overview

Antitrust Remedies for Labor Market Power


Naidu, Suresh, Posner, Eric A., Weyl, Glen, Harvard Law Review


CONTENTS  I.   THE RISE OF LABOR MONOPSONY      A. The Economics of Labor Market Power         1. The Intellectual History of Monopsony         2. The Sources of Monopsony Power         3. The Social Cost of Monopsony         4. Recent Developments: Evidence of Labor Market            Concentration      B. Antitrust Law and Labor Markets         1. Antitrust Litigation Relating to Labor Markets         2. Class Action Requirements and Related Barriers            to Challenges of Anticompetitive Labor Market Practices II.  MERGER ANALYSIS OF LABOR MARKET HARMS      A. Market Definition and Concentration      B. Downward Wage Pressure      C. Merger Simulation      D. Other Factors in Merger Analysis         1. Efficiencies         2. Repositioning, Entry, and Potential Competition      E. Case Study: The Effect of Hospital Mergers on the Labor         Market for Nurses III. LEGAL REMEDIES FOR OTHER TYPES OF MONOPSONISTIC BEHAVIOR      A. Covenants Not to Compete      B. Supplier Wage Suppression      C. Collusion      D. More Speculative Anticompetitive Practices in Labor Markets IV.  CONCLUSION 

In recent years, a declining economic growth rate and rising income inequality have taken center stage in public debate. Academic research has identified several possible causes, ranging from major structural shifts in the economy to public policy failure. One cause that has received increasing attention from economists is labor market power--the ability of employers to set wages below workers' marginal revenue product. (1) New evidence suggests that many labor markets around the country are not competitive but instead exhibit considerable market power enjoyed by employers, who use their market power to suppress wages. (2) Wage suppression enhances income inequality because it creates a wedge between the incomes of people who work in concentrated labor markets and the incomes of people in competitive ones, and often affects low-income earners the most as they have the fewest options and least bargaining power. More important, though, it reduces the incomes of workers relative to those of people who live off capital, and the latter are almost uniformly higher earners than the former. Wage suppression also interferes with economic growth since it results in underemployment of labor. Furthermore, while it may seem to raise the return on capital, wage suppression actually depresses it, as capital must lie idle to take advantage of monopsony power. With wages artificially suppressed, qualified workers decline to take jobs, and workers may under-invest in skills and schooling. Many workers exit the workforce and rely on government benefits, including disability benefits, which have become a hidden welfare system. (3) This in turn costs the government both in lost taxes and in greater expenditures. We estimate monopsony power in the U.S. economy reduces overall output and employment by 13%, and labor's share of national output by 22%. (4)

Labor market power is the mirror image of product market power. A "product market" is a collection of products defined by frequent consumer substitution. When a small number of sellers or only one seller of these products exist, we say that each seller has (product) "market power," which enables it to charge a price higher than marginal cost, or the price that would prevail in a competitive market. When a small number of employers hire from a pool of workers of a certain skill level within the geographic area in which workers commute, the employers have labor market power.

One major source of market power in both types of markets is thus "concentration," where only a few firms operate in a given market. Imagine, for example, a small town with only a few gas stations. Each gas station sets the price of gas to compete with the prices of other gas stations. When a gas station lowers its price, it may obtain greater market share from other gas stations, but it also receives less revenue per sale. …

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