Explainers

Labor and Monopoly


Most major demographic groups in the United States, including college graduates, have less wealth and earn less money after inflation than did their counterparts a generation ago. This pervasive downward mobility among broad sections of the U.S. population has many causes, but one is receiving increasing attention among economists and policymakers. In October 2016, the White House Council of Economic Advisers issued a report noting that the increasing concentration of economic power ultimately “leads to redistribution from workers to employers.”

The basic dynamics behind this redistribution are simple. Consolidation means fewer jobs, as merged corporations tend to cut jobs after they combine. Moreover, in an economy dominated by highly concentrated industires it becomes more difficult for entrepreneurs to start successful new companies, thereby suppressing one the most important sources of new job formation. Consolidation also means there are few employers competing to hire or retain each worker, thereby putting downward pressure on wages.

One way to understand the effects of concentration on workers is to look at layoffs. In 2005, Whirlpool announced plans to purchase Maytag, creating an appliance behemoth that would control between 50 and 75 percent of some markets. Soon after the deal was approved, Whirlpool cut 4,500 jobs. These layoffs were typical of what happens when companies merge. The pharmaceutical industry alone cut over 143,000 jobs between 2008 and 2013, mostly as a result of mergers.

Monopolies and highly concentrated corporations also have the power to prevent entrepreneurs from launching new companies. As American markets have become more concentrated since the late 1970s, the per capita rate of new business formation has dropped in half. Today, there are not enough new businesses to replace those that fail, leaving America with many fewer jobs than it would otherwise have.

Monopolization also leads to a sharp decline in competition for many types of workers, especially in local markets. For instance, a study recently published in Health Affairs found that hospital ownership in 90 percent of metro areas is now so concentrated that it exceeds what antitrust regulators have historically regarded as the threshold for when action is needed to avoid inefficiency and collusion. One effect of this massive consolidation is a significant reduction in the number of hospitals competing to hire nurses and other health care professionals in most communities. This in turn has allowed hospitals to conspire in price-fixing schemes, according to several recent class action lawsuits

When there is only one buyer left in a market with many sellers, that single buyer gains what economists call “monopsony power.”  In a town dominated by a single employer, workers have few or no other places to work. This means that they are effectively forced to take the wage that employer offers if they want jobs at all.  As unions are beginning to realize, even if some monopolies are easier to organize, their monopsony power over labor means that workers are still at a disadvantage.

Moreover, dominant companies often supplement their monopsony power by agreeing not hire each other’s workers. These cartels are easier to organize in concentrated economies, where it is easier to ensure one’s competitors do not abandon the agreement. From 2005 to 2009, many of Silicon Valley’s top engineers saw their wages suppressed by the industry’s biggest firms, including Apple, Google, Intel, and Adobe, all of whom agreed not to hire each other’s employees. The companies effectively cheated tens of thousands of workers out of billions of dollars by agreeing to erase the competitive hiring that helps raise wages.

Another way dominant companies leverage their monopsony power is by requiring workers to sign non-compete clauses. These rules—which limit where people can work after quitting a job—reduce businesses’ competition for workers, thereby suppressing wages and strengthening employers. Some states like California forbid them. But elsewhere, they are common. Today, non-compete clauses cover 30 million of America’s 170 million workers.   They are most common among engineers, nearly a third of whom are bound by non-competes, but anecdotal evidence shows them spreading even lesser skilled jobs, including temporarily employed ‘packers’ at Amazon

Corporate concentration also undermines the bargaining power of the increasing share of American workers who are employed as independent contractors in today’s gig economy. Taxi drivers in many communities find there are only two companies, Uber and Lyft, for whom they can drive, and thus have to accept their terms of employment. Similarly, in highly concentrated media industries, there are fewer and fewer places where freelance writers and creative content producers can sell their work. In turn, they become price takers rather than price makers. Indeed, many American workers have to accept lower prices for their labor and deteriorating working conditions, including the loss of benefits and employment protections.

To be sure, other factors have weakened the bargaining power of labor in today’s economy, but they probably are not as important as many people think. Automation, for example, has played a comparatively minor role, since rates of productivity growth are far lower today than they were in the 1950s and 60s. Similarly, despite increased immigration, the labor force has grown far more slowly than in previous decades due to low birth rates and an aging Baby Boomer population. Additionally, most American workers are employed in the service sectors of the economy, such as health care and education, where there is little or no competition from imports. But the increasing monopolization of the U.S. economy affects nearly all workers, and its timing tracks closely with the declining fortunes of labor.

Americans have faced similar challenges in the past and found ways to meet them. As industries became more consolidated during the late 19th century, many observers saw the threat that concentrated ownership posed to workers. The Knights of Labor, one of the country’s first national unions, viewed monopoly as a direct threat to the liberty of the working man. So did Senator John Sherman, author of the Sherman Antitrust Act of 1890. A monopoly, he said while defending the legislation, “commands the price of labor without fear of strikes, for in its field it allows no competitors.”

To meet the challenge, both Democratic and Republican administrations busted trusts and other corporate monopolies while simultaneously supporting workers’ right to unionize. In 1914, for instance, both parties aligned to pass the Clayton Antitrust Act, which stepped up prosecution of corporate monopolies while exempting unions antitrust prohibitions. In mid-20th century America, anti-monopoly policy and labor advocacy helped drive a broad increase in prosperity and a sharp decline in inequality. But the overthrow of traditional antimonopoly policy a generation go upset this balance, and will not be restored until America once again uses public policy to preserve completion on prevent the cornering of markets.

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In America today, wealth and political power are more concentrated than at any point in our country’s history.

The Open Markets Institute, formerly the Open Markets program at New America, was founded to protect liberty and democracy from these extreme -- and growing -- concentrations of private power.

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