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Employer Concentration and Outside Options Employer Concentration and Outside Options Gregor Schubert, Anna Stansbury, and Bledi Taska * November 22, 2020 Job Market Paper (Anna Stansbury) Click here for most recent version Abstract This paper studies the effect of employer concentration on wages in the United States. We make two primary new contributions. First, we develop an instrument for employer concentration, based on differential local exposure to national firm-level trends. We use the instrument to estimate the effect of plausibly exogenous variation in employer con- centration on wages across the large majority of U.S. occupations and metropolitan areas. Second, we adopt a flexible \probabilistic" approach to labor market definition, identifying relevant job options outside a worker's own occupation using new occupa- tional mobility data constructed from 16 million resumes, and estimate the effect of these outside-occupation options on wages. We find that moving from the median to the 95th percentile of employer concentration reduces wages by 3.5%. But we also reveal substantial heterogeneity: the effect of employer concentration is at least six times higher for low outward mobility occupations than those with high outward mo- bility. Since the majority of U.S. workers are not in highly concentrated labor markets, the aggregate effects of concentration on wages do not appear large enough to have substantial explanatory power for income inequality or wage stagnation. Nonetheless, our estimates suggest that a material subset of workers experience meaningful negative wage effects from employer labor market power. Our findings imply that labor market regulatory agencies and antitrust authorities should take employer concentration seri- ously, but that measures of employer concentration { typically calculated for narrowly defined occupational labor markets { need to be adjusted to incorporate the availability and quality of job options outside the focal occupation. * Schubert: Harvard University, [email protected]. Stansbury: Harvard University, annastans- [email protected]. Taska: Burning Glass Technologies, [email protected]. Previous versions of this paper have been circulated under the titles \Monopsony and Outside Options", and \Getting Labor Markets Right". For their detailed comments and advice, we thank Justin Bloesch, Gabriel Chodorow-Reich, Karen Dynan, Richard Free- man, Ed Glaeser, Xavier Gabaix, Benny Goldman, Larry Katz, Larry Summers, Maya Sen, and Betsey Stevenson. For helpful discussions, we thank David Balan, John Coglianese, Oren Danieli, David Deming, Martin Feldstein, Claudia Goldin, Emma Harrington, Simon Jaeger, Robin Lee, Ioana Marinescu, Jeff Miron, Suresh Naidu, Nancy Rose, Isaac Sorkin, Elizabeth Weber Handwerker, Ron Yang and participants of the briq Workshop on Firms, Jobs and Inequality, the 2019 Federal Reserve System Community Development Research Conference, the IZA Summer School on Labor Economics 2019, the IZA/CAIS Workshop on Matching in Online Labor Markets, the Urban Economic Association Meetings 2019 and 2020, the Wharton People and Organizations Conference, the Asian and Australasian Society of Labour Economics 2019 Conference, the Oxford NuCamp Virtual PhD Workshop, the Harvard Center for International Development Growth Lab Seminar, the MIT IWER Seminar, and the Harvard Labor, Industrial Organization, and Macro lunches, Labor breakfast, and Multidisciplinary Seminar on Inequality and Social Policy. This research was supported by the Washington Center for Equitable Growth (Schubert & Stansbury) and the James M. and Kathleen D. Stone PhD Scholarship in Inequality and Wealth Concentration (Stansbury). 1 Introduction Policy and academic debates have become increasingly focused in recent years on the issue of employer concentration. A lack of choice of job options for workers - as a result of a few large firms dominating their local labor market - has been posited as a possible explanation for inequality, low wages, and stagnant wage growth. Antitrust authorities have been called upon to consider employer concentration when reviewing mergers and acquisitions. Concerns have been raised that high employer concentration may facilitate (legal or illegal) restrictions to labor market competition, such as the use of no-poaching agreements or non-compete clauses. And, since employer concentration can be a source of monopsony power in labor markets,1 concerns around high employer concentration have bolstered calls for higher minimum wages and for a strengthening of workers' collective bargaining power.2 But to assess whether { or in which cases { policy should respond to employer concentration, we need a deeper understanding of the nature and effects of employer concentration in the United States. Two major open issues remain. First, endogeneity: while there is a well-documented negative correlation between local employer concen- tration and wages, the extent to which this is causal { and the magnitude of any such causal effect { is unclear. Second, market definition: assessing the effect of local em- ployer concentration on wages, and pinpointing the workers who are most affected by it, requires a good definition of the relevant local labor market for workers.3 Our paper addresses both of these issues, estimating the effect of employer con- centration on wages across the majority of U.S. occupations and metropolitan areas. To address the endogeneity issue, we develop a new identification strategy based on differential local exposure to national firms’ hiring growth. To address the market def- inition issue, we segment our analysis by the degree of outward mobility from different occupations. We also develop a new measure for the outside option value of local jobs in other occupations, proxying for workers' ability to find a job in another occupation 1See, for example, Robinson (1933) or Manning (2003) on monopsony power. Note that employer concentration is only one possible source of monopsony power in labor markets. Others include search frictions, switch costs, and worker and job heterogeneity. 2Authors making arguments referred to in this paragraph include, variously, Bahn (2018); Sham- baugh et al. (2018); Krueger and Posner (2018); Naidu et al. (2018); Marinescu and Hovenkamp (2019); Marinescu and Posner (2020); Naidu and Posner (2020). 3Prominent critiques of the emerging recent literature on employer concentration and wages focus on these two factors, including Rose (2019) and Berry et al. (2019). 1 using new occupational mobility data which we construct from 16 million U.S. work- ers' resumes, and use our new measure to estimate the joint effect of within-occupation employer concentration and outside-occupation options on wages. Our baseline results suggest an important effect of employer concentration on wages: moving from the degree of employer concentration faced by the median worker to that faced by the worker at the 95th percentile results in a 3.5% lower wage, holding all else equal. This average, however, masks substantial heterogeneity: the effect of employer concentration is at least six times higher for the least outwardly mobile than the most outwardly mobile occupations. A back-of-the-envelope calculation, using our coefficient estimates, suggests that around 15% of the U.S. private sector workforce experiences wage suppression of 2% or more as a result of employer concentration. Overall, our findings point to a middle ground between two prominent views about the effects of employer concentration in the U.S. labor market. On the one hand, em- ployer concentration is not a niche issue confined to a few factory towns: our results suggest that a material subset of U.S. workers see non-trivial effects of employer con- centration on their wages. On the other hand, employer concentration does not seem to be an important determinant of wages for the majority of U.S. workers, and the effects of employer concentration do not seem big enough to have a substantial effect on the aggregate wage level or degree of income inequality in the U.S. economy. The fact that employer concentration affects wages for several million American workers suggests that increased policy attention to this issue is appropriate, both from antitrust authorities and from labor market authorities who might promote counter- vailing worker power through labor market regulations, minimum wages, or collective bargaining. In making policy decisions which depend on employer concentration, how- ever, the definition of the labor market is vitally important. Policymakers seeking to act on a (perceived) lack of labor market competition should take into consideration not only the degree of employer concentration within the local occupation, but also the degree of outward occupational mobility and the availability and quality of local job options in other feasible occupations. We give a more detailed overview of our analysis in the rest of this section. In section 2, we outline the conceptual framework guiding our analysis. We outline our empirical approach in sections 3 and 4, and present our results in section 5. Section 6 discusses the implications of our findings, and section 7 concludes. 2 1.1 Overview of our analysis Employer concentration and wages { theory: There are a number of models of the labor market in which employer concentration matters for wages. First, if there are few large employers in a given labor market, and each individual firm therefore faces an upward-sloping labor supply curve, firms will optimally pay a wage which is marked down below the marginal product
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