RESEARCH BRIEF | May 2019 ec nfip Economics for Inclusive Prosperity Antitrust and Labor Market Power¹ José Azar, Ioana Marinescu, and Marshall Steinbaum Starting with the Chicago School’s influence in the The Theory and Empirics of late 1970s and 1980s, antitrust enforcement has been weakened under the assumption that market power is Labor Market Monopsony justified by economic efficiency. While consumers are the main focus of antitrust enforcement, the weakening Monopoly power is the ability of an individual seller of antitrust enforcement has likely also adversely to control all or a substantial part of the market and impacted workers, thus contributing to increasing thereby dictate the terms of trade, including charging inequality. prices in excess of its marginal cost and imposing disadvantageous non-price provisions on its customers. In this brief, we outline elements of an antitrust Monopsony is the mirror image of that—the ability of reform agenda aimed at reversing the weakening of buyers to dictate prices (wages, in the labor context), antitrust enforcement, insofar as it pertains to and has without fear that many of their workers will leave for strengthened the power employers have to set wages another job, or to dictate working conditions and terms and working conditions for their workers, without of employment that transfer some of the value created countervailing power on the part of workers, who by the employer-employee relationship to the employer. have limited ability to leave for another job in order to increase their pay. Monopsony literally refers to a single buyer in a market, but monopsony power in labor markets can and does This brief is organized as follows. We first summarize arise in less stark conditions: when potential employers a theory of labor market monopsony that can explain are few, when the process of finding another job is a number of otherwise-puzzling facts about the labor costly or a worker is tied to his or her current job by market and workers’ status in it, including stylized family commitments or the need for health insurance or facts such as a negative relationship between employer other job-related benefits. Under such circumstances, concentration and earnings, inter-firm earnings employers are able to profitably pay their workers inequality, and declining job-to-job mobility. We less than their contribution to production (marginal then outline an antitrust policy agenda that speaks to productivity): while some workers quit in response various aspects of employer power in labor markets: to such exploitation, enough workers remain to make the consumer welfare standard, measuring market wage suppression profitable. power for antitrust purposes, anti-competitive conduct in labor markets such as noncompete clauses and no- The basic underlying mechanism in a simple model poaching agreements, mergers that harm workers as of labor monopsony is that individual firms face an sellers of labor, monopsonization of labor markets as a upward-sloping labor supply schedule. This contrasts violation of Section 2 of the Sherman Act, and, lastly, with the perfectly competitive case, when individual the potential for countervailing collective power on the firms face infinitely elastic labor supply. In the latter, part of workers. a tiny reduction in the wage one firm pays will result in all its workers leaving. Under monopsony, on the Economics for Inclusive Prosperity | Antitrust and Labor Market Power econfip.org other hand, pushing wages down results in less than in the empirical literature: finite, and low, labor all of them leaving for competing employers. The supply elasticities to the individual firm,4 a negative equilibrium of a single labor market in which employers concentration-earnings relationship within a given have monopsony power will consist of a wage set labor market,5 inter-firm earnings inequality for similar below workers’ marginal revenue product of labor, workers,6 declining job-to-job transition rates thanks to since employers can get away with paying workers the infrequency of outside job offers,7 and a flattening less than they earn for the firm without having many earnings-tenure relationship for individual workers of those workers depart. It will also lead to lower labor who remain in the same job, since they are unable to demand, and therefore lower employment, relative to obtain the outside job offers that would induce their the competitive case. The employer earns a profit on employers to bid to retain them.8 These particular each worker, namely, the difference between the value findings accompany the time trends in labor market of what each worker produces and his or her cost in aggregates consistent with declining worker power terms of wages. This profit is called the “markdown” relative to employers: rising earnings inequality9, or “exploitation” in the monopsony literature. There the divergence of the median wage from average is also, in general, excess labor supplied to individual productivity per worker10, and, more recently, the firms, and some workers remain unemployed (or work decline of the labor share of GDP.11 It is these facts that fewer hours than they are willing to). have motivated the debate within and outside academic economics about monopsony power in labor markets, A more complicated theory of monopsony involves and which motivate the policy agenda we set out below. heterogeneous employers with varying productivity per worker. More productive firms tend to both be larger and to pay more. But in a competitive labor market, just as in a competitive product market, the most productive The Consumer Welfare Standard firm in a given market would be expected to employ all workers, and there would be no inter-firm wage Part of the revolution in antitrust law that took place as inequality for homogeneous workers because they would a result of the Chicago School was the adoption of the all be working at the single active firm in that market. ‘consumer welfare standard,’ namely, the idea that harm Inter-firm wage inequality arises under monopsony to competition within the legal meaning of the antitrust if firms in the market all face an imperfectly elastic laws corresponds to harm to consumers and their labor supply. The most productive firm pays more than welfare—consumer surplus in the most straightforward others can afford to because workers there are more economic application. This idea is manifested in productive and therefore worth more to the employer, the phrase “antitrust protects competition, not but that employer also has the most wage-setting power competitors.”12 and therefore the ability to pay wages with the greatest markdown below marginal productivity.2 This dynamic What this phrase refers to is the idea that antitrust might of more productive firms paying higher wages but also itself be anti-competitive, because it has the potential enjoying more monopsony power gives rise to earnings to be put to use by incumbents to suppress rather than inequality across firms employing similar workers, as to promote competition. In this theory, incumbents well as a firm-size wage premium.3 might use the legal system to protect their market share from innovative entrants, by claiming that conduct Finally, with both homogeneous and heterogeneous that challenged that market share on the merits, for firms, a decreasing arrival rate of job offers (or, example by introducing new distribution technologies alternatively, a more frictional search-and-matching that reduce the costs of production or eliminated process) will reduce the rate of job transitions for unnecessary middlemen, violate the antitrust laws workers. The more difficult it is to obtain an outside through exclusion or some other means, when in fact offer, the more wage-setting power current employers they represent the kind of competition antitrust should have, and the greater the markdown of wages below be promoting rather than punishing. The Chicago marginal productivity. School critique of mid-century antitrust held that many antitrust cases were opportunistic attempts to In general terms, these theoretical models predict broad impede the economy’s natural creative destruction, labor market patterns that have been documented and thus threatened aggregate welfare by reducing the Economics for Inclusive Prosperity | Antitrust and Labor Market Power 2 competition on which economic progress depends. • Policy-makers should make clear that the antitrust Therefore, we should not measure harm to competition laws protect competition in both labor markets and by whether the ostensible victim loses market share product markets, and that documenting increases in or profits, but rather by whether consumers are made consumer prices is **not** necessary to prove harm worse-off. If they are not, then the presumption is that to competition within the meaning of the antitrust whatever conduct is being challenged is ‘competition on laws. the merits’ and should not be illegal. Would-be private antitrust plaintiffs have to assert this type of “antitrust • Reductions in wages, wage shares (as a percentage injury” in order for their case to survive, and in many of firm revenue), employment, hiring, or job instances litigation is decided based on econometric quality should be prima facie evidence of harm to predictions about consumer price effects. competition within the meaning of the antitrust laws and cannot be traded off or weighed against Such a legal apparatus has overlooked harm to workers price or output effects