RDP 2023-02: Did Labour Market Concentration Lower Wages Growth Pre-COVID? 2. Literature

Labour market, or monopsony, power is defined as the ability of a firm to influence the wage that it will pay.^[1] If a firm has no monopsony power (the labour market is perfectly competitive), if it sets a wage below the market rate it will not be able to attract workers. A firm with some market power may be able to set a lower wage and still attract some staff. This market power could be due to the costs for workers of finding a new job, a lack of other firms offering work, or that available employers aren't perfectly substitutable such as in terms of working conditions or culture.

There is a large literature examining the implications of monopsony power for wages, employment, and policymaking with respect to, for example, minimum wages. The topic has received a lot of focus in recent years in response to slow wages growth, and evidence of increasing inequality and declining labour shares in some advanced economies.^[2] Of particular interest to academics and policymakers is the role of concentration in labour markets (OECD 2020). This is perhaps unsurprising given the coincident increase in, and focus on, concentration in product markets (De Loecker et al 2020; Hambur forthcoming).

In thinking about the impact of concentration on monopsony power, search-and-match type models are useful for intuition. In these models, workers have to search for job offers to gain or change jobs, while firms make job offers and search for workers. When a worker and a firm match, the wage (W_i,t) is set to split the ‘surplus’ created by the job. This surplus is the difference between the revenue generated by the job (p_i,t), and the worker's outside options (oo_i,t), which includes unemployment (and associated benefit payments) and the chance finding other jobs.

As discussed in Jarosch et al (2019) and Schubert et al (2021), if there is only a small number of potential alternative employers the chances of getting an offer from one of them will be lower. This will lower the value of workers' outside options and, therefore, their ability to bargain for a higher wage.^[3]

Numerous papers have demonstrated this link empirically. They find that increases in labour market concentration are associated with lower wages, all else equal. This has been documented for the US (Lipsius 2018; Benmelech et al 2022), UK (Abel et al 2018), Austria (Jarosch et al 2019) and in cross-country analysis (OECD 2021). These papers have varied in the data used to construct measures concentration, creating concentration metrics using employment stocks (Rinz 2018), job advertisements (Azar et al 2020) and new hires (Marinescu et al 2021).

Nevertheless, evidence is mixed on whether there has been an increase in labour market concentration. In fact, both Benmelech et al (2022) and Rinz (2018) find that local labour market concentration rates have been stable to declining in the US over time.

While this might suggest that labour market concentration is unlikely to explain weaker wages growth, it is also possible that the impact of concentration could vary over time due to other factors (X_i,t). For example, in Schubert et al (2021) concentration has a smaller absolute impact where worker's bargaining power $\beta \left(X_{i,t}\right)$ is higher.

Empirically, Benmelech et al (2022) find that concentration weighed more heavily on wages in the US from 2008 to 2016, compared to earlier periods. They link this to declining union membership and, therefore, lower offsetting collective worker power. They find that the impact of concentration on wages was smaller (in absolute terms) where union enrolment rates were higher. Abel et al (2018) find similar results for collective bargaining. Finally, Schubert et al (2021) find that employer concentration is less impactful in industries or occupations with greater occupational mobility because workers can more easily change occupations, increasing their set of outside options.

There has also been an increasing focus on heterogeneity among firms within markets. While early papers focused on monopsonistic models, Berger et al (2021) recently extended the focus to oligopsonistic models, highlighting the potential for differing labour supply elasticities and, therefore, wages (or wage markdowns) among firms with different market shares. Benmelech et al (2022) and Jarosch et al (2019) outline models with similar results. An important implication is that the entire distribution of market shares may be important in considering the effect on wages, and that aggregate concentration metrics could mask relevant changes.

Footnotes

More precisely, it reflects the elasticity of the labour supply curve facing the firm. If the curve is not perfectly elastic, the firm can offer a lower wage whilst still attracting some workers. [1]

For a more detailed literature review, see Manning (2021). [2]

Berger et al (2021) derive a general equilibrium model with finite firms and inelastic labour supply across and within firms, which leads to similar conclusions. [3]