Monopsony and Its Impact on Wages and Employment: Past and Future Merger Review

• Publication year: 2019
• Author: By Caroline C. Corbitt

MONOPSONY AND ITS IMPACT ON WAGES AND EMPLOYMENT: PAST AND FUTURE MERGER REVIEW

By Caroline C. Corbitt¹

I. INTRODUCTION

Should impact on workers' wages be part of merger review? The question has been debated by recent scholarship that is grounded in a wider discussion about how—and if—antitrust law can address rising inequality and falling wages in the United States.

Past merger review conducted pursuant to Section 7 of the Clayton Act has focused on evaluating potential monopoly power and anticompetitive harms. But there is a growing call for merger review to consider monopsony² and its potential harm to workers. Monopsony refers to a situation in which a buyer of products or services has dominant market power. It differs from (and is theoretically the opposite of) a monopoly, in which a seller of products or services has dominant market power.

Companies buy many products or services in the course of running a business. One of their primary purchases is the purchase of labor from workers. A labor market is monopsonistic when one or a small number of firms dominate hiring in the market. A firm with monopsony power can wield this power to lessen competition in the labor market, including by imposing wages below the competitive rate. Large market power— such as the power displayed by tech giants like Apple and Amazon—may also give a firm the ability to impose onerous working conditions on workers such as noncompete clauses, or enable a firm to make stringent pricing demands of its suppliers.

Regulators have recently signaled their intent to evaluate potential labor market monopsony in merger review going forward. But it is unclear how existing antitrust law and guidelines, particularly the Horizontal Merger Guidelines, will be applied to merger review actions.

II. MONOPSONY IN LABOR MARKETS

In a perfectly competitive labor market, employers would face an elastic supply of workers who are highly responsive to changes in wage—and each firm would hire up to the point at which the revenue brought in by workers' labor is equal to the market wage. But in a labor market dominated by monopsony, employers have disproportionate power, allowing them to lower wages below the competitive level. Monopsony causes workers to exit the market and the number of available jobs to decrease: economic modeling demonstrates that is more profitable for a monopsonist to offer fewer jobs at a lower salary than to hire additional workers at a competitive rate.³ Monopsony power also allows a firm to pay below-competitive wages without worrying that employees will leave.⁴

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Monopsony and its effect on wages have been the subject of growing discussion in the antitrust field. Some have argued that monopsony in labor markets occurs more frequently than monopoly in product markets because perfectly competitive labor markets are more illusory than perfectly competitive product markets—there will always be inherent frictions in bargaining between firms and workers.⁵

Others have noted that because antitrust enforcement has largely concerned product competition, not labor competition, firms are more likely to exploit their labor market power than their product market power.⁶ For example, firms may pursue mergers that reduce labor competition, expecting that such mergers will escape government scrutiny because the merging companies are not competitors in a product market.⁷ To date, government regulators have never blocked a merger because of concerns of monopsony power in a labor market.⁸

A. Labor Market Concentration

Monopsony power in labor markets may stem from factors such as increased market concentration, job search frictions, and job specialization.⁹ Firms may also gain market power through forcing employees to enter into non-compete agreements, utilizing independent contractors, and colluding with other firms (e.g., through no-poach agreements).¹⁰

A labor market is "concentrated" if hiring in that market is dominated by a single or small number of firms.¹¹ The effect of labor market concentration has been the subject of numerous studies. Many labor markets are highly concentrated, particularly in rural or semi-rural areas, and scholars argue that labor market concentration is growing.¹² According to one study, as many as 60 percent of labor markets are highly concentrated.¹³ At the same time, wages have stagnated, meaning that the share of the United States' GDP held by labor has been rapidly declining—and suggesting that rising labor market concentration may be a cause.¹⁴ Research based on online job-search data has indicated that posted wages tend to be 0.4 to 1.5% lower when market concentration increases by 10 percent.¹⁵

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Leading experts in the field debated the topic of labor market concentration during the Federal Trade Commission's October 16, 2018 Hearings on Competition and Consumer Protection in the 21st Century.¹⁶ Economist Matthias Kehrig argued that the evidence that concentration in labor market is increasing is ambiguous.¹⁷ Others criticized the methodology of labor market concentration studies to date.¹⁸ Also contested was whether highly concentrated labor markets are linked to lower wages.¹⁹ In the view of one panelist, the late Alan Krueger, growing employer concentration has caused the wage stagnation of recent decades, and increased employer concentration has likely facilitated collusion between employers.²⁰ But according to economist Robert Topel, even if labor markets are concentrated, the correlation between employer concentration and lower wages may not be significant enough to "be worth the attention of the antitrust authorities."²¹

If labor market concentration is increasing and is a cause of wage stagnation, the economic harm could be extensive. In the view of University of Chicago law professor Eric Posner, labor market concentration leads to more pronounced economic harm than product market concentration because "wage suppression is much more significant than price inflation."²²

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One way to address problematic labor market concentration is through merger law—blocking "wage-suppressing mergers before they occur."²³

B. Existing Merger Law and Guidelines

The Federal Trade Commission and the Department of Justice have traditionally focused their merger enforcement efforts on preventing monopolies and harm to product markets. Why enforcement has not targeted monopsonistic labor markets or other forms of labor-market restraints is unclear. Randy M. Stutz of the American Antitrust Institute has suggested possible reasons for this policy decision, including the belief that antitrust and labor policy should be kept separate, a prioritizing of consumer welfare over labor welfare, and perceived difficulty in ascertaining the harmful effects of anticompetitive practices by buyers on labor.²⁴

Perhaps because of lagging wage growth in recent decades, federal agencies have begun to increase their scrutiny of anticompetitive labor markets. In 2010, the Antitrust Division of the Department of Justice investigated "no-poaching" agreements not to hire each other's employees made between major technology companies, including Apple and Google.²⁵ The Federal Trade Commission has followed suit in investigating "naked" wage-fixing and no-poaching agreements.²⁶ In 2016, the agencies also released a new publication "to alert human resource (HR) professionals and others involved in hiring and compensation decisions to potential violations of the antitrust laws": Antitrust Guidance for Human Resource Professionals.²⁷

In keeping with the trend of increased oversight of labor markets, the Department of Justice and the Federal Trade Commission have recently signaled their intention to consider labor market monopsony in merger review going forward.²⁸ Eighteen State Attorneys General have echoed federal regulators.²⁹

Due to the lack of prior merger enforcement efforts on the labor side, there are few examples of how government enforcers and courts may actually act to evaluate monopsony in labor markets. The Department of Justice, together with eleven state Attorneys General and the District of Columbia, have challenged a merger partially on monopsony grounds at least once. In 2016, they challenged a proposed merger between Anthem and Cigna, alleging in part that the merger would create a monopsony in the health care services market, leading to a reduction in payments to doctors and other providers (as well as worsening the quality of health care services in the market).³⁰ But the monopsony claim was not actually considered by the district court or the D.C. Circuit.³¹ (In dissent, Brett Kavanaugh, then a judge on the D.C. Circuit, wrote that the case should be remanded to the district court to consider the monopsony claim and its potential effect on provider rates.³²)

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C. The Horizontal Merger Guidelines

The Horizontal Merger Guidelines, promulgated by the Federal Trade Commission and the Department of Justice to outline the principles and policies by which the two agencies review proposed mergers, provide limited guidance on the agencies' monopsony enforcement policies.

The Guidelines recognize the problem of monopsony stemming from mergers, noting that "Mergers of competing buyers can enhance market power on the buying side of the market, just as mergers of competing sellers can enhance market power on the selling side of the market."³³ The Guidelines further state that the agencies may weigh monopsony power heavily in evaluating mergers between buyers: agencies will not "evaluate the competitive effects of mergers between competing buyers strictly, or even primarily, on the basis of effects in the downstream markets in which the merger firms sell."³⁴

While the Horizontal Merger Guidelines clearly indicate that monopsony should be evaluated under merger review, the Guidelines do not discuss monopsony in the specific context of the labor market.³⁵ Analysis of monopsony power, according to the Guidelines, should "employ essentially...