How Uncompetitive Markets Reduce Wages
The Australian, 23 March 2023
Folk music is replete with songs about struggling employees in company towns. In Sixteen Tons, Johnny Cash sings ‘You load 16 tons, what do you get? / Another day older and deeper in debt / St. Peter, don't you call me 'cause I can't go / I owe my soul to the company store’.
Company towns were the extreme example of monopsony power. While monopolies hurt consumers, monopsonies hurt suppliers.
Today, company towns are rare, but monopsony power is growing. New research from economist Jonathan Hambur uses rich de-identified tax data. To measure concentration in labour markets across the country, it splits Australia into 290 working zones and 190 industries. For example, it might look at the concentration of employers for grocery workers in Wagga Wagga.
The analysis finds that wages tend to be lower when fewer employers dominate the market.
It also shows that employment is twice as concentrated in inner regional areas as it is in major cities. This suggests that monopsony power may be one of the reasons that workers living outside major cities tend to earn lower wages.
While labour markets in Australia have not become more concentrated over time, the negative impact of any given level of concentration on wages has increased.
For any given level of concentration, its negative impact on wages has more than doubled compared to the mid-2000s.
Because of this, employer market power could be a factor that has influenced the glacially slow growth of wages over the last decade. In real terms, average full-time wages grew by just 1 percent from November 2012 to November 2022.
A lack of competition between employers might also explain why the share of productivity gains passed through to workers has declined over the past decade.
Declining firm entry and declining economic dynamism appear to be important factors contributing to the increased impact of concentration.
When firms enter, they tend to compete and poach staff away from existing firms to grow.
As such, they create better outside options for workers.
When firm entry rates are high, people are more likely to switch jobs, and this relationship is driven by people moving from incumbent to young firms.
We’ve always known that monopolies hurt the average person. By transferring resources from consumers to shareholders, they make the typical family worse off, and worsen inequality.
But now we can see another effect.
If those monopolies also exert monopsony power, then they may drive down wages.
Workers may get a smaller pay packet because of monopsony power, and then find that when they try to spend it, they get less for their money because of monopoly power.
It’s a double squeeze.
A particular concern in the labour market are non-compete and no-poach clauses.
A non-compete clause is one in which an employee agrees not to work in a similar industry or area for a period of time after their employment ends.
In Australia, I have been unable to find any surveys of the prevalence of non-compete clauses, though respected labour lawyers tell me they are commonplace. One gave me the example of a minimum wage worker in the early childhood sector whose contract included a non-compete clause.
No-poach clauses have a similar effect to non-compete clauses, by constraining employers from engaging workers who have recently been employed at a competing outlet. Major franchises such as McDonald's, Bakers Delight and Domino’s have standard clauses that prevent franchisees from hiring workers in other stores.
What can policymakers do?
In the US, the Federal Trade Commission has concluded that scrapping non‑compete clauses could boost worker earnings by almost US$300 billion, and close racial and gender pay gaps by up to 9 per cent. Accordingly, the Federal Trade Commission has now proposed a total ban on non-competes across the US economy.
Given the growing body of evidence about the way that non-compete clauses hamper job mobility and wage growth, I have asked the Australian Competition and Consumer Commission and Treasury for advice on the competitive impacts of non-compete clauses and any action the Australian Government should take in response.
And I encourage Australia’s large franchisors to publicly disclose whether their standard agreements contain no-poach clauses, and, if so, to justify why they are in the public interest.
At 12 percent, the unionisation rate is now the lowest it has been since Federation. As the chant goes, ‘the workers, united, will never be defeated’. But in the modern era, employers are increasingly united, while workers are more fragmented than at any time in the past 120 years.
Constraining collusion between employers, and reconsidering the role of non-compete and no-poach clauses, will help ensure that employees get paid what they’re worth. More competition will help forge a more dynamic economy, and a fairer society.
Originally published in the Australian on 23 March 2023.