Does Monopoly Power Explain Workers’ Stagnant Wages?

Does Monopoly Power Explain Workers’ Stagnant Wages?

Does Monopoly Power Explain Workers’ Stagnant Wages?

As industries get more concentrated, workers have fewer employment options—and less leverage to get a raise.


In 2009, Leinani Deslandes got an entry-level job at a McDonald’s franchise in Apopka, Florida, making $7 an hour. She advanced quickly and was promoted to department manager of guest services in 2011, a position that paid her $12 an hour. Not wanting to stop there, Deslandes began the coursework that would make her eligible to become a general manager. The final step was attending a weeklong training at the company’s “Hamburger University” in Illinois. But when her supervisors found out she was pregnant, they canceled her trip, making it impossible for Deslandes to fulfill that last requirement.

Frustrated, Deslandes decided to look for another management job. Although she had gained a lot of experience and training, it was mainly applicable to working at McDonald’s, so she kept her search within the company. She soon found a manager opening at another location, run by a different franchisee, that started at $13.75 an hour and would jump to $14.75 after a 90-day probationary period. That kind of pay meant a 23 percent raise over her current job.

The other franchise was interested in hiring her, but there was a catch. McDonald’s franchisees are required to sign a contract with corporate headquarters that includes a “no hire” and “no solicitation” clause stipulating that they can’t “employ or seek to employ any person” who is either currently employed by another McDonald’s franchise or has been in the past six months.

In order to hire Deslandes, the other franchise had to get her current manager to release her from this clause. But the supervisors at her current job refused the request, telling her that she was “too valuable.” So she had to stay where she was, at her lower pay.

Deslandes is now suing McDonald’s headquarters over its policy, claiming that she suffered reduced wages and the “loss of professional growth opportunities” due to the nonpoaching agreement. “As part of McDonald’s system to maintain its significant competitive advantage…McDonald’s has colluded to suppress the wages of the restaurant-based employees who work not only at McDonald’s in Orange County, Florida, but also throughout the United States,” her lawsuit alleges. “The collusion of employers to refrain from hiring each other’s employees restricts employee mobility. This raises employers’ power in the market at the expense of employees and diminishes employee bargaining power.” This practice, the suit argues, hurts employees by “lowering salaries and benefits they otherwise would have commanded in an open marketplace.” McDonald’s did not respond to a request for comment.

Noncompete and nonpoaching agreements like the ones used by McDonald’s are meant, in theory, to protect company information—so an engineer who has access to intellectual property developed by, say, Microsoft, may be obligated to wait six months, during which that information will become irrelevant, before taking a job at Apple. But such agreements are now becoming rampant throughout the economy and are frequently applied to workers holding low-wage jobs—jobs without any access to company secrets in the first place.

Last year, researchers found that nearly one in five US workers, or almost 30 million people, are subject to noncompete agreements, including 14 percent of those who make $40,000 a year or less. Yet less than half of those who have signed them are actually privy to their companies’ trade secrets, and that’s even less likely for low-wage workers. Other researchers recently combed through franchise agreements at 156 of the largest chains in the country and found that nearly 60 percent included nonpoaching clauses among franchisees similar to what Deslandes faced at McDonald’s, including low-wage employers like Burger King and Baskin-Robbins. It’s hard to imagine what secrets of ice-cream scooping need to be protected by such agreements; instead, it’s likely that they’re meant to keep workers stuck in place.

These kinds of agreements, imposed only in order to reduce job-search competition that would otherwise increase workers’ wages—whether they block people from moving between companies or from franchise to franchise—are illegal under the Sherman Antitrust Act. A 2016 joint report by the Justice Department’s antitrust division and the Federal Trade Commission said as much, stating: “Agreements among employers not to recruit certain employees or not to compete on terms of compensation are illegal.” And yet they crop up nearly everywhere you turn.

As much of a scourge as noncompete agreements are, they are in many ways just a symptom of a much larger disease sickening the economy: monopsony power. That’s not a typo, though “monopsony” is closely related to “monopoly.” Monopoly power allows a company that has eaten up an entire industry to fix prices for consumers, driving them higher than they would be if other companies were able to compete in the same market and offer lower prices. If just one company controls the market for, say, chairs, then consumers have no choice but to pay whatever it charges.

Monopsony power allows that same powerful, concentrated company to fix wages for employees, driving them lower than they would be if workers could bargain more effectively or leave for higher pay at other employers. It means that big companies in highly concentrated industries can act like cartels, compensating employees less because those employees have nowhere else to turn. The skilled employees of that single chairmaker have nowhere else to work in their field, making it riskier to demand higher pay from their bosses and impossible to leave for a better-paying job elsewhere.

So companies get away with forcing employees to sign noncompete agreements, which help keep their wages down, because they are so dominant in their own industries. Indeed, nearly two-thirds of job applicants who signed a noncompete agreement when they were hired had no other job opportunities, leaving them little choice but to accept.

“In terms of suppressing competition, companies agreeing not to compete for each other’s employees is the same as companies agreeing not to compete for each other’s customers,” explained Wharton professor of business economics and public policy Joseph Harrington in 2014. “In the latter case, it results in customers paying higher prices because of the lack of competition, and in the former case, it results in workers receiving lower wages because of the lack of competition.” An issue brief on monopsony power written by the Council of Economic Advisers under President Obama concurred, stating: “[T]hese agreements are often used to create or exercise market power.”

The question of why american workers’ wages have stagnated for decades even as their productivity—how many goods or services they can produce or deliver—climbed higher has befuddled many an economist and policy-maker. According to the Economic Policy Institute, from 1973 to 2014 most workers barely saw any increase in pay, adjusted for inflation—about a 9 percent raise overall, or just 0.2 percent a year. Yet in that same period, productivity rose 72 percent, or 1.33 percent a year.

Now a new answer is coming into view: monopsony power, or the fact that our economy has become so intensely concentrated in so few hands.

In a recent paper, London Business School assistant professor Simcha Barkai attempted to identify plausible reasons for why productivity has become so unmoored from worker pay. Some economists have posited that it’s because companies are investing more of their profits in robotics and automation: This makes them more efficient, which helps increase productivity, but it also replaces human workers. But Barkai found that even as companies are spending less on wages for their employees, they’re also spending less on capital investment, including robots, machinery, plants, and even research and development. “As workers become more productive, we’re spending less on machines,” he noted.

That led Barkai to a crucial question: “What’s happening with [the money] that’s left over?” he asks. “Is this really covering the cost of the equipment around you, or is this being kept by the firm in the form of profits?” Many workers may already intuit the answer.

This indicates, in turn, that American firms are enjoying strong monopoly power. Any other explanation wouldn’t account for how they can get away with spending less on labor and capital at the same time. “This is the only explanation that allows firms to produce more markups and keep more profits,” Barkai said.

Such concentration “plays a significant role in the decline of the labor share”—that is, the share of money made that workers receive—of companies’ profits, Barkai’s paper states. “Increases in industry concentration are associated with declines in the labor share.”

Barkai examined American industries across the economy between 1997 and 2012 and found that they have virtually all been concentrating. “About 70 percent of industries [saw] an increase in concentration,” he said. “It’s not limited to any sector of the economy,” but holds true from service-sector retail stores to goods-producing manufacturing plants.

Barkai also found that in the same percentage of industries, the share of profits going toward compensation for workers declined over that period. To establish causation, he compared the industries that had concentrated to those that had grown more diverse; labor’s share of profits dropped in the concentrated ones.

Another recent working paper reinforces this conclusion. Economists José Azar, Ioana Marinescu, and Marshall Steinbaum looked at job vacancies posted on CareerBuilder, the largest online jobs board in the United States, between 2010 and 2013. “We did the most straightforward thing you could do from an antitrust perspective: calculate concentration and see if concentration has anything to do with wages,” Steinbaum told The Nation. “And lo and behold, it does.”

What they found was not only that most labor markets in this country are highly concentrated, with very few potential employers in most areas for workers to choose from, but that this holds down the level of worker pay. Areas that were more concentrated were associated with a decline in posted starting wages. Since companies “have few competitors among would-be employers, their workers receive few outside job offers and hence can be forced to accept a lower wage,” Steinbaum wrote in an explanation of his work.

The probability that we live in a monopsonized economy illuminates the limits of our current approach to antitrust policy. At present, if one company tries to merge with another, government regulators generally approve the deal if the companies can guarantee that consumers won’t face higher prices or fewer choices. But that doesn’t address what might happen to workers if a competing employer disappears. Virtually no deals have been stopped on this basis in recent decades.

“We have confined antitrust policy, and at least the policy apparatus that deals with monopoly, to a small subset of the issue: ‘What’s the price of detergent and how many options do consumers have?’” Steinbaum said. “But as this new research shows, the harm Americans face goes well beyond what they pay at the checkout line. It also influences what they see on their pay stubs.

“Monopsony power in the labor market does pose a very substantial threat to the consumer-welfare standard,” he added—in other words, the basis of the current approach to regulating consolidation.

Barkai warns there is much we still don’t know about why industries are concentrating and competition is diminishing. And the answer to those questions should inform policy solutions. If large players are colluding and purposely keeping competitors out, the answer could be simply to break them up. But it could also be that, in our globalized, highly technological world, smaller players really can’t compete—which means that breaking up a large corporation might not fix the underlying problem.

However, there are policy solutions to monopsony power, and to monopolized firms’ control over the labor market, that don’t require a complete overhaul of the country’s antitrust regime. Steinbaum has four in mind: increasing the minimum wage; facilitating unionization; implementing a jobs guarantee that would get the economy to full employment; and instituting some sort of unconditional income, perhaps a universal basic income. “The whole issue with monopsony power is that [workers’] power is reduced,” he said. “Any form of unconditional income for workers increases their bargaining power.” If someone knows that she can rely on at least a modicum of money, she has more power to refuse a job that doesn’t pay her what she’s worth. A universal basic income might have allowed Deslandes to quit—or threaten to quit—and focus on finding something better if the McDonald’s franchise refused to increase her pay. A union could have helped her fight for higher wages. Both could help other low-wage workers, like those who have claimed that the fast-food chain Carl’s Jr. held down their wages by barring them from being hired by other franchisees.

In fact, if the economy suffers from monopsony power, that makes an even stronger case for measures like a higher minimum wage and greater union density. In a perfectly competitive market, raising wages for some workers through those outside mechanisms can end up reducing employment or pay elsewhere. “If a market is monopolized,” on the other hand, Steinbaum said, “wages are already below where they should be.” So a higher wage floor and stronger unions simply bring them back to where they otherwise would be.

Another quick fix has started to spread: ending companies’ ability to require employees to sign noncompete agreements. Massachusetts lawmakers are hoping to pass legislation soon that would ban their use among low-paid hourly workers and limit how long they could be imposed on others. They’re already basically unenforceable in California, Oklahoma, and North Dakota, and other states, including Illinois, Utah, and Washington, have recently considered similar reforms.

Meanwhile, the Justice Department’s antitrust division recently indicated that it will police these kinds of agreements. Assistant Attorney General Makan Delrahim told a conference audience on January 19 that the department has a number of criminal cases in the works over nonpoaching agreements. “In the coming couple of months, you will see some announcements—and to be honest with you, I’ve been shocked about how many of these there are, but they’re real,” he said.

More research will need to be done to determine how monopolized companies are harming the country’s workforce and what we can do to address it. But these ideas have already gained significant traction. “This is definitely an issue that has galvanized a lot of public attention,” Steinbaum said, “and I don’t think that’s going to go away anytime soon. It’s pretty obviously not just a fad, but how the economy works.”

For her part, after being completely stymied in her attempt to secure promotions and raises, Leinani Deslandes finally quit her job at McDonald’s in early 2016. But because her training and experience were only translatable within the company, she had to start all over. She got an entry-level position at Hobby Lobby, the craft-supply chain, making $10.25 an hour. It represented a fresh start, but also a nearly 15 percent cut in pay—a far cry from what she would have earned at the McDonald’s job she wanted.

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