It’s Time for Antitrust to Take Monopsony Seriously

Antitrust policy has typically viewed monopsony power in the labor market as arising from an essentially competitive context—if it exists at all. The maintained assumption in the antitrust orthodoxy has been that the economy is on or near its production possibility frontier, and hence the proper role of competition policy was to correct or prevent distortions arising from market power in the product market, with the understanding that doing so would make the labor market operate as efficiently as possible. If, on top of that, we tried to take action against monopsony, so the thinking went, all we would do was inefficiently protect incumbent workers from market pressure—the antithesis of economic reasoning.

What we’ve learned recently is that the labor market doesn’t work like that. Monopsony power is very real. Firms pay workers very differently, even ones with similar skills and experience—a reality that would be impossible in a competitive labor market with sufficient job offers to ensure that workers earn their marginal product of labor. Increases in the minimum wage have very little, if any, effect on employment, implying that wage-setting already operates at firms’ discretion. And at a macro level, growth in worker compensation has diverged from productivity, job-to-job and geographic mobility rates have fallen, wages are stagnant for all but the top 1%, and as Professor Stiglitz mentioned, the profit share of national income has skyrocketed at the expense of both labor and capital. It’s abundantly clear we have a market power problem, and that problem is most acute in the labor market.

The recent, and important, working paper by De Loecker and Eeckhout, “The Rise of Market Power and the Macroeconomic Implications,” posits that monopsony-like outcomes in labor, namely reductions in equilibrium employment and wages, are the result of rising market power in the product market. And the follow-on labor market effects of the rising markups they document ought well to be taken into consideration by the antitrust authorities. But the problem is worse if firms exercise monopsony power over and above their monopoly power. In that case, maximizing consumer welfare by making the product market competitive will not solve the labor market’s competition problem, which is why I have maintained the clear need for a departure from the existing consumer welfare standard if we are going to get serious about solving the economy’s market power problem. This doesn’t imply that economics needs to be taken out of antitrust policy—quite the contrary: Economics needs to be brought back into it. It’s time to stop conducting policy on the basis of a model of the economy that we know to be false.

Antitrust has experience combatting labor market power, as several merger and conduct cases show, but that record is relatively sparse, and it notably perceives the threat of monopsony as arising from out-and-out written agreements not to compete, as in the Silicon Valley no-poaching case and even the anti-competitive language in franchising agreements recently documented by Ashenfelter and Krueger. But those instances are more effects than causes, and antitrust needs to go after the cause of monopsony power. A permissive environment for vertical restraints and vertical integration is one such cause: Dominant firms are more or less at liberty to contract in ways that disadvantage upstream suppliers, and that status quo is driven by enforcement guidance and court rulings that assume the result is inconsequential, since competitive product markets imply cost savings will be passed to consumers. But the rise of independent contracting and other “alternative work arrangements,” so-called by Katz and Krueger, belies this permissive stance vis-à-vis vertical restraints. Workers are being re-classified as contractors, and as such, they are completely unprotected. We must see “alternative work arrangements,” what David Weil has called the Fissured Workplace, for what they are: a means of avoiding liability under both labor and antitrust law, and as such, at the root of rising market power. The premise of labor law is that with control comes responsibility, but dominant firms are increasingly aware that they can exercise control without responsibility by contracting and subcontracting. If they want control, let them employ workers. If they want to avoid responsibility, they ought not to be able to exercise control over suppliers.

Antitrust policy once sought to combat market power wherever in the economy it was to be found, and increasingly, we know it resides with employers. That’s why it’s high time we had a debate about the ways we might deploy antitrust against that power. To do so is not a perversion of its proper role—that is its proper role, and it is one contemporary labor economics is well-equipped to help it fulfill. I look forward to today’s discussion about how that might happen.

Editor’s Note: A monopsony is when a single firm (or a small number of firms), that serves as the dominant purchaser of a good or service, can provide uncompetitive advantages. It is particularly important in the labor market, where employers (purchasers of labor) wield market power.