Structural changes explain stagnating wages in US labour markets

05 Dec 2018

The US unemployment rate is at its lowest since Armstrong set foot on the moon, yet wages are stagnating. Structural shifts in the labour market in recent decades have moved the goalposts and left workers with much less bargaining power.

The alarming rise in financial inequality has been a topic of much discussion in recent years. Parallels have been drawn with the situation during the 19th and early 20th centuries, especially by Thomas Piketty, author of the book ‘Capital in the 21st Century.’ In some ways, conditions of employment in today’s gig economy resemble those of the 19th century except that those  providing domestic services today are called wealth workers and have been ‘uberised’.

Only recently has the role of wage-setting mechanisms in contributing to the significant rise in inequality and polarisation of incomes in the US come under the spotlight.


A rise in monopsony power in the US economy

The existence of monopsony power or oligopsony in the US labour market at the global or local level seems to provide part of the explanation as to why there has been a downward shift in labour’s share of national income in the US since the 1990s, after decades of stability.

While a monopoly is a market with one seller, a monopsony is a market with only one buyer (an oligopoloy being a market with a small number of sellers, a oligopsony a market with only a small number of buyers). When applied to the labour market it means that individuals have no choice. They are salary takers and not salary makers, exactly the situation that prevailed at the beginning of the 20th century with one-factory towns such as Wolfsburg (VW), Sochaux (Peugeot) or Flint (General Motors).


Local-level labour market monopsonies help explain stagnating wages in the US  

Proof that global oligopolies, such as the ‘superstar’ companies, can become oligopsonies in the US labour market comes from studies on the effect of local-level employer concentration on wages.

It is fascinating to read research by Benmelech, Bergman and Kim on this subject. They find that the higher the local-level employer concentration, the lower the rises in wages. Intuitively this makes sense – the quantitative evidence is resoundingly unambiguous.

What is also striking in the same research is how strongly the average local-level employer concentration has increased in the US over the last 30 years.


Oligopsonies in US labour markets

A study quantifying the level of labour market concentration across nearly all occupations and for every commuting zone in the US by Aznar, Marinescu, Steinbaum and Taska found that 54% of the local labour markets in the US are highly concentrated. This means they have, on average, fewer than four different employers per job type (according to the Herfindahl-Hirschman index, a measure of market concentration). These levels of concentration suggest employers have market power in many US labour markets.


An ongoing structural shift in the US labour market toward weaker worker bargaining power

At the Jackson Hole Economic Symposium in August 2018, Alan B. Krueger, an economist at Princeton University, presented a paper entitled “Reflections on Dwindling Worker Bargaining Power and Monetary Policy.” His message was that declining worker bargaining power helps to explain the conundrum of relatively weak wage growth despite historically low unemployment in the US economy. Among his observations on US labour markets he noted that:

  • There has been a proliferation of practices that enhance monopsony power and weaken worker bargaining power. For example, a quarter of American workers are bound by non-compete clauses. While it might be understandable for higher wage earners, it remains bemusing to learn that 20% of workers with a wage below the median in the US have a non-compete restriction clause. It is hard to see this as anything other than the consequence of oligopsony.
  • 58% of franchise companies in the US have a no-poaching clause: an employee at a fast food chain on the upper west side in New York cannot be hired by a burger chain in Little Italy. In 1996, the same metric stood at 36%. Such clauses restrict worker mobility and opportunities.
  • Collusion – a situation where employers refrain from hiring each other’s workers or set pay/pay increases at a common level – is playing a role. The example is cited of a class-action suit alleging collusion, brought on behalf of more than 64 000 software engineers and other employees of Apple, Google, Intel, Intuit, Pixar, and Lucasfilm. The case was settled for half a billion dollars in 2015.

So, there is clearly evidence of global or local oligopsonies in labour markets.

In addition, we have seen the simultaneous fall of the biggest opponent to employer’s oligopsonies: the labour unions. Between 1980 and 2017, union membership in the US fell from 25% to 10%. The labour force is fragmented while employers’ forces are more united.

These explanations are enlightening in helping us understand why wages have been so inert despite apparently tighter conditions in US labour markets.


What’s next? What are the key conclusions?

  • The first point we may draw is that one should no longer look solely at the unemployment rate as an indicator of likely wage pressure. More pertinent today are new indicators such as the quit rate, whether the most important problem for companies is poor sales or quality of labour, and the average number of days to fill vacant jobs.
  • The second conclusion is that that a shortage of labour may still break the oligopsony at some point with a quicker and wider inflationary impact on wages.
    1. There is an incentive to be the first mover within an oligopsony when a shortage of labour necessitates higher wages. It increases the likelihood of a wage increase by one firm being replicated by others.
    2. Amazon is a case worth looking at: on 1 November 2018, Amazon announced an increase of its minimum wage in the US to USD 15/hour (just over twice the USD 7.25/hour Federal minimum wage). Previously, Amazon had applied different minimum wages per state, at levels varying from USD 12-13/hr. When a superstar firm like Amazon increases the wages of a large number of employees it inevitably has a major impact on other companies.
  • Given the evidence, one should be aware that measures to correct what appear in some cases to be excesses may affect the situation of superstar firms. US states might decide to deal with these companies using antitrust remedies such as those applied to Standard Oil or Du Pont de Nemours in 1911.

As indicated earlier, in many ways we are back to the beginning of the 20th century.

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