The Treasury Department has released a new report that examines labor market competition in the American economy. It came equipped with recommendations on improving competition and includes a commitment to enforce antitrust laws in the labor market. Labor markets do not function like the conventional “perfect competition” model where workers and employers meet each other as equals. Instead, labor markets are filled with power and information imbalances and an uneven regulatory environment that consistently limits worker power. 

The report’s major themes include:

  • Non-concentration origins of monopsony. The paper presents substantial evidence suggesting that “monopsonistic labor markets” should be the starting point for understanding how the U.S. labor markets currently work. While “monopsony” traditionally means that there is only a single employer, the paper documents recent research that demonstrates how labor markets frictions can result in monopsony conditions even when there are many employers.

  • Asymmetric information between workers and employers. Workers may have incorrect beliefs about what a competitive wage is in their sector, or what their coworkers make, which firms can exploit.

  • An anti-worker regulatory environment. Restrictions on workers – such as non-compete contracts and occupational license requirements – limit peoples’ ability to choose how and where they work.

  • An unproductive, undynamic economy. Problems in the labor market will be reflected in the economy as a whole. Uncompetitive wages will keep workers out of the labor market, and can also cause firms to underinvest in labor-augmenting technology that increases the productive capacity of the economy as a whole.

The aggregate effects of these factors is large, suggesting that on average, wages may be as much as 20 percent below what they would be in a “competitive” market.

While the report mentions some legislative proposals, it primarily focuses on the enforcement of existing (but inadequate) regulations that can be executed unilaterally. In other words, the bulk of the material focuses on solutions the Biden administration can do without Congressional approval. 

Many of the policy recommendations mentioned are likely to have limited impacts. For example, the report recommends using antitrust authority at the FTC to limit anti-competitive practices. We applaud many of these efforts, but reducing concentration through antitrust authority will have a limited impact if frictions – not concentration – is the leading cause of monopsonistic labor markets, as the report itself suggests. 

Some potential options include:

  • Robust Unemployment Insurance Reform. The current unemployment insurance system is inadequate, as highlighted in the early days of the pandemic. Only a small percentage of the unemployed receive benefits, and the benefits themselves are meager. A more robust unemployment system would give workers more leverage when negotiating with employers, and people more time to find a job that is right for them.

  • Fully Funded Employment Service.  The U.S. only spends 0.10 percent of GDP on “Active Labor Market Programs” to help people find jobs or re-enter the workforce, well below the international average of 0.52 percent. On top of this, Employment Service, the federal program that aids job seekers in finding new jobs, has not had a funding increase since 1984. Given the increasing population of the United States and the complexity of the labor market, increases in funding are warranted.

  • Sectoral Bargaining. If search costs and complexity are causing problems, one option is to create rules that reduce that complexity. Sectoral bargaining, for example, is a framework in which unions negotiate with all employers in a particular industrial sector (e.g. fast food restaurants), and substantially reduce the informational costs of moving between employers in a sector. In the United States, most unions engage in “enterprise bargaining” where contracts are negotiated with individual employers. In sectoral bargaining, the union would negotiate with all firms in a sector simultaneously, setting a common wage and labor standards. Because sectoral bargaining results in contract structures that are identical (or at least comparable) within the same industry, this reduces the informational frictions for workers looking to switch employers. Moving to a new employer (for example, to a business with a shorter commute) would no longer involve negotiating a new contract.
  • Prohibition of Non-Compete Clauses. Though the FTC has the power to police the use of non-compete clauses, their capacity to monitor and regulate the enormous number of non-competes currently in existence is limited. Instead, a legislative fix should simply impose a flat prohibition on the use of these clauses in employment contracts. Some states, like California, have already done this. Others either limit them somewhat or have few restrictions on them. The case for non-compete clauses in lower-wage industries is nonexistent, and while there is a plausible argument for them in higher-wage industries, most of the concerns they seek to address are better solved through trade secret law.

Understanding that labor markets are not currently acting in the “perfect-competition” model featured in an introductory economics course, is the first step to figuring out how to help our labor force. Workers need more protection in the workplace- let’s hope this paper is the opening salvo of a greater effort to introduce legislation that will do exactly that.

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