Why concentration of market power could be to blame

In one, he cited the findings of Jonathan Hambur, a researcher who shuttles between the Treasury and the Reserve Bank, that Australian companies’ “premiums” – the gap between their production costs and their selling price – have been steadily increasing.

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But in another speech this month, Leigh shifted the focus from what “market concentration” means (among a few large companies) for the industry’s customers to what it means for its employees.

So in business language we are moving from monopoly to “monopsony”. huh? Literally, monopoly means a market in which there is only one Salesperson Satisfying the demand for the product. Monopsony means there is a single buyer by the people who provide the inputs for production. Workers provide the company with the labor it needs.

The term was introduced by Joan Robinson, a colleague of Keynes’s at Cambridge, who was one of the first to challenge standard theory of how markets work. She was 30 years old in 1933 when she published her dissenting view that truly competitive markets were rare.

She argued that monopsony was endemic in the labor market and employers used it to keep wages low. When there are fewer employers competing for workers, those workers have fewer “go away options” (move to another company that offers higher wages or better conditions).

This limits workers’ bargaining power and gives employers the ability to keep wages lower.

At the time, few economists were interested in it. But in recent years, academic economists have increasingly focused on market power.

For example, Monopson was cited in a 2019 US Supreme Court ruling against Apple. A report by Democrats in the US House of Representatives accused Amazon of using monopsony power in its warehouses to depress wages in local markets.

Evidence from the US, UK and Europe has shown that increasing labor market concentration – fewer employers to work for – is associated with lower wages.

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According to Leigh, economists have long known that people in cities tend to earn more than people in regional areas. His own research found that the annual income of a person moving from a rural area to a major Australian city increases by 8 per cent.

“The economics of monopsony suggests that an important part of the urban wage premium can be explained by greater employer competition in denser labor markets,” says Leigh.

Leigh reminds us that Australia’s average full-time wage ($1,808 a week last November) was only $18 a week higher than 10 years ago, allowing for inflation. Many things would explain this pathetic improvement, but one factor could be employer monopsony.

We know that turnover between employers has decreased. But over the course of a working life, the largest average wage increases occur when people change employers. And when some people leave, the bargaining power of those who stay increases.

This decrease in the number of moves could be due to an increasing employer monopoly. Hamburg conducted a study on employment concentration between 2005 and 2016.

He found that in industries with increasing concentration, real wage growth was significantly lower over the decade.

When a company accounts for a large share of industry employment, the gap between the value of the work a worker performs and the wages they receive for it tends to widen.

He found that employment in metropolitan regions is twice as concentrated as in cities. In remote areas it is three times as much.

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Read this carefully: Hamburg noted that labor markets had not become more concentrated over the decade. But at each level of concentration, its negative impact on wages had more than doubled.

Employers’ market power could thus be a factor that helps explain the virtual absence of real wage growth over a decade. Hambur notes that the greater impact of employer concentration may have meant wage growth was 1 per cent lower than usual between 2011 and 2015.

This would help explain why not all (weak) labor productivity growth during the period was passed through to real wages – as conventional economists and businessmen always assure us it will be. The weak competition allowed employers to keep much of it to themselves.

Part of the competitive process is the entry of new companies into the industry. New companies tend to recruit staff from existing companies. But we do know that the rate of new entrants has declined.

Ross Gittins is a business editor.

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