This year, the Federal Trade Commission (FTC) and Justice Dept. (DOJ) launched a joint inquiry investigating the “impact of monopsony power, including in labor markets.” Monopsony, unlike monopoly, is the condition of a single buyer, or small group of buyers, manipulating a market. To conceptualize monopsony in labor markets, think of the company as a town. A single firm employs all or most workers in a town. The firm has no competition when hiring townsfolk. The townsfolk do not have an alternative when looking for employment. This allows the firm to set wages with minimal negotiation as the sole buyer of labor. The firm has become a monopsony. Remember that in labor markets, workers supply while firms purchase labor.
An existing example of labor monopsony is, surprise, the healthcare industry. In most U.S. states (not Texas), hospitals must obtain a certificate-of-need to operate, a program which restricts the amount of health services in an area under the typical direction of a state board. The rationale behind this program is that allowing competition among hospitals may lead to business practices which incentivize sales as opposed to quality of healthcare. However, it has been shown that these programs may worsen rather than improve healthcare quality when they restrict supply. Large hospital consolidations have also been shown to depress wages of healthcare workers. This is classic monopsonic behavior. As buyers of labor specific to the healthcare industry decrease, wages within this sector decline. You may be surprised that the legal remedy to this issue is not found in prosecuting large hospitals as labor monopsonies. The big business of large hospitals has, ironically, labor unions to thank.
More than a century ago, Congress shielded labor unions from antitrust regulations. This is because unions are, by definition, monopolies of labor. As a union becomes larger, it possesses the power to monopolize labor, negotiate wages as its seller, and create barriers to entry against nonunion workers. Some argue that while labor unions are immune from antitrust prosecution, this does not preclude neither the DOJ nor FTC from applying antitrust law to labor markets to prosecute firms as labor monopsonies. However, there are fundamental hurdles which must be overcome to make this case. Antitrust prosecution has traditionally and successfully been pursued to advance consumer welfare. By breaking up big business, the federal government creates market competition to generate the downward movement of prices and more consumer choice within a sector. However, in labor markets, firms are the consumers. To prosecute firms as monopsonies, U.S. attorneys must wave goodbye to the consumer welfare argument and likewise avoid the potentially hypocritical rhetoric that producers should win.
Antitrust law has always been a contentious issue. More than a century ago, the U.S. codified antitrust regulations to give the DOJ and the FTC broad powers to prosecute firms suspected of commodity monopolization. Antitrust prosecution was many times pursued against Standard Oil, American Tobacco, AT&T, and Microsoft (though never broken up), to name a few. However, legal scholar Robert H. Bork wrote a famous criticism of antitrust prosecution, since cited by over 100 courts, arguing,
“Business efficiency necessarily benefits consumers by lowering the costs of goods and services or by increasing the value of the product or service offered; this is true whether the business unit is a competitor or a monopolist. When efficiency is not counted, or when it is seen as a positive evil, it appears that no business structure of behavior has any potential for social good, and there is consequently no reason to uphold its legality if any remote danger can be imagined.”
Put simply, a big business is not necessarily a bad business if it engineers greater levels of productive efficiency. This would be an argument from those advocating for the certificate-of-need programs previously mentioned, though Bork here references monopolies gaining market share through efficiency as opposed to state-sanctioned monopoly. Bork argues that monopolies may increase consumer welfare through productive efficiency in producing commodities at a lower cost or with greater value. However, it should be noted that productive efficiency may benefit both producers and consumers through lower productive costs. Bork may have meant to say total welfare instead. Nevertheless, Bork’s consumer welfare has largely shaped the Supreme Court’s reasoning on antitrust law ever since.
Even then, given current U.S. labor dynamics, the argument that monopsony is widespread seems to lack standing. Consider again the company town. We should see generally low job turnover in the economy as workers are stuck and unable to choose comparable occupations. They would have no choice but to stay in their jobs, where firms will deliberately exploit this situation to minimize wages. But this is not the case. Rather, U.S. job turnover is very high. Hires, quits, and separations were all above average in 2021. Moreover, workers report having more flexibility, better benefits, and more opportunities for advancement because of leaving their past job and finding a new one. These workers are not necessarily middle and upper-class workers who can easily move to different sectors because they can telework and/or have transferable skills. On the contrary, among the states which saw the greatest population gains and losses in 2021, the average income of those moving out-of-state was around $28,000, well below what may be considered middle-class.
Economists and lawyers alike will debate this issue in the coming months, especially during the political finger-pointing of the upcoming recession. Although the ideas which provide the foundations for antitrust law are often taken for granted, we should be cognizant that they often have large consequences. How does the market change when AmazonBasics products are no longer existent, Google’s advertisements are suddenly not the one-stop-shop for online promotion, or when social media sites must viciously compete for our information? Now, we must consider the implications of prosecuting companies who may purchase too large a share of the same type of labor. If Starbucks is found guilty of purchasing too large a share of the world’s coffee beans, what would the penalty look like? Would the federal government muster the will to punish the most beloved American coffee shop?
This month’s article was written by Gustavo Alcantar, an undergraduate student at Columbia University studying economics with a concentration in history. Recently, he helped work on a paper published in the Harvard Journal of Law and Public Policy titled Antitrust and Modern U.S. Labor Markets: An Economics Perspective.
