Why Aren’t Americans Getting Raises? Blame the Monopsony
Instead of bidding up wages, firms collude to keep pay low and enforce noncompete clauses.
By Jason Furman and Alan B. Krueger
Pat Cason-Merenda had worked as a registered nurse at the Detroit Medical Center for four years, unaware that she was being underpaid. That changed when a class-action lawsuit alleged that her employer, along with seven other hospitals, had colluded to suppress the wages of more than 20,000 nurses. The suit claimed the hospitals conspired to keep pay low by inappropriately sharing information about nurses’ salaries and pay increases. By this year, the hospitals agreed to pay $90 million dollars to settle the wage-fixing case.
Stories like this are too common, thanks to many employers’ exercising monopsony power over workers. A monopsony is the flip side of a monopoly: It occurs when a buyer, rather than a seller, has sufficient market power to set its own price. While economics textbooks often describe the labor market as perfectly competitive, in reality employers often use their power to underpay workers.
In addition to holding down workers’ paychecks, monopsony power can depress overall hiring and output, as employers are unable to find enough workers at the wage they offer. If monopsony power creates barriers to workers switching jobs, it can slow labor turnover, reducing dynamism and innovation. Counteracting monopsony power would lead to higher wages, lower unemployment and stronger economic output.
Some employers act as monopsonists by illegally colluding, as alleged in the case of Detroit hospitals. Others require employees to sign noncompete agreements that prevent them from working for a competitor in the future. And nearly all employment arrangements involve a degree of implicit monopsony power: Frictions, such as finding new child-care arrangements or spending time searching for work, can make it costly for workers to change jobs. Many companies exercise monopsony power even though they are not the only employer in town.
Evidence suggests monopsony power is restricting pay increases. Job openings have steadily risen in recent years, but hiring has not kept pace. Some employers cite this as evidence of a shortage of skilled workers. In a competitive labor market, however, employers would bid up workers’ compensation until vacancies were filled. Yet wages have not grown faster in sectors with rising job openings, according to the Washington Center for Equitable Growth, suggesting that companies are resisting raising wages.
New research also highlights excessive use of noncompete clauses. Nearly 20% of American workers have signed a noncompete agreement, according to economic researchers. This is far higher than any plausible estimate of the share of workers with access to trade secrets that could harm their employers if taken to a competitor. Even in states where noncompete agreements are effectively banned, they remain prevalent, suggesting a blanket approach to their use by employers. There is no reason why employers would require fast-food workers and retail salespeople to sign a noncompete clause—other than to restrict competition and weaken worker bargaining power.
The trend toward greater concentration among businesses in recent decades could be exacerbating these problems. Large corporate mergers make it easier for the remaining firms to explicitly or implicitly collude and enforce noncompete agreements.
Last week, the Obama administration called on states to adopt a set of best practices ensuring that noncompete agreements are narrowly targeted and appropriately used. The White House also announced commitments to initiate the largest-ever data collection of its kind on noncompete usage.
The Justice Department and Federal Trade Commission last month released new guidance for human resources professionals to help identify and report wage collusion among employers, including information about a reporting hotline. And allegations of companies engaging in illegal wage-collusion will now be criminally investigated by the Justice Department.
A strong voice for workers and robust labor standards can also help counteract monopsony power and lift wages. Congress should raise the federal minimum wage, which has been stuck at $7.25 an hour since 2009. Supporting collective-bargaining rights also helps workers negotiate with employers on a more level playing field. To assure adequate benefits, the Labor Department recently acted to modernize overtime regulations, and Congress should follow suit by expanding paid leave.
The idea that employers take steps to suppress pay is not new. Adam Smith wrote in “The Wealth of Nations” that employers were “always and everywhere in a sort of tacit, but constant and uniform combination, not to raise the wages of labour above their actual rate.”
Hundreds of years later, the U.S. needs policies that prevent and counteract monopsony power. Greater labor-market competition can help the entire U.S. economy—and ensure that workers like Ms. Cason-Merenda in Detroit share in the economic growth they help create.
Mr. Furman is the chairman of President Obama’s Council of Economic Advisers. Mr. Krueger, a former chairman of the council (2011-13), is a professor of economics at Princeton University.