If Corporations Are Holding Down Wages, Employees Won’t Work as Hard

If Corporations Are Holding Down Wages, Employees Won’t Work as Hard

Two new proposals from the Brookings Institution’s Hamilton Project envision potential reforms to corporate and public policies to protect workers from the negative effects of non-compete agreements and other labor market practices the authors describe as anti-competitive. The first, written by Boston University professor Matt Marx, offers several suggestions for ensuring that non-competes are not abused, such as ensuring candidates are aware of them before accepting a job and improving non-disclosure agreements to be a better substitute for overly-restrictive non-competes.

The other paper, co-authored by economist Alan Krueger and law professor Eric Posner, takes a broader view of the problem of employers using their market power to suppress wages. In an op-ed at the New York Times, the authors highlight the crux of their argument:

The culprit is “monopsony power.” This term is used by economists to refer to the ability of an employer to suppress wages below the efficient or perfectly competitive level of compensation. In the more familiar case of monopoly, a large seller — like a cable company — is able to demand high prices for poor service because consumers have no other choice. It turns out that many corporations possess bargaining power over their workers, not just over their consumers. Their workers accept low wages and substandard working conditions because few alternative job opportunities exist for them or because switching jobs is costly. In other words, in the labor market, effectively a small number of employers are competing for labor.

The authors point to non-competes, anti-poaching agreements, or other forms of collusion, as well as mergers with adverse effects on the labor market, as the means by which companies keep wages low. This might be true, or there might be other tools that companies are using to hold back wage growth (e.g. pressure from the CFO to drive margin, or lobbying states and municipalities to not increase minimum wages). This public policy debate, however, misses a bigger issue that this strategy causes for the companies themselves.

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