Hearing Recap – (Im)Balance of Power: How Market Concentration Affects Worker Compensation and Consumer Prices

Apr 13, 2022
Press Release

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WASHINGTON – On April 13, 2022, the U.S. Select Committee on Economic Disparity and Fairness in Growth – led by Chairman Jim Himes (CT-04) – held a hearing, “(Im)Balance of Power: How Market Concentration Affects Worker Compensation and Consumer Prices,” to hear from experts on how market imbalances lead to greater economic disparities for employees and consumers alike.

“We celebrate success in this country, but if concentration is damaging American prosperity because companies are squeezing workers, taking out competition, or enjoying excess profits, it is right that Congress gets involved,” opened Chairman Himes. “I would like to thank Congresswoman Pramila Jayapal whose bipartisan work on the House Judiciary Antitrust Subcommittee was responsible for this timely and important hearing.”

“Corporate concentration has a direct impact on widening economic disparities, making workers, consumers, and small businesses unable to bargain for fair wages, lower prices, or a sustainable market share,” opened Congresswoman Jayapal. “To make matters worse, the abuse of power is more prevalent in industries that disproportionately employ marginalized groups – and I think that is important – such as rural communities, women, and people of color.”


The Select Committee presented recorded video testimonials from individuals personally affected by market concentration:

“When you see your coworkers, but also your dear friends, being exploited throughout a pandemic, it kind of wakes something up in you,” said Hillary Laskonis, a barista, union organizer, and IBEW Local 494 member. “Before we unionized, I did not feel like I had much power at all,” she added. “We’ve seen improvements to how workers are being treated. For example, shortly after the election, we were given a dollar raise.”

“A lot of people at the beginning did think that money was the driving force behind why we’re unionizing, but it couldn’t be further from the truth. It’s about making sure that our patients are protected, that we have enough people on the floor to care for these patients,” said Emily Wilder, registered nurse and National Nurses United member. “We don’t have enough staffing so that everybody can take a break. This means that some days I’m at work – going on 12 hours – and maybe using the restroom once a shift,” she added. “It’s really devastating, actually, to know that a lot of these problems – like safe staffing, break coverage, ratios [defined as how many patients one nurse provides care for at one time] – all of that could be fixed. Organizations are choosing not to fix those problems.”


The following witnesses testified before the Select Committee on market concentration and its effects on workers, consumers, and small businesses:

Dr. Kate Bahn, Chief Economist at the Washington Center for Equitable Growth,
explained the factors that lead to noncompetitive labor markets—a phenomenon known as monopsony—and the effects that monopsonistic corporations have on workers and their communities. “Economists have found that monopsony power is rampant in the labor market, allowing companies to undercut wages,” testified Dr. Bahn.

“Monopsony power impacts not just some workers or some labor markets, but the entire economy,” continued Dr. Bahn. “To address corporate power, policymakers should reinforce the power of our antitrust authorities and adopt a whole government approach to increasing competition.  And to the worker power, we must enhance the ability of workers to negotiate collectively for improved wages and working conditions.”

Dr. Heidi Shierholz, President of the Economic Policy Institute, focused her testimony on how unions and collective bargaining are an important counterbalance to monopsonistic forces. “Unions reduce the wage-suppressing effects of corporate power by providing countervailing power to workers. Unions just make it harder for employers to use their power to pay workers unfairly,” testified Dr. Shierholz.

“On average, a worker covered by a union contract earns 10.2 percent more than a similar worker who is not in a union. And union workers don’t just have higher wages; they are also more likely than their nonunion counterparts to have employer-sponsored health insurance, employer-sponsored retirement plans, and paid leave,” continued Dr. Shierholz. “[This] direct effect of unions on union members… [is] an important counterbalance to corporate concentration and other forms of monopsony power.”

Mr. Michael Mitchell, Director of Policy and Research at Groundwork Collaborative, focused his testimony on supply chain stalls, the effects of corporate profiteering on consumer welfare, and the ways in which small businesses struggle to compete with corporations that use their market power to stifle competition. “Corporate revenues increased well above the additional cost businesses have taken on as a result of the pandemic—profit margins rose 40 percent last year and are at the highest levels in the past 70 years,” testified Mr. Mitchell.

“Corporate concentration not only harms consumers,” added Mr. Mitchell. “It harms small businesses who face unique challenges as they fight to survive in deeply consolidated markets occupied by megacorporations. As demand has increased and supply chains have been unable to keep up, small businesses have struggled to maintain inventory. As a result, these businesses must spend additional time and resources trying to source products.”

Dr. Hal Singer, Managing Director of Econ One Research, spoke to how market concentration affects consumer prices. “When we observe episodes of massive parallel price hikes that cannot be explained by rising costs, as we did in 2021, we should understand those prices hikes through the prism of market power,” testified Dr. Singer. “U.S. firms are doing much more than just passing along costs dollar for dollar, otherwise their profit margins would be shrinking, not growing.”

“One of the reasons that firms in concentrated industries can turn small bouts of inflation into large bouts of inflation is because they can, and they are even willing to explore the boundaries of collusive behavior, egregiously, by announcing their intentions to raise future prices on earnings calls,” continued Dr. Singer. “I am calling for a change in the presumption and associated burden of proof in price fixing cases once plaintiffs have established certain evidentiary criteria, such as parallel price hikes and the sharing of future price intentions.”

Mr. Ryan Bourne, R. Evan Scharf Chair for the Public Understanding of Economics at Cato Institute, offered a different perspective, proposing two policy proposals to help workers and their families. “First, undo existing government policies that make workers less mobile by occupation and geography…[and] recognize that while wages are, of course, important to working households, what matters to families is how far those wages go in providing a decent standard of living.”



The subsequent Q&A portion of the hearing produced the following points of exchange between the Select Committee Members and witnesses:

Chairman Himes (CT-04)
opened the Q&A portion of the hearing by asking Dr. Bahn to describe the characteristics of the labor markets that are the least competitive. She responded by noting that 20 percent of workers in geographies that cover 60 percent of the country are adversely affected by monopsony. “Inherently, that means it is going to be…rural labor markets with fewer workers that you are going to see a lot of these impacts of concentration,” she added. “But that is not the only place…a wide body of research finds that the healthcare industry is particularly concentrated.”

Congresswoman Jayapal (WA-07) asked Dr. Shierholz to speak to how monopsony power results in adverse working conditions. Dr. Shierholz responded by noting that while lower wages are often associated with labor market concentration, “[the employers] do not have to provide high-quality jobs, which includes not just wages, but also benefits and things like workplace safety.”

Congressman Gonzalez (TX-15) asked Mr. Mitchell to elaborate on the impact of corporate concentration on supply chains and rising costs, and how Congress can take steps to alleviate these issues. Mr. Mitchell responded, “corporate concentration effectively hollows out and nearly eliminates diversity in our supply chains.” He added that “where there [are] high levels of corporate concentration, it leaves us very vulnerable to price gouging and profiteering.”

Congresswoman Kaptur (OH-09) asked Dr
. Singer to explain how the deregulation and concentration of the airline industry has led to consumer harm. He began by stating that “the airline industry has become highly concentrated over the last few decades because mergers have been tolerated.” He then went on to note that “as a result, it has been easier [for airlines] to coordinate reductions [in quality and service].”

Congresswoman Ocasio-Cortez (NY-14) asked Dr. Bahn to speak to how dominant employers in labor markets can exert outsized influence on wages and employment. Dr. Bahn, citing a study on places where Walmart sitings occur compared to those where they don’t, replied, “within five years, wages go down by 5.2 percent, employment decreased by 2.9 percent, and the labor force goes down by 1.4 percent.” She added, “overall, there is just more deadweight loss” in the local economies that have large employers.


Summary of Memorandum Prepared by the Select Committee’s Majority Staff:

Within labor markets, an imbalance of power between a company and its workers is not always due to the outsized share of the market that the company occupies. More broadly, imbalances can stem from workers having few outside options for employment or less freedom of choice than their employers—a phenomenon referred to as “monopsony.” Due to geographic constraints, rigid benefit structures, or nontraditional work arrangements, many individual workers cannot actually or credibly threaten to leave employers when they are being underpaid or mistreated. Similarly, when a company occupies a dominant share of a product market, it generally has power to set prices higher than justified by costs—a phenomenon referred to as “monopoly.”  A firm’s dominance in an industry can also imply that it receives prioritized access to input supply chains and customer bases over smaller businesses, further increasing the advantages it holds over smaller competitors.

Markets with power imbalances between companies and people—be they workers, consumers, or small business owners—can result in distortions that inefficiently distribute resources, including goods, wages, and returns to capital. Such “market failures” call for public policy interventions or reimagined business practices that can better align the maximization of private profit with the maximization of societal well-being. These can be policies or practices that make it easier for workers or consumers to organize, or they can be regulatory policies designed to bring market prices closer to what they would be in a competitive market.


The Imbalance of Power in Labor Markets

The textbook concept of monopsony, or when a single employer is the sole purchaser of labor, is the input-side equivalent to a pure “monopoly,” or a single seller of a consumer product. Since the mid-1990s a growing body of economic research has provided empirical evidence that many employers have sufficient market power within local labor markets to set wage levels rather than accept what a perfectly competitive, productivity-based market would dictate. One review by the Treasury Department of the academic literature finds that wages in the U.S. are on average about 20% lower than what they would be in a perfectly competitive labor market.

But having just a few firms that make up an entire industry or hire an entire occupation is not the only factor that can lead to a lack of worker power. More broadly, there is an inherent imbalance of power in the firm-worker relationship, even in labor markets that are not highly concentrated. Workers are always at an informational disadvantage relative to their employers since, for example, the employer knows how much the worker is paid relative to their other employees, and any individual worker often has very limited employment options at any given time, since workers are not constantly looking for new employment. This can make a worker’s current employer their only practical option due to a combination of geographic, occupational, and household constraints.

These kinds of constraints, or “frictions,” on worker mobility imply that the inherent power advantage of any employer over any individual worker is a persistent condition that is challenging to change. Increased unionization is one way to rebalance bargaining power to increase competition in markets and achieve both higher pay and benefits and increased employment. On average, a worker covered by a union contract earns 10% more in wages than a peer with similar education, occupation, and experience in a nonunionized workplace in the same sector. 95% have access to employer-sponsored health benefits, compared with just 69% of nonunion workers. Moreover, unionization boosts non-union worker wages in the same labor markets because non-unionized companies need to compete with unionized companies for workers.


The Imbalance of Power in Product Markets

A monopoly industry is one in which the market for a product has only a single seller, which implies that the sole firm can choose to charge a price inconsistent with its costs because it does not face competition. An oligopoly, which is a far more common situation in which a market has only a limited number of firms, can similarly have prices above the level consistent with perfect competition if the firms coordinate to set prices above their costs. Price-fixing behavior in oligopolistic industries happens often enough that there are antitrust laws, including the Sherman Act of 1890, designed to limit it.

Despite the relatively low level of market concentration in most industries today, a few still consist of a very small number of companies, and empirical analysis shows that the most concentrated industries have experienced the largest price increases. While an overarching factor driving inflation over the pandemic recovery has been supply lagging in catching up to demand, data show the price increases have been uneven across goods, which is inconsistent with either wage increases or government spending being the sole driver of inflation. Many of the goods with the largest price increases are “necessity” goods—such as food, energy, and household staples—that make up larger fractions of lower-income families’ budgets and also are produced in highly concentrated industries. This means that companies have substantial market power and the capacity to raise both prices and profit margins.

Input markets include not just labor, but also intermediate inputs. Due to their size, dominant firms are the least likely to be adversely affected by supply chain bottlenecks yet are the most likely to be able to cite general price inflation as a reason to raise the prices they charge, even when their own costs have not gone up. Smaller and new businesses cannot remain competitive against large corporations that buy inputs at lower costs and sell products at higher prices to their established customer base, or against corporations that are able to cover losses in some locations or areas of their business with profits in others. Regardless of what motivates suppliers to prioritize larger firms over small ones, this is just another factor that creates barriers and obstacles for small and independent businesses to remain economically competitive—particularly in resource-constrained times.


Proposals to Increase Worker Power and Competition

  • Prioritize reforms that restore workers’ rights to organize and bargain collectively, including the Protecting the Right to Organize (PRO) Act and the Public Service Freedom to Negotiate Act, which would address many of the major shortcomings of current labor laws.
  • Amend the Sherman Act to make it easier to prove that firms have engaged in anticompetitive behavior and to permit courts to bar corporate executives convicted of price-fixing from working in the industries in which they broke the law.
  • Explore taxing excess profits, much like after World War I and World War II, to encourage productive private-sector investment and deter price gouging, as partially outlined in the Ending Corporate Greed Act.
  • Further empower regulators at both the state and federal levels to identify price gouging and protect consumers, as outlined in the COVID-19 Price Gouging Prevention Act and the Prohibiting Anticompetitive Mergers Act.

 

Read the full Select Committee memorandum here.
 

117th Congress