As market concentration goes up, employees’ wages go down

Labor economist Ioana Marinescu discusses her research, which she presented to the Federal Trade Commission on Tuesday, Oct. 16.

In the U.S., despite a great decrease in unemployment and general economic growth, wages have been stagnant. One potential explanation for this phenomenon, says labor economist Ioana Marinescu, is employers’ market power.

Ioana Marinescu, of the School of Social Policy & Practice, presented her work at an FTC competition and consumer protection hearing.

“Work by myself and other colleagues shows that lower competition for workers does depress wages,” says Marinescu, of the School of Social Policy & Practice. “In general, the competition for workers is often quite weak, therefore there’s a real danger of workers being underpaid because of a lack of competition.”

When one company merges with another, it’s familiar territory for the Federal Trade Commission to analyze the ins and outs of how the act might impact consumer prices. But now, the FTC is taking into account—for the first time—the long-ignored notion that merging corporations can lower wages for employees due to decreased competition for workers.

In fact, on Tuesday, Oct. 16, when the FTC held a series of competition and consumer protection hearings, Marinescu spoke on a panel that focused precisely on this issue.

Marinescu, an expert in the field who’s already produced three papers on this topic in the past year (including one with Penn Law’s Herbert Hovenkamp), chatted with Penn Today about five takeaways from the FTC discussion.

1. Taking it seriously 

Marinescu and colleagues have been able to show that, in some cases, workers are underpaid relative to their actual productivity because there is not enough competition for their services—putting employers in the position to suppress wages. “We don’t fully understand the extent of it,” Marinescu says, “but there’s a lot of evidence that this is happening, and I think the Federal Trade Commission is listening.” In fact, the FTC recently announced that going forward, every time two companies merge, it will consider the potential adverse impact on the labor market. “It’s a pretty significant change in practice,” Marinescu says. 

2. Employer power

Marinescu discussed the evidence from her research during her testimony, and how she’s been able to measure the concentration of employers. “The idea is that the same company is not going to compete with itself by driving up wages,” she says. Marinescu and colleagues found that 60 percent of markets are highly concentrated, therefore a merger, if examined, in any of these markets would likely be problematic for workers. 

3. Wage drop 

Marinescu and colleagues found that when the market concentration goes up, wages go down. Specifically, when talking numbers, a 10 percent increase in concentration—meaning a reduced variety of employers currently hiring—is associated with about 1 percent in lower posted wages. 

4. Validation

Other studies have found the same results, with different data sets and methodology, confirming the need for this conversation. “This research has been validated and reproduced successfully in terms of showing this negative relationship between concentration and wages,” says Marinescu. “It’s not just me. This is the consistent, general picture.”

5. Nowhere to go

Not specific to Marinescu’s research but still relevant, she says, are recent findings that indicate how if an employer lowers wages by 10 percent, only 1 or 2 percent of workers might leave. “They are stuck,” she says, adding that they’d leave if they could go somewhere that offered more pay. “It’s showing another way of looking at the question by examining cases where employers attempt to decrease wages, and showing that, by and large, most employees stay on, which demonstrates that employers have the power to set wages.”