It\u2019s dawning on people that when the competition between businesses isn\u2019t strong, firms can raise their prices by more than the increase in their costs, and so fatten their profit margins. What\u2019s yet to dawn is that weak competition also allows businesses to pay their workers less than they should.<\/p>\n
In standard economic theory, it\u2019s the intense competition between firms that prevents them from overcharging for their products and earning more than a \u201cnormal\u201d profit.<\/p>\n
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<\/span>Credit:<\/span> <\/cite><\/p>\n Normal profit gives the owners of the firm just sufficient return on the capital they\u2019ve invested to stop them leaving the industry and trying their luck elsewhere.<\/p>\n The theory assumes the industry has numerous firms, each one too small to influence the market price. In today\u2019s world, however, many markets are dominated by just two, three or four huge firms.<\/p>\n These firms are<\/em> big enough to influence the market price, especially when it\u2019s so easy for them to collude tacitly with their rivals.<\/p>\n We see the four big banks doing this every time interest rates are raised. They have an unspoken agreement not to compete on price.<\/p>\n When a firm has a large share of the industry\u2019s employment, the gap between the value of the work a worker does, and the wage they\u2019re paid in return, tends to grow.<\/p>\n I say they have \u201cpricing power\u201d, but many economists say they have \u201cmonopoly power\u201d. How can a handful of firms have monopoly power? Because economists don\u2019t use that term literally. On a scale of one to 1000 firms, we\u2019re right down the monopoly end.<\/p>\n Dr Andrew Leigh, the Assistant Minister for Competition, and a former economics professor, has been giving a series of speeches about recent empirical studies on how competitive our markets are.<\/p>\n In one, he quoted the findings of Jonathan Hambur, a researcher who pivots between Treasury and the Reserve Bank, that Australian firms\u2019 \u201cmark-ups\u201d \u2013 the gap between their cost of production and their selling price \u2013 have been rising steadily.<\/p>\n But in a further speech this month, Leigh turned the focus from what \u201cmarket concentration\u201d (among a few massive companies) means for the industry\u2019s customers, to what it means for its employees.<\/p>\n So, in econospeak, we\u2019re moving from monopoly to \u201cmonopsony\u201d. Huh? Taken literally, monopoly means a market in which there\u2019s a single seller<\/em> meeting the demand for the product. Monopsony means there\u2019s a single buyer<\/em> from the people supplying the inputs to production. Workers supply the firm with the labour it needs.<\/p>\n The term was introduced by Joan Robinson, a colleague of Keynes at Cambridge, who was among the first to question the standard theory of how markets work. She was 30 in 1933 when she published her dissenting view that truly competitive markets were rare.<\/p>\n She argued that monopsony was endemic in the labour market and employers were using it to keep wages low. If there are few employers competing for workers, those workers have fewer \u201coutside options\u201d (to move to another firm offering higher pay or better conditions).<\/p>\n This limits workers\u2019 bargaining power and gives employers the power to keep wages lower.<\/p>\n Amazon was accused of using monopsony power in its warehouses to depress wages in local markets.<\/span>Credit:<\/span>Dhiraj Singh<\/cite><\/p>\n At the time, few economists took much interest. But in recent years there\u2019s been a growing focus on market power by academic economists.<\/p>\n For instance, monopsony was cited in a US Supreme Court ruling against Apple in 2019. A report by Democrats in the US House of Representatives accused Amazon of using monopsony power in its warehouses to depress wages in local markets.<\/p>\n Evidence from the US, Britain and Europe has demonstrated that increases in labour market concentration \u2013 fewer employers to work for \u2013 are associated with lower wages.<\/p>\n Leigh says economists have long known that people in cities tend to earn more than those in regional areas. His own research found that when someone moves from a rural area to a major Australian city, their annual income rises by 8 per cent.<\/p>\n \u201cThe economics of monopsony suggests that an important part of the urban wage premium can be explained by greater employer competition in denser labour markets,\u201d Leigh says.<\/p>\n Leigh reminds us that Australia\u2019s average full-time wage ($1808 a week last November) was only $18 a week higher than it was 10 years ago, after allowing for inflation. Many things would explain this pathetic improvement, but one factor could be employers\u2019 monopsony.<\/p>\n We know that the rate at which people move between employers has fallen. But over a person\u2019s working life, the biggest average wage gains come when people switch employers. And when some people leave, the bargaining power of those who stay is increased.<\/p>\n This decline in people moving could be caused by increased employer monopsony. Hambur has done a study of employment concentration between 2005 and 2016.<\/p>\n Increases in labour market concentration are associated with lower wages.<\/span>Credit:<\/span>Louie Douvis<\/cite><\/p>\n He found that, within industries where concentration rose, growth in real wages over the decade was significantly lower.<\/p>\n When a firm has a large share of the industry\u2019s employment, the gap between the value of the work a worker does, and the wage they\u2019re paid in return, tends to grow.<\/p>\n He found that employment in regions close to major cities is twice as concentrated as in the cities. In remote areas it\u2019s three times.<\/p>\n Read this carefully: Hambur found that labour markets had not become more concentrated over the decade. But<\/em> at every degree of concentration, its negative impact on wages had more than doubled.<\/p>\n So, employers\u2019 market power could well be a factor helping to explain the virtual absence of real wage growth over a decade. Hambur finds that the greater impact of employer concentration may have caused wage growth between 2011 and 2015 to be 1 per cent lower than otherwise.<\/p>\n This would help explain why not all the (weak) growth in the productivity of labour during the period was passed through to real wages \u2013 as conventional economists and business people always assure us it will be. Weak competition allowed employers to keep a lot of it back for themselves.<\/p>\n Part of the competitive process is new firms entering the industry. New firms usually poach staff away from the existing firms. But we know the rate of new entry has declined.<\/p>\n<\/p>\n
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