Antitrust Regulation in the Labor Market

December 24, 2021 | Riya Jain

Edited by Talia Shadroui

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Rising economic inequality and wage stagnation over the last four to five decades has led many academics and policy-makers to try and understand its causes. One theory in economics is monopsony power in the labor market. Employers are buyers of labor who operate within a labor market, and a monopsony exists when one or a few buyers have substantial control over a market as the major purchaser of goods and services. If an employer has significant control over hiring, they can suppress wages and prevent the free movement of employees. The theory underlying this argument is that in a perfectly competitive labor market, workers “sell” their labor and should be able to demand a fair market “price” as determined by supply and demand. While a simple supply and demand model does not account for a lot of factors (such as search costs for workers and onboarding costs for employers), wage stagnation suggests that the current labor market is somehow not operating competitively. 

Issues related to worker welfare have always been regulated by labor law and employment law, but there is growing concern that the consolidation of employer power could also be an antitrust issue. Antitrust law in the United States regulates the behavior of business corporations to promote competition, prevent monopolies, and protect consumer welfare. Traditionally, antitrust litigation since the passage of the Sherman Antitrust Act has focused primarily on the marketplace for goods and services and is aimed at companies that illegitimately seek to increase market share in order to raise prices. So, high prices trigger antitrust suspicions. In the labor market, however, the issue is the opposite: prices are too low. Where monopolies create upward price pressure by controlling the selling price, monopsonies create downward wage pressure by controlling the buying price. Labor market power can be thought of as a mirror image of product market power, yet courts pay little attention to competitive dynamics in the market for labor. The two most common forms of anti-competitive agreements that exist in the labor market today are “no-poach” or “no solicitation” agreements and wage-fixing agreements. The former exists between companies that have agreed not to solicit or hire each other’s employees, and the latter occurs among companies that coordinate employee wages or other forms of compensation. In both cases, the employer holds a significant amount of power to keep the price of labor low at the detriment of employees. 

The failure to apply antitrust law to anti-competitive labor agreements has important social and economic costs. With wages artificially suppressed, qualified workers decline to take jobs or remain underemployed. Workers may also underinvest in skills and schooling if they don’t foresee strong employment prospects in their preferred field. As a result, estimates show that monopsony power in the U.S. economy reduces overall output and employment by 13% and reduces labor’s share of national output by 22%. One major concern is that anticompetitive practices often target the most vulnerable workers: those with limited education and low skills. Regulating anti-competitive labor market practices fall outside the scope of labor law and employment law, rendering them insufficient to protect workers. Worker’s rights are further undermined with the collapse of union activity in the United States and the shift away from traditional employment contracts towards the “gig economy,” a currently underregulated gray area. While legal theory has focused on consumer welfare and therefore, product markets, economists have long understood that consumer welfare is worker welfare, and vice versa. Antitrust law can appropriately be applied to fill this gap/mend this disconnect.

The Department of Justice has largely ignored no-poach agreements and wage-fixing agreements, leading to their proliferation in the current workforce as they are now “extraordinarily common and frequently applied to low-wage workers.” In fact, a 2016 study of employment contracts of the 156 largest franchise chains in the United States found that 58% of major franchise chains include no-poaching agreements in their contracts. The DOJ filed its first antitrust complaint in 2010, a civil case against six major tech companies which reached a $435 million settlement and prohibited the companies from engaging in no-poach agreements. Since then, the Federal Trade Commission (FTC) and the Antitrust Division of the Justice Department have actively been investigating civil antitrust claims. In 2016, the DOJ and FTC released the Antitrust Guidance for Human Resource Professionals which indicated that, going forward, they would not only be treating wage-fixing and no-poaching conduct as per se unlawful, but that they also intended to pursue criminal enforcement. The document explains that these types of agreements, “eliminate competition in the same irredeemable way as agreements to fix product prices or allocate customers, which have traditionally been criminally investigated and prosecuted as hardcore cartel conduct.” The DoJ has also made it clear that no-poach and wage-fixing investigations can arise from merger reviews and whistleblowers. This is significant as ​​the DOJ and FTC have never before challenged a merger because of its possible anticompetitive effects on labor markets, or even rigorously analyzed the labor market effects of mergers as they do for product market effects. Following the release of the Antitrust Guidance document, the DOJ launched several investigations in a range of industries to uncover wage-fixing and no-poach agreements and brought its first criminal charge in December 2020. Currently, it has three total active criminal cases pending, all in the healthcare field. Notably, the healthcare industry lends itself naturally to monopsony power. This is because a geographic region tends to only have one or a few major hospitals and the labor market is a well-defined set of trained doctors and nurses living in the region. Thus, anticompetitive conduct is likely, especially in small towns and rural areas. 

The DOJ’s decision to treat such conduct as per se illegal does not mean that district courts will give weight to their view or follow their approach. Given that the first ever no-poach and wage-fixing criminal charges were brought less than a year ago, the courts are unsure of how to analyze this conduct and there is no consensus on what standard to apply. Some argue that these anti-competitive agreements are per se illegal (similar to how courts treat price-fixing and geographic market divisions). Per se illegality is reserved for the behavior that almost always leads to anticompetitive effects and can rarely be justified by pro-competitive outcomes. For that reason, horizontal agreements among competitors are more likely to be per se illegal, for they often raise prices and rarely enhance consumer welfare. Thus, the case for no-poach and wage-fixing conduct to be condemned as per se illegal is strong. Others more cautiously seek to apply a rule-of-reason analysis which determines whether the effect of an action is to unreasonably restrain trade. For an action to be illegal, it must be proven that the defendant has market power in the relevant market and that anticompetitive effects of the defendant’s action outweigh procompetitive justifications. No-poach agreements, for example, may have pro-competitive benefits. If someone works at a company for 3 months and then is hired by another company in the same industry, the first company will have sunk 3 months of time, money, and resources into training an employee who ultimately utilized their investment at another company. Some companies seek to protect trade secrets which could be jeopardized if employees are allowed to quit and work at a rival firm. By enacting restrictions on employee compensation and movement in the form of no-poaching agreements, firms seek to protect their investments, increase output, and improve operational efficiencies. These arguments perhaps justify taking an effect-based approach for no-poach agreements. A procompetitive argument for wage-fixing, on the other hand, is extremely difficult to make. It is the labor-market equivalent of horizontal price-fixing in the market for goods and services and should be deemed per se illegal. 

The Antitrust Division has carved out labor market restrictions as “a top criminal enforcement priority,” a shift which has major implications. Companies should recognize that they are now operating under increased scrutiny around compensation and hiring practices, and understand the risks associated with criminal prosecution. HR professionals ought to proactively monitor the behavior of company employees, and companies should be especially careful when communicating with other firms who hire from the same labor pool. Ultimately, concentrated labor power is bad for the economy, wealth equality, and social welfare. In the early 20th century, following the passage of the Sherman Act, enough political will was mustered to break up the behemoth Rockefeller and Carnegie-era monopolies. Today, Senators are vocal about regulators taking action against dominant “Big Tech” monopolies. It remains to be seen, however, whether similar pressure will be placed on the FTC and DOJ to break up monopsonies in the labor market.

Jain is a senior at Johns Hopkins University pursuing a double major in Political Science and Economics. Additionally, she is a frequent contributor to the publication.

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Sources:

[1] Desilver, Drew. “For most U.S. workers, real wages have barely budged in decades.” Pew Research Center. (August 7, 2018) https://www.pewresearch.org/fact-tank/2018/08/07/for-most-us-workers-real-wages-have-barely-budged-for-decades/

[2] Benmelech, Efraim, Nittai Bergman, and Hyunseob Kim. “Strong Employers and Weak Employees: How Does Employer Concentration Affect Wages?” National Bureau of Economic Research. (February 2018).

[3] Posner, Eric, Glen Weyl, and Suresh Naidu. “Antitrust Remedies for Labor Market Power.” Harvard Law Review. (December 10, 2018).

[4] Ibid.

[5] Steinbaum, Marshall. “Antitrust, The Gig Economy, and Labor Market Power.” Law and Contemporary Problems. (2019).

[6] Posner, Eric, Glen Weyl, and Suresh Naidu. “Antitrust Remedies for Labor Market Power.” Harvard Law Review. (December 10, 2018).

[7] Stutz, Randy. “The Evolving Antitrust Treatment of Labor-Market Restraints: From Theory to Practice.” American Antitrust Institute. (July 31, 2018).

[8] Department of Justice 2016

[9] Posner, Eric, Glen Weyl, and Suresh Naidu. “Antitrust Remedies for Labor Market Power.” Harvard Law Review. (December 10, 2018).

[10] Colin-Dubuisson, Charlotte, John Eichlin. “Employing Old Antitrust Theories in New Markets: A Look at Antitrust Enforcement in Labor Markets in the US, EU and Beyond.” Linklaters. (June 2021). https://www.linklaters.com/en-us/insights/blogs/linkingcompetition/2021/june/employing-old-antitrust-theories-in-new-markets-a-look-at-antitrust-enforcement-in-labor-markets

[11] Lynch, Niall, Elizabeth Prewitt, and Ashley Bauer. “DOJ’s First Criminal Charges for Wage-Fixing and No-Poach Labor Agreements: 6 Key Takeaways.” Latham & Watkins Client Alert. (February 18, 2021).

[12] Colin-Dubuisson, Charlotte, John Eichlin. “Employing Old Antitrust Theories in New Markets: A Look at Antitrust Enforcement in Labor Markets in the US, EU and Beyond.” Linklaters. (June 2021). https://www.linklaters.com/en-us/insights/blogs/linkingcompetition/2021/june/employing-old-antitrust-theories-in-new-markets-a-look-at-antitrust-enforcement-in-labor-markets

Photo Credit: Competition Policy International