Home Antitrust and Competition Countering Employer Monopsony Power With Fundamental Labor Rights

Countering Employer Monopsony Power With Fundamental Labor Rights

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Illustration by erhui1979, via Getty Images

Labor policies grounded in the fundamental rights of workers can reinforce the aims of a proposed labor antitrust agenda by limiting a firm’s ability to abuse market power. Drawing from studies of guest worker programs that grant firms control over the sponsorship of foreign nationals to work legally in the US, policymakers and economists should consider non-discrimination law, wage standards, and bolstering worker’s ability to quit to reduce a firm’s ability to exercise monopsony power in labor markets.


Does antitrust have a labor market problem? The last few years have seen growing interest among academic scholars in the causes and effects of concentration in US labor markets. Concurrently (and not unrelated), there has been an explosion of interest among policymakers and the general public in the impact that firms with market power may have on wages and working conditions. What do the data say regarding employer concentration and its effect on workers? Is antitrust in its current form equipped to address issues related to labor market power? In an attempt to answer these questions and more, we have decided to launch a series of articles on antitrust and the labor market.

As antitrust experts consider addressing firm power in the labor market, the discourse rarely differentiates between institutional contexts. Focusing on employer concentration and imagining generic interventions to reduce monopsony power for a hypothetical single US labor market could miss a key point about the complex set of institutions and policy choices that affect how a firm with market power uses that power. While it may not ever be possible to completely eliminate monopsonistic power in the labor market, expert agencies working in a particular context as part of a “whole of government” approach that Hiba Hafiz has described are necessary to combat the exercise of monopsony power.

Consider the situation of guest workers on temporary visas in the US. For some of these workers, quitting ends their legal right to remain in the US. For others, employers pay “hiring taxes” when they bring foreign nationals to the US, and “quitting” taxes when poaching a worker from another employer. Judicial interpretations have blessed price-fixing employer cartels to set wages for temporary migrant workers, and while federal regulations often require they be paid a minimum of the 50th percentile of the relevant labor market, authority and resources to enforce regulations are lacking. With this background, it is no wonder that guest worker programs raise concerns about employer power in the labor market.

Critics have called these “monopsony visas,” in the words of Heidi Shierholz of the Economic Policy Institute, and a “subsidy” to employers, in the words of Milton Friedman. In a series of papers over several years on guest worker mobility, employer strategy and guest worker hiring, and antitrust concerns and visa programs, I and others have studied firm monopsony power over these workers, and how different sources of labor market power might have different remedies and consequences.  

Our research shows that even with many employers and no concentration, guest workers will face unequal power in the labor market. In the H-1B program, my co-authors and I found that even in a market with infinite firms and zero concentration, employers will still have power to pay H-1B workers only 70 percent of their worth to the firm. We estimate that even though concentration reduces wages by 13 percent in the extreme case of a single employer in a labor market, such a firm has the power to pay far lower wages. 

Why don’t firms pay as low as our analysis suggests they can? In the context of the H-1B program, non-discrimination laws, high minimum wages, and the enforcement of labor standards take a significant bite of employer rents by restraining the ability of firms to use their monopsony power. While context is key, this article presents potential solutions to monopsony power. These proposals are drawn from fundamental rights of labor recognized by US and international law that could apply to many labor markets, but address a specific concern suggested by research in the guest worker program context.

1. Enforce Non-Discrimination Laws and Address Inequities Created by Law

One of the most common ways in which employers use monopsony power is by discriminating against vulnerable workers. When enforced, equal pay requirements prevent labor monopsonists from paying less to groups of workers who are more exploitable because of their segmentation into secondary labor markets characterized by lower job mobility. When the UK Equal Pay Act of 1970 was enacted to require women be paid equally to men for the same work, women’s wages rose rapidly, but rather than seeing women lose their jobs, women’s employment also rose, as is consistent with a monopsonistic understanding of the labor market.

In a competitive market for labor, a worker is paid their worth to a firm, wages are set by the market, and a law raising one group’s wages would reduce that group’s employment. However, an employer with monopsony power can profit through exploiting the difference between the value of work and the lowest wage at which a worker is willing to work (this “reservation price” is often set by a worker’s best option in the external labor market, which is lower for groups facing discrimination in the labor market). When non-discrimination laws require a firm to pay equal wages to disadvantaged groups, a monopsonist has less profit from exploitation, but more workers who had faced discrimination may enter the labor market as wages go higher. In the study of the UK Equal Pay Act, both wages and employment of women increase, suggesting that non-discrimination and curtailing the use of monopsony power go hand in hand and can improve labor market outcomes.

“Discrimination should be a central concern for those interested in labor antitrust.”

Discrimination should therefore be a central concern for those interested in labor antitrust. Immigrant and non-citizen workers in the United States and other countries should be entitled to equal wages and equal treatment compared to citizens. Under the H-1B program, employers are required to pay guest workers equal wages and benefits to existing employees, but can escape this requirement by outsourcing the work to a vendor. The loophole in the H-1B program for outsourcing arrangements is a widespread practice in corporate America that, as David Weil has written about in general, allows leading firms to escape obligations to treat workers fairly. More than just visa programs, outsourcing grants firms with market power the ability to disclaim responsibility for unequal wages paid to subcontractors who in many cases sit and work besides employees performing identical work.  

In the guest worker context, federal regulations and courts have undermined the principle of fair rules, equal pay for equal work, and even the equal application of antitrust law. In Llacua v. Western Range Association (2019), a federal court held that a conspiracy by sheep-ranchers to hire Peruvian H-2B sheep herders and pay them low wages was lawful because the visa programs allow such combinations which are otherwise banned by antitrust law. As the following section will show, inequities for guest workers are built into the law and create an environment in violation of the principles of fairness.

2. Promote and Enforce High Wage Standards and Decent Work

Weak or non-existent wage standards and labor rights apply to many groups of workers and allow firms with employer power to use it. Sub-minimum wages and exclusions under the Fair Labor Standards Act and the National Labor Relations Act allow certain employers to evade minimum wage and overtime pay requirements, and can leave workers without fundamental rights to petition their employer and form unions if they wish. By misclassifying workers as independent contractors, or outsourcing work that was once done in-house to a third-party vendor, employers can pass costs and risks onto workers, and use their power to extract wage concessions. For janitors and security workers, outsourcing can lower wages significantly.

In a current working paper examining underpayment of wages in the guest worker context, my co-author and I find that subcontractors who outsource guest worker labor to another firm are more likely to violate wage and hour laws and more likely to state that they pay wages just above the legal minimum wage they face. As seen in Figure 1, there is a spike in the wage H-1B subcontractors state they pay their guest workers just above the effective minimum wage of $60,000.

This very high minimum wage, when enforced, restricts the ability of firms to pay workers as low as our measurement of firm power indicates that they otherwise could. The development and enforcement of appropriate labor standards is thus a central issue in combatting firms’ use of potential monopsony power. Targeting minimum wages at, for example, particular regions and large employers—as was done by a New York wage board that established a targeted minimum wage for large fast food chains, for example—can limit an employer with market power’s ability to profit from exploitation. 

Wage standards in guest worker programs face the problem of weak enforcement and numerous loopholes. The L visa for intra-company transfers, the J visa for cultural exchange, and the B visa for business travel have weaker wage standards than the H visas; this laxity has allowed firms to sometimes engage in regulatory arbitrage. Proactive investigations that target specific industries and occupations in which workers are likely to be underpaid are a major tool of wage and hour law enforcement. In the guest worker context, however, as my recent working paper discusses, the US Department of Labor’s Wage and Hour Division is prohibited by law from conducting proactive investigations into underpayment in the H-1B program. In other programs, the responsibility for investigating labor standards violations is placed under the ill-equipped State or Homeland Security Departments. In the past, when Homeland Security tried to collaborate with the Department of Labor to enforce standards, lawsuits and Congressional restrictions placed on inter-departmental cooperation further undermined the ability to enforce labor standards.

3. Protect and Expand the Freedom to Quit 

Even if there are many firms in the labor market, it is harder to quit a bad job if few are hiring. “Natural” frictions in the environment, such as high levels of unemployment or informational disadvantages within a particular community, limit workers’ ability to quit to better job opportunities. “Institutional” frictions such as regulations that make quitting or hiring more costly can also reduce the mobility of workers and raise firm power.

From the H-1B context, research I have done with others shows that the general health of the labor market as measured by state-level variation in the unemployment rate is strongly related to quitting behavior and measurements of firm wage-setting power. The same research shows that guest workers on H-1B visas in the “hot” information technology labor market exhibit the ability to jump from job to job during hot labor markets, but are still restricted in their freedom to quit.  

One way these programs restrict freedom to quit is to impose “taxes” on hiring and quitting by charging fees to employers who wish to hire guest workers already in the US. These costs can be a substantial barrier to firms’ willingness to hire a guest worker: for the H-1B program, hiring costs are approximately 75 percent higher than the baseline costs of hiring a skilled professional. The H-1B visa favored by large technology firms, the H-2B seasonal program, and the H-2A agricultural program require a firm that wishes to hire a guest worker already in the US to pay between $1,400 and $6,300 in visa fees, in addition to the costs of legal advice. 

As the legal scholar Maria Ontiveros has written, the 13th amendment’s prohibition against indentured servitude provides a legal rationale for aggressive actions to expand worker’s freedoms to escape domination by a single employer and set minimum labor standards that uphold free and voluntary labor. Economists recognize that job mobility is fundamental to protecting workers from bad employers, and that quits discipline bad employers and push wages and working conditions upward. In general, there are many labor market policies that could make it easier for workers to quit and should be pursued.

Conclusion

Solutions to monopsony power can draw from fundamental worker rights recognized by US and international law and be applied in context. Examining a particular labor market context such as the institutions governing guest worker programs provides insight into how a better coordinated “whole of government” approach might improve future efforts to remedy the ill effects of employer power, as Hiba Hafiz has written. In the guest worker context, the complex intersection and inconsistencies of federal laws, executive orders, regulations, and case law in the areas of immigration, employment, and antitrust law highlight the need for an integrated and thoughtful approach of how best to combat monopsony power.

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