Fewer employers = less competition for workers = smaller paychecks
Companies are hiring so much that they have pushed the supply of workers, as measured by the unemployment rate, to its lowest level since 2000. Yet real hourly pay is only slightly higher than it was in the 1970s. While profits ramped up, raises barely kept pace with inflation.
There are many factors behind wage stagnation. One is known as monopsony. A flurry of research links stagnant paychecks to employers that hold more control over local wage rates than the free market might afford. Recent consolidation among employers has left some workers with few places within commuting distance to hawk their skills. Employers in particularly concentrated markets are stingier with pay than their counterparts in more competitive markets, according to the general consensus.
Textbooks typically illustrate monopsony with the example of an old-fashioned company town, where a single employer can pay pittance wages because locals have no other place to work. The counter-example is a city with a multitude of employers, a market in which workers can hope to pit one company against another in seeking top pay. Recent research describes how shrinking competition in some geographic areas and industries, even when multiple employers remain, depresses wages. In those instances, monopsony is implicated in the income inequality that’s plagued an otherwise healthy economy.
These findings have put pressure on government regulators to block corporate mergers that give companies outsized wage-setting power, just as conventional antitrust review prevents mergers that result in monopoly price-setting that harms consumers. The movement gained traction in the last two years, complete with a nod of support from a federal appellate judge who now sits on the U.S. Supreme Court.
Now a working paper offers insights into when and how actual mergers suppress wages. Looking at hospital deals, Northwestern’s Elena Prager and UCLA Anderson’s Matt Schmitt detail how professional pay is held down in the years following some mergers. They outline quantifiable differences in these competition-reducing mergers, which hit pay for skilled workers, and mergers that result in less market consolidation, which have no effect on wage trends.
The study provides further evidence that mergers can give employers control over wages beyond what is expected in a competitive market. But it also offers guidance for antitrust regulators who may soon be required to distinguish between mergers that are dangerous to workers and the many others that are not.
Trapped Professionals, Smaller Raises
When a hospital merger significantly reduces local competition, pay raises for its nurses, pharmacists, administrators and other professionals are notably smaller than those of peers in more competitive markets, according to Prager and Schmitt’s findings. By four years after the merger, cumulative increases in pay for their professional workers are more than 25 percent lower, according to the findings. Before the mergers, the study finds, wage growth in both types of markets are roughly equivalent.
“It’s not like paychecks are shrinking,” Schmitt explained in an interview. “What we’re finding is that wages don’t grow as fast as they do in markets without mergers.”
Alternatively, post-merger raises for hospital janitors, cafeteria workers and other workers in low-skill jobs were on par with competitive markets, according to the study, because their labor is also in demand by other industries.
The findings are consistent with suspicions that corporate mergers are suppressing wages, Schmitt said. Employers can’t pay below market wages for low-skilled labor, because those workers can leave for jobs in other industries. But a merger can reduce the job options for nurses and other employees with skills that don’t easily transfer outside of hospitals, leaving them to accept more readily whatever wages the merged company offers.
However, the degree of consolidation — how much the merged company grew in comparison to its combined local competitors — makes a huge difference in whether workers lose future pay in the deals. Hospital mergers that only modestly reduced local competition had no effect on any employee pay raises, according to the study.
Roughly, Schmitt said in the interview, two local hospitals’ merging affected wages only if there were five or fewer hospitals there to begin with. When a merger took the competition down from six hospitals to five, for example, the study found no difference in wage growth from hospital markets without mergers.