Why Labor Monopsony Shouldn’t Be Included in Merger Guidelines

The Federal Trade Commission (FTC) and Department of Justice (DOJ) recently issued new merger guidelines that include labor monopsony power as a new theory of harm when evaluating mergers. As part of the guidelines, the FTC and DOJ assert that “when a merger involves competing buyers, the Agencies examine whether it may substantially lessen competition for workers, creators, suppliers, or other providers.” However, monopsony power is not the main explanation for changes in workers’ earnings after a merger or acquisition, or in the general economy. In fact, studies concluding that labor market monopsony negatively impacts wages are questionable. Moreover, including labor monopsony power in the updated Merger Guidelines will not only disincentivize greater consolidation, reducing the number of large firms that pay workers more, but will also harm workers in their capacity as consumers as a result of tradeoffs between worker and consumer welfare. As such, the FTC and DOJ should ignore the guideline on labor monopsony when reviewing mergers.

First, the entire notion of labor market monopsony constraining wages is, at best, inaccurate. This is because, in the grand scheme, monopsony may not be a concern to the economy at all. For example, an ITIF article notes that labor market monopsony is likely a manufactured concern because “the reality is that most of the labor markets with high levels of employer concentration are rural and small-town areas,” affecting fewer people than proponents of small firms imply. Moreover, a meta-analysis on labor monopsony studies has also found that literature concluding monopsony power exists is more likely to be published than those that found no monopsony power in the economy. As a result, the extent of monopsony power in the economy is, at best, questionable. Yet, proponents of small firms nevertheless claim that monopsony power is hurting wages and have weaponized the Merger Guidelines to break up large firms in order to address this—possibly nonexistent—problem.

However, even if we assume that labor monopsony does exist, including it in merger guidelines will not benefit workers and increase their wages. This is because labor monopsony is not the main explanation for changes in earnings after a merger or acquisition because the vast proportion of M&A does not significantly impact labor market competition. In a study on workers’ labor market outcomes after a corporate M&A, the authors ruled out monopsony power as the primary cause of wage losses because “99 percent of the M&A events have a zero predicted change in local labor-market concentration.” The study also noted that declines in earnings were similar for high- and low-concentration markets and “job transitions to employers with poor match qualities” were the primary reason for a decline in workers' earnings after an M&A. Further corroborating their findings, a World Bank study concluded that only two of the 1,013 firm takeover events had a non-negligible impact on labor market concentration, meaning that firm monopsony power could not explain labor market outcomes. Instead, they concluded that labor restructuring is the primary mechanism for the outcomes in labor’s income after consolidation.

More generally, factors other than monopsony power are also likely at work when it comes to stagnating wages for the overall economy. For example, a Cato study found a series of flaws in studies that concluded that monopsony power was negatively affecting wages. They noted that some of these “analyses face the challenge that concentration might be a symptom of market power, but it might also be a symptom of…changes in productivity.” Meanwhile, an ITIF case study on nurses’ wages concluded that nurses’ preferences on job location rather than changes in labor market concentration is the cause of wage markdown. Further corroborating these findings, a study by Azar et al. concluded that moving from the 25th to 75th percentiles in labor market concentration could be associated with about a 4 percent increase in wages. In other words, monopsony power, if it exists, cannot reasonably be attributed to changes in wages. Yet, proponents of small firms have nevertheless included monopsony power in Merger Guidelines.

To make matters worse, the new Merger Guidelines reduced market share thresholds. These are problematic themselves and its inclusion of labor monopsony as a harm can potentially hurt workers by reducing the number of large firms in the economy. This is because large firms generally pay workers higher wages. For example, a World Bank study of 45,000 firms in over 100 countries found that larger firms were generally three times more productive and offered two times higher wages than their smaller counterparts. More specifically, for the United States, ITIF concluded that those working in firms with over 500 employees earn about 38 percent more than those working at firms with less than 100 employees. Further supporting these findings, a study of wage and firm data for the state of Utah found that “the time spent in large firms is associated with higher wages, while small firms tend not to pay as much.” Moreover, the study also concluded that those with a technical certificate working at a large firm experienced a 6 percent, or $1,694, increase in wages compared to those at small firms. Additionally, a study by Azar et al. concluded that moving from the 25th to 75th percentiles in labor market concentration could be associated with about a 4 percent increase in wages.

Finally, there is another problem with the Guidelines’ turn to labor: Benefits to labor can coincide with harms to consumers, creating challenges in merger reviews. Indeed, Gilman et al. highlight this conflict when they ask, “Are mergers to be challenged—and, if challenged, blocked—if they harm workers in a single labor market, even if they are procompetitive (and pro-consumer) in the relevant product market?” In other words, will the agencies be able to conduct effective merger reviews when a merger raises labor market concentration—which may or may not hurt workers—but reduces prices for consumers? Moreover, even if a merger does not result in a conflict between worker and consumer interests, it could result in conflicts between two labor markets that can further hinder effective merger review. Gilman et al. also highlight this when they assert that merger benefits in one labor market could offset the losses in another, resulting in net gains for the overall labor market. In this case, the agencies will also face another challenge in effectively conducting merger reviews when they have to balance gains and losses between labor markets.

In conclusion, the FTC and DOJ seem to have opened a Pandora’s box without any good reason. Merger guidelines that include labor monopsony power or increased labor market concentration as a theory of harm may not necessarily lead to higher workers’ income but could instead harm them by reducing the number of large firms in the economy. Workers are also consumers, and keeping the antitrust laws focused on consumer welfare will ensure that the workers are not harmed as consumers in a misguided attempt to use merger policy to deal with labor monopsony. In fact, state and federal labor laws already exist to protect workers, and antitrust is an imperfect tool for addressing these concerns. In a perfect world, the FTC and DOJ would do best to ignore this guideline to ensure that they can conduct effective merger reviews that benefit consumers.