Competition policy: turn to the labour market

Weak competition on labour markets means wages are often set below the market-clearing level.

In the recent inflationary years, it has become increasingly clear that competition in many product markets in the European Union do not work satisfactorily. The clearest examples are probably banking, food retail and construction. Politics must take focused action against this, yet more would still be required.

National competition policies and the associated authorities must direct more attention towards lack of competition in labour markets. Weak competition among employers for potential employees is as harmful to the economy as weak competition over their products—in principle, there is no difference.

Wages driven down

This insight has recently started to affect political dynamics in the United States. In October 2022, for the first time the US competition authority prohibited a merger, arguing that there was a great risk that, were two big publishing houses to become one, compensation for the labour of authors would be pushed down. If the number of potential buyers decreased, the price paid for their work would likely be driven below the economically efficient market level (an equilibrium of supply and demand) in the presence of a range of publishers.

The economic prediction—at the individual firm and for the aggregate economy, if scaled up—is thus that output, the number of employees and productivity would be lower than in a competitive labour market. The US would thus drift in a negative economic direction.

At the EU level, and in some member states, some preliminary steps have also been taken, but the focus has been on other anti-competitive measures—for example, companies colluding to keep wages down or promising not to compete for each other’s employees. Last month, the European Commission said it had made its first unannounced inspections of companies suspected of collaborating to keep employees’ wages down.

Further steps should be taken towards analysing potentially negative effects on competition in the labour market when companies have announced a merger: did the increased concentration result in lower wages? Moreover, it is essential that business models based on franchising are not organised around agreements that reduce wages or where franchisees have agreed not to compete for each other’s employees.

This new political and inspection strategy has its roots in a fast-growing area of economic research, which has quickly had significant impact. One reason is that the results are unusually clear: in many countries, industries, regions and occupational groups, weak competition between firms for their wage-earners means wages are often below the market-clearing level. In these cases, higher wages lead to a more efficiently functioning market economy.

Labour-market institutions

In addition to measures in support of competition, high union density and centralised wage negotiations—as in Sweden and some other parts of northern Europe—could constitute a guarantee against wages falling through this floor. The message from the research though is that while these institutions in the labour market are a protection, this does not exempt such countries from the problem. Strong unions and co-ordinated wage negotiations are therefore a necessary but not sufficient condition to ensure employees’ wage trends match those of their productivity.

One challenge beyond that is to ensure that platform workers are given the same opportunities as others to secure their wages and working conditions. But a much broader approach is required, to strengthen the overall bargaining position of wage-earners.

Infrastructure investments can expand regional labour markets, for instance, and opportunities for remote work can be improved. But active labour-market policies, lifelong learning, local commuting, relocation allowances and availability of rental properties are all at stake. The underlying idea is simple: the more potential employers employees have, the greater their opportunity to negotiate a higher salary.

Finally, national competition authorities, as in the US, and the European Commission on a more general level should publicly emphasise that employers’ competition for employees is a central aspect of economically efficient market economies—and that reforms that improve the negotiating position of wage-earners, individually and collectively, therefore lead to higher productivity and employment. Are the political community and the competition authorities ready for this necessary shift in perspective?