Forbes: While Some Blame Immigrants For Low Wages, An Alternative Theory Gains Traction Among Economists


Lagbor Image

If these researchers are onto something—namely, that industry concentration dictates wage shares and wage levels—it could have important implications for how we think about antitrust enforcement and other labor policies (such as minimum wage, unionization, and state-based occupational licensing.

Wages are falling when expressed as a percentage of national income. The share of national income captured by labor (“labor share”) has declined sharply since the early 2000s, falling from 66 percent in 2000 to 58 percent in 2017 according to the Federal Reserve Bank of St. Louis. The decline in the labor share over the past 30 years reflects the gap between labor productivity (which has continued to grow) and compensation (which has stagnated).

The relevant economic questions are: What is causing wage growth to be so anemic? And what can be done from a policy perspective to accelerate it?

To say that there is lack of economic support [for the claim that immigrants have caused falling wages] is an understatement. The economic literature reveals that immigration does not reduce wages for native-born workers. Ottaviano and Peri (2012) and Borjas (2014) find that foreign-born workers (that is, earlier immigrants) bore the brunt of the wage impact from immigration, with native-born workers actually experiencing a slight increase in wages owing to immigration.

What is a plausible alternative for stagnating wage growth? Several recent studies have focused on the role of industry concentration. The working theory is that as firms gain control in product markets, the opportunities for job mobility within a given industry are restricted, which permits these firms to exercise buying (or “monopsony”) power in the labor markets.

MIT economist David Autor finds that concentration of sales of the largest firms in an industry (and of employment) has risen from 1982 to 2012 in each of the six major sectors covered by the U.S. economic census.  —each percentage point rise in an industry’s concentration index (as measured by the share of shares accruing to the 20 largest firms) predicts a 0.4 percentage point fall in its labor share. In an effort to determine the causes of industry concentration, the authors further find that the fall in labor share is mainly due to a reallocation of labor toward larger and more productive (“superstar”) firms with “lower (and declining) labor shares, rather than due to declining labor shares within most firms.” Why their workers aren’t sharing the productivity gains of these “superstar” firms is an open question that deserves further research.

In Declining Labor and Capital Shares (2016), London Business School economist Simcha Barkai attributes most of the decline in the labor share to decreased competition, which has allowed firms to spend less on both labor and capital, and thus to keep more profit. He estimates that if competition increased to levels last observed in 1984, wages would increase by 24 percent. With respect to policy implications, he notes that “[it] may well be the case that the forces of technological change and globalization favor dominant firms and are causing the decline in competition. The causes of the decline in competition are left as an open question for future research.”

In The Decline of the U.S. Labor Share (2013), University of Edinburgh economist Michael Elsby find that the labor share declines the most in U.S. industries strongly affected by import shocks, which suggests that “offshoring of the labor-intensive component of the U.S. supply chain” (but not immigration) is putting downward pressure on wages. One of the key explanatory variables in their model is unionization-coverage rates. The authors find that “cross-industry variation in changes in unionization rates explains less than 5 percent of the variation in changes in payroll shares across industries.” Although the estimate is not statistically significant at conventional levels, the finding is consistent with the notion that greater worker bargaining power vis-à-vis employers would lead to higher wages.

Most recently, in Labor Market Concentration (2017), Roosevelt Institute economist Marshall Steinbaum and his co-authors analyzed the movements in wage levels (as opposed to wage shares) using a database of job listings in (I asked Steinbaum why he assessed wage levels as opposed to wage shares, and he told me that he lacked revenue data for the employers in his sample.) The authors find that America’s local labor markets are highly concentrated, and that employers also tended to advertise lower pay in cities and towns, as well as in occupations, where fewer businesses were posting jobs. Controlling for other factors such as “market tightness” they estimate that moving from the 25th percentile of labor market concentration to the 75th percentile would lower (advertised) pay level in a metro area by 17 percent. Reflecting its import in policy circles, the one-month-old article already has been reviewed in the Economist, Slate, and the New York Times.

If these researchers are onto something—namely, that industry concentration dictates wage shares and wage levels—it could have important implications for how we think about antitrust enforcement and other labor policies (such as minimum wage, unionization, and state-based occupational licensing).

A bill proposed by Senator Amy Klobuchar (D-Minnesota) in September 2017 would require the Government Accountability Office to assess wage impacts of mergers. Senator Corey Booker (D-New Jersey) recently called on the antitrust agencies to consider employment impacts in merger reviews. Perversely, the squeezing of input prices, including for labor, is considered a merger synergy under current antitrust doctrine. Beyond mergers, the antitrust agencies (or state attorneys general or private enforcers) could bring monopsony cases when a dominant firm unilaterally erects artificial restrictions to labor mobility (such as non-competes), or when a group of firms jointly agree not to compete for labor.

Link to full article