One reason Australian wages are depressed? Formidable employer power

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The level of employer concentration in some of Australia’s labour markets is so high that powerful employers are suppressing workers’ wages.

Those are the findings from a new Treasury working paper.

The federal Assistant Minister for Competition, Charities and Treasury, Andrew Leigh, says the findings paint a worrying picture.

Dr Leigh said they added to accumulated evidence that Australia’s economy has become less dynamic in the 21st century, with less competition among firms, increasing mark-ups from big companies and declining productivity.

The Treasury paper also says declining union membership has helped employers become more powerful and that may be contributing to weaker wages.

However, the paper says, a key driver of the increased impact of employer concentration appears to be declining firm entry and dynamism, because it has meant that established businesses are facing less competition from new entrants, and that’s allowing them to exert more market power.

Dr Leigh will outline the findings of the Treasury paper in a speech in Melbourne today. It is his fifth in a series of lectures on competition and economic dynamism in Australia.

‘Monopsony’ power and weak wage growth

The Treasury working paper, written by Jonathan Hambur, is titled, “Did labour market concentration lower wages growth pre-COVID?

It is an important piece of work, providing fresh evidence that market concentration is driving down Australian wages.

It deals with a concept economists call “monopsony.”

We’ve all heard of monopolies, which are market structures with a single seller of a good. They face no competition so they can charge monopoly prices, and extract monopoly rents from consumers.

A “monopsony” works on a similar principle, but it refers to a single buyer of a good.

If you’re the only employer in town, local workers have few outside options so their bargaining power will be limited. As the only employer, you have the power to set lower wages because you’re the only one purchasing labour in the area.

The Treasury paper investigates the prevalence of monopsony power in Australia’s labour markets.

It documents the extent of employer concentration in Australia’s labour markets between 2005 and 2016 and shows what impact that has had on wages.

The paper provides the first Australian evidence of the phenomenon using a comprehensive, de-identified Linked Employer-Employee Dataset (LEED) based on administrative tax data.

It suggests that the level of employer concentration remained broadly unchanged over the period studied, however, the impact that this was having on wages was increasing.

“For any given level of concentration, its impact on wages has more than doubled compared to the mid-2000s,” the paper says.

“Simple back-of-the-envelope … estimates suggest wages were a little under 1 per cent lower, on average, from 2011 to 2015 than they would have been had the impact of concentration not increased.”

It’s a real problem for regional workers

Dr Leigh says the Treasury paper provides more evidence of deep problems in Australia’s economy, exemplified by the past decade of anaemic wage growth.

“The average weekly full-time wage in November 2022 was $1,808 a week. In 2022 dollars, the average wage in November 2012 was $1,790 a week,” he will say in his speech.

“In other words, after inflation, Australian workers earned only $18 per week more in November 2022 than they did in November 2012.”

Dr Leigh says the paper shows employer concentration in the Australian labour market is highest in the mining industry, manufacturing, transport, utilities and retail trade.

And wage growth is slower in more concentrated markets.

He says real wage growth over the decade was significantly lower in highly concentrated markets, according to the Treasury paper.

The paper also shows that employer concentration is worse for workers in Australia’s regional and rural areas than in capital cities.

It found employment concentration is twice as high in inner regional areas as it is in major cities, and it is three times as high in remote areas. (See graphic below.)

This graph uses the standard measure of concentration, called the Herfindahl-Hirschman Index (HHI).

The HHI is bounded from 0 to 1.

Low levels of the HHI indicate low levels of employer concentration (lots of small firms). High levels of the HHI indicate a highly concentrated market, with an HHI of 1 showing that there is only one employer.

“Workers benefit when there are more employers in the labour market,” Dr Leigh will say in his speech today.

“More employment options mean greater bargaining power. Workers can swap jobs and move on to better pay and conditions with another employer.

“Economists have long noted that people in cities tend to earn more than those in regional areas. My own research finds that, when someone moves from a rural area to a major Australian city, their annual income rises by 8 per cent.

“The economics of monopsony suggest that an important part of the urban wage premium can be explained by greater employer competition in denser labour markets.”

As unions lose power, employers gain power

The Treasury working paper says a key driver of the increased impact of employer concentration, and lower wages growth, has been declining firm entry and dynamism because established businesses are facing less competition from new entrants.

However, declining union coverage and occupational mobility may also have played a role in weaker wage growth as well.

Dr Leigh says it’s just one more dynamic in the forces suppressing wages in Australia.

“Over recent decades, the share of Australian workers who are union members has steadily declined, dropping from 41 per cent in 1992 to 12.5 per cent in 2022,” he will say in his speech.

“Not since 1901 has the Australian unionisation rate been as low as it is today.

“Deunionisation is not the primary reason for a decade of wage stagnation. But at a time when the market power of employers is growing, declining union membership risks tilting the playing field further away from workers.

“In the modern era, employers are increasingly united, while workers are more fragmented than at any time in the past 120 years.

“Providing employees with more opportunities to collectively bargain for better pay and conditions would be a useful check on monopsony power,” he will say.

What will the Albanese government do?

Dr Leigh says the Albanese government will take this new information on board.

He says there are different ways to prevent employers abusing their power.

Dr Leigh has asked the Australian Competition and Consumer Commission, and Treasury, for advice on the competitive impacts of non-compete clauses and any action the Australian government should take in response.

However, this won’t be the end of the story.

“While the Australian government has not reached a fixed view on whether new action is needed to tackle the impact of market concentration on wages, we are watching these developments closely and seeking advice from the key economic and competition agencies,” he says.

By business reporter Gareth Hutchens (Original ABC Article)