By Alan B. Krueger
Apr 4, 2018
More than two centuries ago, Adam Smith, renowned as the father of laissez faire economics, raged that the market for labor was rigged. He argued that self-interested employers manipulated the labor market to drive workers’ wages below their competitive level. Smith warned that employers “are always and everywhere in a sort of tacit, but constant and uniform combination, not to raise the wages of labour above their actual rate.”
As in many areas, Adam Smith’s insights were spot-on and prescient. The conspiracy that Smith warned us about is alive and well in the 21st century, and it still receives too little attention from policymakers, economists, and the media.
Much research in labor economics over the last quarter century has found that employers routinely use anti-competitive practices to reduce pay and curtail worker mobility. New practices have emerged to facilitate employer collusion, such as non-compete clauses and no-raid pacts, but the basic insights are the same — employers often implicitly, and sometimes explicitly, act to prevent the forces of competition from enabling workers to earn what a competitive market would dictate.
We’ve seen examples across a host of occupations and industries. Anti-competitive forces were evident in professional sports before free agency enabled athletes to earn what the market would bear. Even the economics profession participated in anti-competitive practices: Newly minted PhD economists used to be paid the terms agreed upon by university economics department chairs at the annual American Economic Association Meeting. While these anti-competitive practices are now a thing of the past, workers in many other less glamorous and lower-paying industries — from sandwich makers to warehouse employees — are still subject to anti-competitive forces.
There have been several prominent lawsuits that reveal employer collusion. In early 2017, the Walt Disney Company and its subsidiaries — Pixar, Lucasfilm, and Imagemovers — became the last of the major film companies to reach a settlement in an antitrust suit brought on behalf of movie animators. Along with Sony, Blue Sky, and Dreamworks, they agreed to pay $169 million to settle charges that they “conspired to suppress compensation by agreeing not to solicit each other’s employees, to take special procedures when contacted by each other’s employees, and to coordinate compensation policies through direct, collusive communications.”
The antitrust action on behalf of the film animators had its roots in a well-publicized Department of Justice investigation of anti-poaching practices used by the tech companies Adobe, Apple, Google, Intel, Intuit, and Pixar. The Justice Department complaint was quickly settled in 2010, but not before the investigation revealed some colorful evidence of efforts to restrict workers’ opportunities. For example, after Google’s co-founder Sergey Brin tried to hire a programmer from Apple’s browser team, Steve Jobs wrote in an email, “If you hire a single one of these people that means war.”
High-tech employees are not the only ones to have won civil suits alleging anticompetitive conduct by employers in recent years. Several suits have been successfully brought on behalf of nurses against hospitals, for example. On September 16, 2015, the Detroit Medical Center became the last of eight major Michigan hospital systems to reach a settlement in a suit alleging that the hospitals colluded to reduce their pay. The hospitalsapparently endeavored to share information about nurses’ salaries and pay increases. With pay artificially pushed below competitive levels, the hospitals often turned to temporary staffing firms to hire workers (at salaries above those of existing staff) and made do with vacancies.Similar cases are in various stages of resolution in Albany, Chicago, Memphis, San Antonio, and Arizona.
Another tactic that employers frequently use to tilt the balance of bargaining power in their favor is to require employees to sign non-compete agreements that prevent them from working for a competitor for an extended period. Although mutually agreed-upon non-compete agreements can sometimes be justified as a means to increase labor productivity by giving employers incentives to share trade secrets with employees or to invest in expensive firm-specific training, the practice has run amok. For the vast majority of employees whose work does not entrust them with trade secrets or provide much training, such agreements restrict worker mobility, reduce labor market competition, and suppress pay and productivity by preventing workers from moving to jobs that offer better compensation and working conditions.
18 percent of American workers are currently constrained by non-compete clauses.
These agreements are widespread. According to survey research by economists Evan Starr, J.J. Prescott, and Norman Bishara, 18 percent of American workers are currently constrained by non-compete clauses. Moreover, nearly 40 percent have signed non-compete agreements at some point in their careers. These figures greatly exceed any plausible estimate of the share of workers with access to trade secrets that could justify non-compete agreements.
Although non-compete agreements are more common in higher-paying jobs, there are plenty of instances in which low-paid service workers are caught in the net. Amazon, for example, requires its warehouse workers, including seasonal hires, to sign an agreement that strictly restricts a wide swath of employment for 18 months after the job has ended. My own research with Eric Posner finds that more than one in five workers with a high school education or less are subject to a non-compete agreement on their current or a former job.
Non-compete agreements have even become common in the fast food industry. For example, the sandwich chain Jimmy John’s, with 2,000 restaurants, until recently used a non-compete clause that prohibited its employees from working at any other restaurant that sells “submarine, hero-type, deli-style, pita, and/or wrapped or rolled sandwiches” within two miles of a Jimmy John’s shop while they were employed at a Jimmy John’s and for up to three years afterwards.
While Jimmy John’s prohibited its employees from working for competitors, Burger King came at the issue from the other side. Its franchise agreement prohibits its own franchisees from hiring workers away from other Burger King restaurants, and they can’t hire workers who left a Burger King for at least six months after they’ve left without prior written consent of the other franchisee. With 7,000 Burger King restaurants across the United States, this restrictive hiring covenant could significantly curtail the freedom of Burger King workers to seek better pay and working conditions.
The percentage of major franchise chains with similar no-poaching restrictions in their franchise contracts increased from 36 percent in 1996 to 56 percent in 2016, according to research that Orley Ashenfelter and I conducted.
Against this backdrop of employer efforts to rig the labor market, policymakers are making some progress. Toward the end of Obama administration, the Department of Justice and Federal Trade Commission issued significant new guidelines for human resources professionals to help identify and report wage-fixing and hiring collusion among employers, and created a hotline to report instances of collusive behavior. Moreover, for the first time, the Justice Department threatened to bring criminal (as opposed to civil) cases against individuals and their companies for entering into no-poaching and wage-fixing agreements with competitors. The current head of the Justice Department’s Antitrust Division, Makan Delrahim, has said that he is “shocked” by the widespread use of no-poaching agreements, although charges have not yet been announced.
The Obama administration also called on the states to adopt a set of best practices to ensure that non-compete agreements are narrowly targeted and appropriately used — and some, such as Illinois, are taking actions to eliminate non-compete agreements.
A lack of labor market competition is one of the greatest challenges facing our economy today.
If the Trump administration wants to continue this momentum, there is no better place to start unrigging the labor market than by raising the federal minimum wage, which has remained fixed at $7.25 an hour since 2009, reining in the excessive use of non-compete clauses, vigorously enforcing antitrust laws to prohibit employer anticompetitive practices, and increasing worker bargaining power. The adverse effect of mergers on labor market concentration could also be scrutinized and taken into consideration under existing anti-trust laws.
States, too, can make reforms to boost competition. Many have already begun to raise their state minimum wage and outlaw the use of non-compete agreements for low-wage workers, and their attorneys general have been on the vanguard at challenging excessive use of non-compete clauses. The states could also pursue means to improve worker bargaining power and pass tougher laws to penalize employer collusive behavior that restricts worker mobility and suppresses pay.
The bottom line is that a lack of labor market competition is one of the greatest challenges facing our economy today. Fixing it will require elected officials to step up and change the rules of the game to give workers the fair shot they deserve.
About the author:
Alan Krueger was a professor of economics at Princeton. He served as chair of the President’s Council of Economic Advisers and a member of his cabinet from 2011 to 2013. Previously he served as assistant secretary for economic policy and chief economist at the U.S. Department of Treasury (2009–2010) and chief economist at the Department of Labor (1994–1995).