Is a lack of competition among employers keeping wages down? Yes. That’s the conclusion from the Organization for Economic Co-operation and Development in its latest employment outlook.
The OECD makes the case that “monopsony power” among firms is rampant in advanced countries, and that Canada has a worse problem than average. But it’s a situation that could be made better by policies including more remote working.
It is no secret that wages are not rising fast enough to keep up with prices. Inflation has been seemingly out of control, with the inflation rate hitting 7.6 per cent in July. As of the second quarter of 2022, data from Statistics Canada show that on a national basis, household disposable income was up by 1 per cent while household consumption rose 4.3 per cent.
In a nutshell, everything cost more, and households had to dig into savings to keep up their standard of living, which resulted in the household savings rate falling to 6.2 per cent in the second quarter from 9.5 per cent in the first.
The standard explanation of why there is such a gap between prices and earnings is that inflation surprised everyone by being so high and that it will take time for wages to catch up. Although that may be true, it is also the case that wages have been lagging prices in Canada for years, with lower-wage workers most apt to have lost ground. The same has been true in much of the world, a consequence of many factors including changes in the economy and the use of technology.
Monopsony as a reason for wage stagnation is not often discussed, but the OECD findings suggest that perhaps it should be.
The OECD found in its research across 16 countries that monopsony, defined as a situation where firms have the power to set wages unilaterally or below what would prevail in a more competitive market, is a persistent issue.
Sixteen per cent of business-sector workers in 15 OECD countries work in labour markets that are least moderately concentrated, while 18 per cent of Canadians work in concentrated markets with fewer than seven firms. The more concentrated the market, the lower the wages.
The OECD found that a 10-per-cent increase in concentration from the average reduces daily wages of full-time workers by 0.2 per cent to 0.3 per cent, and that workers in the most concentrated labour markets faced a “wage penalty” of at least 5 per cent compared with those in labour markets with the median level of concentration.
Workers are also less likely to be offered permanent work in concentrated markets and face a tougher time in general, with employers asking for a longer list of skills than in other markets.
Monopsony power happens when there are few potential employers hiring people, which means that workers do not have a ton of bargaining power even when the labour market is supposedly tight. If there are two restaurants in town, a would-be waiter can try to play them off against each other, but even if they do not formally collude, it is unlikely that they will have to raise the wage they offer by too much.
Unsurprisingly, the OECD found that workers in rural areas are much more likely to work in concentrated markets, and that during the first year of the pandemic, front-line workers were more likely to face concentration than those whose jobs could be done remotely. That said, any worker whose skills can best be used in an industry with few players probably faces monopsony as well.
In the U.S., for example, the Justice Department is trying to block a merger between Penguin Random House and Simon & Schuster, with some worried that if it goes ahead the lack of competition in the publishing market would drive down the money paid to authors.
So how to turn things around?
In Canada and elsewhere, the OECD suggests policy prescriptions for shifting power to workers, including encouraging unions and collective bargaining to give voice to workers unable to bargain well for themselves.
With the union initiatives we have recently seen from corporations such as Starbucks that have traditionally not been unionized, that may well happen over time. Minimum wages, which are already in force in Canada, are also thought to help. Key also will be a move to retrain and reskill workers for new jobs rather than having them battle for what is left using traditional skills or in waning sectors.
Interestingly, the OECD also found that allowing remote work could raise wages. It makes sense: Someone who works in a small town with few local employers would see a world opened up if they could work for employers far outside their commuting distance.
In the Canadian case, concentration would already no doubt be higher and wages lower if people were not so willing to commute, whether that means driving an hour or more from a far-flung exurb to a downtown Toronto office, or even hopping a plane from Newfoundland to get to the oilfields of Alberta.
Still, a move toward more remote work could make a difference to concentration in Canada, with the OECD finding that if everyone whose occupation allowed them to work remotely did so, labour market concentration would fall by 34 per cent. In turn, that would send real (inflation-adjusted) wages up by 1 per cent, which would at least go some way to increasing buying power.
Firms are going back and forth on remote work now, with many wanting workers back to the office where they can re-establish familiar routines and traditional management can be put in place once more.
That may or may not be a good idea on an individual level, but it is interesting that a policy that gained ground because of necessity during the pandemic might actually amp up the competition among employers to get workers and ultimately give many an effective raise in pay.
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