What do we know about labour market power in the UK?

The ability of powerful firms to set pay and other working conditions is a growing concern for economic researchers and policy-makers. Much of the evidence is from the United States, where labour market institutions and policies are very different. Hence the need for emerging UK-specific analysis.

Competition authorities – such as the Competition and Markets Authority (CMA) in the UK – have traditionally monitored firms’ ability to raise the price of products, thus disadvantaging consumers.

But they have become increasingly interested in firms’ ability to affect wages too. Firms’ market power in labour markets may not only reduce the wages of affected workers, but it could also distort labour supply (the amount of hours worked at a given wage) and production decisions. This may, in turn, reduce how well markets work for everyone, including consumers.

We call the ability of firms to pay workers less than the value of their contribution to their firm's sales ‘employer market power’. This can arise from two sources.

First, workers may not view all jobs as equally suitable for them, either because some jobs demand specialised skills or because workers value certain amenities, such as closeness to their home. The fact that some jobs are more desirable than others gives those employers market power.

Second, when searching for jobs is costly or time-consuming, workers are less likely to leave. This knowledge too may give some employers market power.

What do we know about labour market power in the UK?

To understand how widespread employer market power is in the UK and how it affects workers, the Microeconomics Unit at the CMA recently published a report on the state of competition and market power in UK labour markets. This highlights four key findings.

First, overall employer market power in the UK is broadly stable. This is in contrast to what is found in some other countries like the United States, where evidence suggests employer market power has risen. This highlights the importance of UK-specific evidence.

Second, labour markets differ substantially in the extent to which they are dominated by few or many firms (in other words, how concentrated they are), and these differences persist over time. For example, concentration is four times as high in Scotland and Wales as it is in London. This means that there are a smaller number of firms in Scottish and Welsh labour markets that control much of the hiring in their respective markets.

Third, workers in more concentrated labour markets pay a very real cost. For comparable workers, wages are 10% lower in the most concentrated labour markets compared with the least concentrated.

Fourth, labour market power and worker outcomes are shaped by the available technologies and other labour market policies in complex ways. This should make us cautious about carrying over insights from product market competition unthinkingly.

Why should we care about labour market power?

Labour markets have been in the sights of competition agencies worldwide lately, with the US Federal Trade Commission (FTC) leading the way. For example, the new FTC/US Department of Justice merger guidelines now explicitly state that US competition agencies will intervene in mergers that create labour market concerns, regardless of their effects on product market outcomes (US Department of Justice, 2023).

Elsewhere, competition authorities have investigated Dutch supermarkets (Dutch Competition Authority, 2021), Lithuanian real estate agencies (Competition Council of the Republic of Lithuania, 2022) and Portuguese football teams (Portuguese Competition Authority, 2022) for ‘wage fixing’ – illegal collusion between employers to set artificially low wages.

There has also been an explosion of careful work on many aspects of labour market power. We have learned that employer market power has increased in US manufacturing lately (Yeh et al, 2022), and more broadly (Kirov and Traina, 2022).

Evidence also shows that large mergers can affect workers’ wages (Arnold, 2021). This is particularly the case in concentrated, skilled labour markets (Prager and Schmitt, 2021). Non-compete agreements (which prevent employees from moving to a competitor or starting a competing business for a certain period of time) can also lower worker mobility and innovation (Balasubramanian et al, 2020).

Where concentration is high, other labour market policies may have unexpected effects. For example, while minimum wage policies can lower employment, this may be less likely where employer market power already restricts employment (Azar et al, 2019).

But most of this new empirical evidence comes from the United States. What do we know about labour market power in the UK? Is it also a concern? How has it changed over time? How does it affect workers? And how does it interact with wider trends in the labour market, from hybrid working (which allows a combination of work at home and in the workplace) to the gig economy (where employers hire workers for short-term commitments)?

How has UK labour market power changed over time?

First, UK employer market power – the market power that firms have in labour markets – has stayed constant or fallen over the last 15 years. Figure 1 shows the wage markdown, which measures the difference between worker wages and their marginal contribution to a firm’s revenue.

Today, workers retain slightly more of their contribution to revenue than they did in 2008. In other words, the wage markdown across the whole economy is either the same as or lower than it was 15 years ago. This result holds across a range of methods of analysis.

Likewise, labour market concentration has fallen slightly – despite a short and sharp uptick during the Covid-19 pandemic – and the labour share of income (an aggregate measure of all the income going to workers) has also remained steady. This contrasts with the rise of employer market power shown in US studies and again highlights the importance of UK-specific evidence for UK policy-making.

Figure 1: Employer market power measured via wage markdowns is constant or declining

Whole-economy mean markdown series from a variety of production function estimation approaches (100 = 2008 values)

Source: Annual Business Survey, 2008-2021

Are there any important differences across labour markets?

While overall employer market power and labour market concentration are stable, labour markets vary widely in how concentrated they are.

Geographically, London and the South East are much less concentrated than the rest of the country. For example, concentration is four times higher in Scotland than it is in London. These geographical differences have not decreased over time.

In terms of occupations, blue-collar workers have faced falling concentration while white-collar concentration has stayed constant. While blue-collar workers were facing higher concentration than white-collar workers 20 years ago, the reverse is true now.

How does labour market power affect outcomes for workers?

For affected workers, labour market concentration comes at a very real cost. Those working in more concentrated labour markets tend to receive lower pay. Indeed, moving a worker from a labour market in the top 10% by concentration to a labour market in the lowest 10% by concentration would increase their wage by 10%.

To make this more concrete, take the example of a construction worker in highly concentrated Chester. If they were to move to the more competitive Chelmsford, they could expect to earn 10% more. This is true even where we compare very similar workers in very similar firms.

Figure 2 shows the relationship between workers’ wages and the concentration in the job market they face after removing the effects of other worker, firm, region and time characteristics. The higher the labour market concentration, the lower a worker’s pay. When we control for the widest set of characteristics, a 10% increase in concentration is associated with a 2% drop in wages.

There are two silver linings to this finding. First, the wage penalty from being in a concentrated labour market has been falling over time. In 2002, it was four times higher than it was in 2021.

More research is needed as to why this is the case, but two potential explanations are the relative strength of labour markets in recent decades and the rise of the national minimum wage. Both tend to shift bargaining power from firms to workers.

Further, when workers are covered by a collective bargaining agreement, the negative relationship between wages and concentration disappears. This is likely to be because workers negotiating together have ‘countervailing’ bargaining power to firms. Similar results have been found in other countries (Benmelech et al, 2020) and in the UK in the past (Abel et al, 2018).

Figure 2: Wages and labour market concentration are negatively correlated

Source: Annual Survey of Hours and Earnings and the Business Structure Database, 2002-22

How do labour market factors shape labour market power?

The CMA report looks at the impact of four trends that have the potential to change how labour markets work, and how employers and workers bargain with each other.

First, the gig economy. While it is growing, it still only represents 5% of UK employment. Gig workers earn similar amounts to workers in the traditional economy, but they often work multiple jobs and long hours.

Second, hybrid working practices have risen dramatically since the pandemic: from 4% to 20%. This trend appears predominantly in the least concentrated labour markets. Hybrid working has led to a sorting of workers from city centres to surrounding areas and it is popular with workers.

Third, non-compete agreements and other employment clauses that restrict worker mobility are common in the UK, across industries, occupations and income levels. Firms often argue that these agreements are necessary to give them the incentives to invest in worker skills. While we find that workers with non-compete clauses in their employment contracts are slightly more likely to receive formal training, these clauses do seem to prevent workers from leaving their employers.

Finally, we look into pay practices within firms and find that performance-related pay increases both average wages and wage inequality, but that collective bargaining agreements can offset the latter.

What are some of the open questions in this area?

There are still many issues that we need to understand better, and in many cases we need more UK-specific evidence to make informed policy choices. For example, we need to understand better how employer market power affects consumers. This may depend on the source of employer market power, how firms bargain with workers and other suppliers, and the degree of market power in the product market.

Other questions that remain unanswered include: How do mergers and acquisitions (M&A) affect wages and employment? How do workers and firms bargain when both have market power? How do non-compete agreements affect the innovation capacity and dynamism of the UK economy? And what will be the impact of the widespread use of artificial intelligence on labour market concentration and labour market power?

Where can I find out more?

Monopsony in labor markets: a review: Alan Manning of the Centre for Economic Performance at the London School of Economics (LSE) provides a wide-ranging overview of the economics of imperfect labour markets and recent empirical advances. Monopsony essentially means employer market power.
Labour market power: new evidence on non-compete agreements and the effects of M&A in the UK: A recent study by LSE researchers, which summarises some of the policy issues in this debate, reviews the evidence and provides some initial insights on non-compete agreements and the labour market impact of mergers in the UK.
Declining worker power versus rising monopoly power: Explaining recent macro trends: Anna Stansbury and Larry Summers argue that falling worker power, rather than rising labour market concentration, is behind many of the US trends in recent decades.