Economist’s perspective: US antitrust regulators focus on defining relevant labour markets

In summary

This article describes economic issues that arise in defining antitrust labour markets and how courts have evaluated these in recent and ongoing cases concerning low-skilled workers.

Discussion points

• Increased focus of US regulators on antitrust issues in labour markets
• Economics of labour market monopsony
• Market definition in labour markets
• Court rulings on relevant labour markets for lower-skilled workers in two recent cases

Referenced in this article

• Deslandes v McDonald’s USA et al., No. 17-CV-4857 ND Ill, Eastern Division
• Jien v Perdue Farms, Inc et al., No. 1:19-CV-2521-SAG, D Md
• US Department of the Treasury, ‘The State of Labor Market Competition’
• Department of Justice Antitrust Division and Federal Trade Commission, ‘Antitrust Guidance for Human Resource Professionals’

US antitrust regulators and policymakers have identified protecting competition in labour markets as a priority.^[1] With the increased focus on competition in labour markets, attention is focused on relevant labour market definition to assess whether potentially anticompetitive conduct would have appreciable effects. In recent antitrust actions involving fast food restaurants and poultry processing, courts have considered market definition as an important step to assessing market power. These cases differ from previous high-profile actions in that the jobs in question generally do not require specialised training or experience.^[2]

A relevant labour market is one in which, from the perspective of workers, jobs are reasonably interchangeable with the jobs at issue in the matter.^[3] In broad terms, the relevant jobs are those that workers are willing and able to do in terms of skills and commuting distance; in other words, the relevant labour market has a product or service and geographic dimension. Just as consumers’ willingness to substitute among products in the relevant market disciplines firms and prevents them from raising prices, in principle, the jobs offered by competing employers in a relevant labour market are those that workers view as reasonably interchangeable, and therefore workers’ willingness to move between jobs will constrain firms’ wage-setting decisions in the labour market.

This article examines these issues in the context of recent experience with market definition from cases that involve demand for relatively low-skilled workers. We describe the economic issues and the recent cases where market definition has played a significant role. Based on our review, we observe:

• as with product market definition, substitution – in this case, job switching by workers – has a central role in labour market definition;
• labour markets for lower-skilled workers will often include more substitutes than the corresponding product (or output) markets because of the nature of labour market relationships and the multiple dimensions on which workers evaluate alternatives; and
• the nature of labour markets can make it harder to measure substitution patterns and other features. In many markets, workers tend to switch jobs infrequently, have limited information on available choices, and any change in jobs requires two-sided matching, which means that employer decisions will also be important for labour market definition.

Market definition and market power

Defining the relevant market is an initial step in the structural approach to assessing market power because, without defining a relevant economic market it is not possible to compare the relative sizes of suppliers or buyers and thus start to consider the potential dependence of third parties on these suppliers or buyers. Market power can be evaluated indirectly via market structure, by determining whether the conditions and circumstances of the relevant market result in market power by the firm being scrutinised, or it can be evaluated directly, by identifying direct evidence of a firm’s ability to exercise labour market power in the form of lower wages or lower employment. Structural analyses, as the name implies, focus on measures such as market shares and concentration (ie, is the market in question dominated by one or a small number of suppliers or buyers?). A sound assessment of the relevant market is critical to the implementation of structural analyses because the share of the relevant labour market accounted for by the firm in the antitrust case are key inputs to the assessment of market power.

Under a structural approach, the existence or potential for a firm to exercise market power is inferred from the market shares of all relevant parties in the relevant market. Firms with larger shares are considered to be more likely to exercise market power. As a matter of economics, the relationship between market structure and market power is not straightforward for a number of reasons. First, firms may achieve a high market share without attaining substantial market power. For example, a first mover might achieve a high market share and still face pricing discipline from rival products if consumers view products as highly substitutable. Second, even within a relevant market, where firms are differentiated, some firms may be closer competitors than others (for example, in terms of their geographic proximity) in ways not captured by their overall market shares. Third, and on other hand, firms may face some competitive constraints from firms outside the relevant market. Moreover, inferring labour market power from market structure typically requires a detailed understanding of worker information and choices, employment frictions, employer needs and hiring criteria, and the dynamics of the economies in which workers are searching.

Labour market power

Labour market power, or monopsony power, is the ability to reduce wages relative to the level that would prevail in a competitive market.^[4] The concept of monopsony in a labour market is often presented in terms of a single employer, which can be thought of as the buyer-side analogy to the monopoly model with a single seller in an output market.^[5] In this representation, the single employer faces an upward-sloping labour supply curve because, as the only employer, to attract more labour it must increase the wage not just for the last worker hired but for all employed workers. Conversely, the monopsonist recognises that if it hires fewer workers, it can pay a lower wage for all the workers it employs. As a result, and analogous to the monopoly outcome, the single employer hires fewer workers than would be hired under perfect competition, and it pays a lower equilibrium wage.^[6] Output is reduced but the firm’s profit is increased because of the lower cost of production for all units sold.

More generally, the terms ‘monopsony power’ and ‘labour market power’ are used refer to any labour market departures from perfectly competitive outcomes.^[7] Most labour markets differ from the perfectly competitive benchmark in important ways.^[8] Labour markets involve two-sided matching: for a job to be filled, the employer must offer the position to a worker and the worker must accept.^[9] There are also significant frictions in labour markets: there are costs to employers of finding, hiring and training workers, and there are costs to workers of switching jobs (eg, the cost of finding a job that leaves them better off than the job they already have, including along non-monetary dimensions). Labour relationships typically are not purely transactional: employees return to work for the same employer over longer periods of time. These features alone can confer market power on employers and result in wages being below those that would prevail under the perfectly competitive labour market benchmark.^[10] However, this cannot be assumed as, by the same measure, employers may value reliable and high-effort workers. Efficiency wage theory suggests that where worker quality or effort is imperfectly observable, firms may pay a premium to secure and retain higher quality or higher effort workers.^[11]

Further complexities can arise if there are trade unions and collective bargaining by these unions because then even a monopsonist buyer may face a monopoly or quasi-monopoly supplier (depending on the degree of unionisation). In this scenario of ‘bilateral monopoly’ on both the buyer and supplier sides of the market, the precise outcome in terms of both wages and employment may depend on the relative bargaining strength of the firms and unions in question and their skill and sophistication in negotiations.

Defining markets

In practice, labour market definition involves a fact-intensive understanding of the jobs, their attributes and worker switching, as well as the geographic scope of markets. The fundamental aim of defining the relevant market is to identify the reasonably interchangeable alternatives available to workers. ‘From an antitrust perspective, firms that compete to hire or retain employees are competitors in the employment marketplace, regardless of whether the firms make the same products or compete to provide the same services.’^[12] Information on reasonable substitutability of jobs can come from internal documents that show which jobs the company views as relevant for its employees and evidence that employers had offered raises to retain employees who had been offered positions at other employers.^[13] Data on job flows can also be used to identify worker alternatives. The US Census Bureau’s Longitudinal-Employer Household Dynamics data details worker-level information on employment, earnings and other features that can be used to measure job-to-job worker flows.^[14]

A set of substitute jobs, particularly for low-skilled workers, is often broader than a set of substitutes for the outputs they produce.^[15] In output markets, the majority of consumers typically choose between a small number of products that satisfy similar functions; however, the variety of jobs that employees come from or leave for is often much greater because skills are often transferable across industries.^[16] Moreover, when considering their options, workers may value job characteristics differently, affecting which jobs are closer substitutes (eg, some workers may value a predictable schedule highly while others may place premium on a short commute).

Research using the US Census Current Population Survey finds that just over 35 per cent of job switchers move to a job in the same four-digit industry while just under 35 per cent of switchers stay within the same three-digit occupation classifications.^[17] The corollary of these statistics is that at both the three and four-digit levels, some 65 per cent of job switchers find jobs in different industries, suggesting that neither level is a good guide to labour market definition. Therefore, industry codes and other pre-defined ways of classifying employment sectors should be used with care. On the one hand, they may be overly broad, and include employees and jobs that are not reasonably substitutable, and on the other hand, they may be overly narrow, and exclude employees and jobs that, to employees and employers, appear reasonably substitutable.

Other idiosyncrasies of labour markets should also be considered when ascertaining substitutes for specific jobs. Workers tend to switch employers relatively infrequently and, when they do, their choice set may be limited; whereas in output markets, consumers can buy whichever product they can afford. Job markets require matching a worker to an employer with an open position who is willing to hire that worker. As a result, the alternatives available to a worker (ie, the potential substitutes to a job) can change over time, in particular as the economy enters a different phase of the business cycle. Moreover, workers’ willingness to travel for new employment can lead to a relevant geographic market that differs from that of the output. For example, hospital executives may be willing to relocate across the country, suggesting a national geographic market, whereas the hospitals themselves compete for patients more locally. Conversely, low-skilled and less well-paid workers may not be willing to relocate to take advantage of regional wage discrepancies that are smaller in financial terms, whereas the output they produce is traded nationally. Finally, labour markets are characterised by information asymmetries: workers may be uncertain about working conditions at a prospective employer, and employers might not be able to distinguish between ‘good’ and ‘bad’ job applicants. These characteristics of labour markets can lead to market distortions that prevent a textbook competitive market outcome.

Recent court developments

Court opinions relating to labour market definition in two ongoing cases support a central role for market definition and illustrate the need to consider both worker characteristics and job attributes.

Deslandes v McDonald’s

In a class action against McDonald’s (Deslandes v McDonald’s), plaintiffs alleged that no-hire agreements in McDonald’s franchise agreements were anticompetitive.^[18] The plaintiffs argued that the hiring restraints should be analysed under a per se standard or, alternatively, under a quick-look approach, while the defendants argued that the restraints should be judged under a rule of reason approach.^[19] In its opinion denying class certification, the court found that analysis of the no-hire agreement required a rule of reason analysis and, citing Ohio v American Express Co,^[20] the court further found that this ‘requires courts to conduct a fact-specific assessment of “market power and market structure”’.^[21]

The court found that the ‘relevant market for employees to do the type of work alleged in this case . . . who hold low-skill retail or restaurant jobs . . . is a small, geographic area’.^[22] To identify the other jobs, if any, in the relevant market, the court cited evidence of franchisees and other local employers competing for the same workers.^[23] In doing so, the court rejected the plaintiffs’ assertion that the relevant market should be the market for McDonald’s restaurant workers, which the court observed would mean limiting the market to a single brand, which ‘defies logic’.^[24]

The court ultimately dismissed the remaining claims of the individual plaintiffs, finding that neither plaintiff could plausibly allege that McDonald’s had labour market power in the relevant market. The court again rejected a relevant market limited to McDonald’s restaurants, saying that a relevant market ‘limited to McDonald’s outlets is implausible. They could have sold their labour to other buyers’.^[25] The court noted that:

[i]t is undisputed that, within three miles of Deslandes’s home were two McDonald’s restaurants and between 42 and 50 other quick-serve restaurants. Within ten miles of Deslandes’s home were 517 quick-serve restaurants. Accordingly, Deslandes cannot plausibly allege that defendants had market power in the relevant market within which she sold her labour. Within ten miles of Turner’s home were 253 quick-serve restaurants. Accordingly, Turner cannot plausibly allege that defendants had market power in the relevant market in which Turner sold her labour. Without market power, defendants could not suppress plaintiffs’ wages; another buyer would step in to pay plaintiffs more.^[26]

Jien v Purdue Farms

In Jien v Purdue Farms, the plaintiffs alleged a conspiracy by poultry processors and several data consulting companies to fix and depress compensation and a conspiracy to unlawfully exchange compensation data.^[27] The court determined that the information exchange claim should be evaluated under the rule of reason and that that required an analysis of the relevant market to evaluate anticompetitive effects.^[28]

The Jien plaintiffs argued for a relevant market definition limited to jobs in the poultry industry, pointing to worker characteristics such as low educational attainment, limited language skills and industry-specific skills, which they argued limit their ability to transition to other jobs.^[29] In contrast, the defendants argued that the relevant market should include other jobs located in the same geography that hire low-skilled workers.^[30] In its opinion on motions to dismiss, the court found that the relevant market definition was sufficient for this early stage of the litigation even though some of the allegations ‘will require significant fleshing out to survive challenge at later stages of this litigation’.^[31]

Notably, the court found:

[t]he poultry processing labour market is plausible, because Plaintiffs have sufficiently pled facts suggesting the Defendant Processors’ employees are reasonably limited to poultry jobs. Specifically, Plaintiffs claim that at least some of [the] poultry workers have developed industry-specific skills . . . Plaintiffs also claim that limited education and language skills make it difficult for poultry processing workers to transition to other jobs.^[32]

That is, the court accepted the argument at the early stage of the litigation that poultry workers might be unable to substitute to other, local, low-skilled jobs because other employers did not want to hire these workers. In Jien, the court highlighted the lack of formal education and language skills. It will be interesting to see whether this conclusion is sustained if or when the case is fully litigated.

Conclusion

Given the increased scrutiny of labour markets by antitrust authorities, we expect more cases in which defining the relevant market for labour is a key point of contention. In labour markets, workers often have limited information on available choices and tend to switch jobs infrequently. Moreover, job changes require agreement between employers and employees, which means that employer decisions are also important for labour market definition. Therefore, defining relevant labour markets can present challenges that are not typically found in defining relevant output markets.

Recent cases have involved markets for lower-skilled workers, which can include more substitutes than the corresponding output markets. However, Jien highlights that courts will judge these points on a case- and fact-specific basis.

Notes