Are big businesses slowing wage growth?

A recent “Heard on the Street” column by The Wall Street Journal’s Justin Lahart explores one particular theory that might explain why wage growth has been so slow. Lahart wonders whether the increasing size of businesses allows them to repress wage growth. He zeroes in on wage trends since the end of the Great Recession. While his hypothesis doesn’t mesh well with other research on wage growth, the trends he flags might lead to a different answer.

The overwhelming reason why wage growth is currently slow is because the labor market is still not entirely healed from the Great Recession. With the unemployment rate standing at 5.8 percent, there remains considerable slack in the jobs market—especially since the unemployment rate actually understates the number of unemployed and under-employed workers seeking full-time jobs. The share of the working-age population with a job is still about 3 percentage points below its level in December 2007, before the Great Recession.  Until the demand for workers picks up there is little reason for employers to pay higher wages.

That said, Lahart’s idea about employer size causing tepid wage growth is at first glance intriguing. He argues that big employers have attained so much power in the labor market that they can push down wages. In other words, employers have become monopsonists—single buyers of labor in increasingly concentrated industries—who can affect the level of wages. Monoponistic models of the labor market have become increasingly popular in economics, so understanding how the increasing concentration of firms within industries is important. But the data Lahart uses only shows that employers are getting larger, not that industries are becoming more concentrated.

Another issue with his hypothesis is that larger employers actually tend to pay more than small employers. The wage premium for workers at large firms is well-documented fact. Workers who leave mom-and-pop retailers, for example, to work at an established large retail chain see an increase in their wages. Some research finds evidence that this premium is declining, but that simply means the potential pay increase would be smaller. Overall, wages are still larger at big companies compared to smaller ones.

Yet Lahart’s third point—about the decline in the rate of new company creation—might be more instructive because this may be another sign of a slowdown in dynamism in the U.S. economy. With the decline in new startup companies, the average size of employers is increasing. And if there is less dynamism in the economy, that underlying fact may also explain the reduction in wage growth.

Consider declining labor market churn, another sign of dynamism and fluidity in the labor market. Churn is an important source of wage growth for workers and the decline is troubling. But the source of this decline isn’t well understood. One paper by economists Raven Molloy and Christopher Smith at the Federal Reserve Board and Abigail Wozniak at the University of Notre Dame argues that employers and employees are better matched now than in the past so job-switching doesn’t pay off in the form of higher wages as much as it used to. So the decline in churn would be the issue here, not the increasing size of firms.

Understanding the flaws in the U.S. labor market is vitally important for boost both economic growth and insuring increased prosperity for all, not just the select few. Slow wage growth in the United States has many causes. But the increasing size of employers probably isn’t one of them.

November 24, 2014



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