The Biden administration is pushing two irreconcilable theories about labor markets. One theory argues that labor markets are too concentrated; the other says they’re too fissured. How long can the administration sustain the disconnect? 

---

Last month, the Federal Trade Commission and the Department of Justice announced that they were revising their joint Horizontal Merger Guidelines. The announcement invited the public to comment on, among other things, excessive concentration in labor markets. That invitation represented a sharp turn for progressive policymakers, who for years have argued that labor markets are too “fissured.” The fissuring argument is hard to reconcile with this new focus on concentration: one position maintains that markets are too decentralized; the other says they’re too consolidated. But so far, the Biden administration has shown no interest in resolving the conflict. Instead, it seems to have decided to speak out of both sides of its mouth.

The concern with labor-market concentration stems from a basic economic concept: “monopsony” power. While that term sounds quasi-scientific, it’s not complicated. A monopsony is essentially a buyer-side monopoly. When a firm has monopsony power, it can dictate prices to sellers. It does that in a variety of ways, usually by reducing how much of a product it buys. Because there are no other buyers in the market, demand for the product falls. With lower demand, sellers have to compete for fewer sales. And that competition forces them to drop their prices. The result is a smaller market with cheaper goods and services (for the monopsonist).

In theory, monopsonies can occur in labor markets too. Imagine a small town with only one large hospital. The hospital is the only employer hiring nurses. Without competition, the hospital can unilaterally reduce the wages it offers new employees. Some candidates will decide the lower wage isn’t worth it and will stay out of the market. But others will still work for the lower rate. So while the hospital may ultimately hire fewer nurses, it will pay those nurses lower wages.

Notice that the theory works only if there are no other employers to pick up the slack. If the town has a second hospital, that hospital will offer higher wages and scoop up the best nurses. The first hospital will then be forced to raise its own wages to retain talent. And some nurses who refused to work for lower wages will be drawn back into the market. Both wages and overall employment will rise.

None of this is particularly new. As a theory, monopsony has been around since 1932, when it was coined by Joan Robinson, a British economist. But until recently, it was uncommon to speak of labor monopsony as a problem for antitrust law. No administration had rejected a proposed merger because of potential labor-market concentration. And certainly none had relied on it to block a merger in court.

But as we know, personnel is policy. And the labor-monopsony theory has gained traction with some key Biden appointees. For example, Sharon Block, co-author of a recent book on labor-market competition, took a top post at the Office of Information and Regulatory Affairs. Tim Wu, the author of The Curse of Bigness, joined the White House National Economic Council. Lina Kahn, an academic proponent of the labor-monopsony theory, was named chair of the FTC. And Jonathan Kanter, a vocal critic of labor monopsonies, was confirmed to head the DOJ Antitrust Division.

At the time, these appointments looked like the critical mass labor-monopsony theory needed to hit the mainstream. And sure enough, the administration quickly sued to stop a proposed merger between Penguin–Random House and Simon & Schuster. The administration argued not, as you might expect, that the deal would consolidate the market for books. Instead, it argued that the deal would consolidate the market for authors—i.e., the market for book-writing labor. The companies have so far resisted the lawsuit and denied any negative labor-market effects. But if the lawsuit succeeds, it will be the first time in history the government has blocked a merger in court because of alleged labor-market consolidation.

The administration isn’t content, however, to file a few lawsuits. It also wants to lock labor-monopsony theory into the structure of merger review itself. That much became clear when the FTC and DOJ asked for public comment on the Horizontal Merger Guidelines. The Guidelines have been with us since the 1960s, and despite several revisions, have never considered a merger’s effects on labor markets. But in the call for comments, the agencies leaned hard on labor-market issues. They asked how to define labor markets, how to measure labor-market concentration, and how to handle other “anticompetitive restraints on competition for workers.” The revisions themselves are still (at least) months away. But already, the trajectory is clear: the agencies want to use the Guidelines to prevent big employers from getting bigger.

At this point, the informed reader could be forgiven for feeling a bit of whiplash. The idea that labor markets are too concentrated marks a sharp turn from recent progressive policy. In fact, until the last year or so, it would have been heresy in some circles to suggest that too few companies were hiring workers. Instead, leading progressive thinkers argued that America had the opposite problem. Labor markets, they said, weren’t too concentrated; labor markets were too “fissured.”

The term “fissuring” comes from the title of an article (later a book) by Professor David Weil. For years, Weil has argued that wages are low in some sectors not because of anything about the jobs in those sectors, but because big companies have spun off the jobs to smaller firms. Weil says that in the twentieth century, the economy was dominated by large firms like GE, Sears, IBM, and Alcoa. These companies did huge volumes of business and, as a result, employed a lot of people. They employed not just their core workers—assembly workers, product designers, executive teams—but also support workers, like janitors and groundskeepers. These support workers tended to earn compensation packages similar to those of their core-worker peers, in part because it’s hard for companies to offer starkly different compensation packages to different groups inside the same four walls. So in that way, support workers benefited from working with core workers. The core workers were more productive, economically speaking, and so dragged everyone’s compensation up.

Now, overpaying some workers is obviously not the most cost-effective way to run a business. So in recent decades, Weil says, companies started testing different models. They figured out that if they maintained tight brand standards, they could keep their core functions in house while farming out ancillary tasks. They did this through various business structures: subcontracting, franchising, temp agencies, and third-party management services. These structures helped them shift ancillary tasks onto a bustling marketplace of smaller firms. That shift made it easier for these “lead” companies to pay something closer to market value for the ancillary work. Even better, the small firms handling that work competed vigorously with one another for the lead company’s business. And in their scramble to compete, they controlled costs by cutting wages.

This process, according to Weil, caused the labor market to “fissure.” While the employment relationship used to exist within one company, it has now been fractured among hundreds of smaller companies. These smaller companies have a competitive incentive to keep wages as low as possible. If one of them raises wages, it will be immediately underbid by the others. The only firm with real power to raise wages is the lead company. So to reverse the trend, according to Weil, you have to hold the lead company responsible, no matter who employs the workers.

Weil put that theory to the test during a stint as the Wage & Hour Administrator for the Obama administration. Among other things, he issued a raft of so-called administrator’s interpretations, cutting back on independent contracting and broadening joint employment. The Trump administration later rescinded those interpretations. But now, Weil has been nominated by the Biden administration to retake his old post. And nothing he’s written or said while he’s been out of office suggests that he’s changed his mind on these topics.

At this point, anyone half-awake will begin to see the disconnect. On one hand, the Biden administration is saying that wages are too low because labor markets are too concentrated. Big employers have too little competition, and they’re using their market dominance to bid down wages. But on the other hand, the administration is saying that wages are too low because markets are too fissured. Too many small employers are scrambling to keep costs low, and they can’t raise wages without being undercut. In other words, there’s too much competition.

Put aside whether either of these theories is plausible. Even if you could believe one, you couldn’t reasonably believe both. After all, labor monopsony is a problem only if there’s no competition for workers. It occurs only when a single employer dominates the market. If there are other firms hiring in the same market, they can easily steal the dominant employer’s workers by offering higher wages. So for the monopsony theory to make any sense, you need high levels of concentration.

But under the fissuring theory, the problem is a lack of concentration. Employment has been spun off to a sub-market of small firms, and these firms compete desperately with one another. It’s competition, not consolidation, that’s driving down wages. And in fact, Weil wants to remedy the problem by artificially consolidating markets. He wants to locate employment responsibility in a single lead firm. So in effect, he wants to do exactly what the labor-monopsony theorists are trying to prevent—create an employment market of one.

Now, it may be too much to ask for perfect consistency from any administration. The administrative state is an unwieldly behemoth. With thousands of appointees, you’re bound to end up with a few discordant voices. But it’s not too much to ask an administration to avoid directly contradicting itself, especially on major policy initiatives affecting the same private parties. What, exactly, is the regulated community supposed to do with these monopsony and fissuring theories? Should companies try to foster labor-market competition by sourcing from a lot of different firms? Or should they avoid fissuring by hiring all the workers themselves? The Biden administration has answers to these questions; unfortunately, its answers point in opposite directions. 

Robert Bork once called antitrust policy a policy at war with itself. The Biden administration’s labor-market policy is even worse than that. It’s not only confusing; it’s contradictory. The only coherent through-line is a sustained hostility toward corporate America.

Note from the Editor: The Federalist Society takes no positions on particular legal and public policy matters. Any expressions of opinion are those of the author. We welcome responses to the views presented here. To join the debate, please email us at info@fedsoc.org.