Hunting for Labor-Market Monopsonies (and Giffen Goods)

Eric Fruits —  11 May 2022 — Leave a comment

If you wander into an undergraduate economics class on the right day at the right time, you might catch the lecturer talking about Giffen goods: the rare case where demand curves can slope upward. The Irish potato famine is often used as an example. As the story goes, potatoes were a huge part of the Irish diet and consumed a large part of Irish family budgets. A failure of the potato crop reduced the supply of potatoes and potato prices soared. Because families had to spend so much on potatoes, they couldn’t afford much else, so spending on potatoes increased despite rising prices.

It’s a great story of injustice with a nugget of economics: Demand curves can slope upward!

Follow the students around for a few days, and they’ll be looking for Giffen goods everywhere. Surely, packaged ramen and boxed macaroni and cheese are Giffen goods. So are white bread and rice. Maybe even low-end apartments.

While it’s a fun concept to consider, the potato famine story is likely apocryphal. In truth, it’s nearly impossible to find a Giffen good in the real world. My version of Greg Mankiw’s massive “Principles of Economics” textbook devotes five paragraphs to Giffen goods, but it’s not especially relevant, which is perhaps why it’s only five paragraphs.

Wander into another economics class, and you might catch the lecturer talking about monopsony—that is, a market in which a small number of buyers control the price of inputs such as labor. I say “might” because—like Giffen goods—monopsony is an interesting concept to consider, but very hard to find a clear example of in the real world. Mankiw’s textbook devotes only four paragraphs to monopsony, explaining that the book “does not present a formal model of monopsony because, in the world, monopsonies are rare.”

Even so, monopsony is a hot topic these days. It seems that monopsonies are everywhere. Walmart and Amazon are monopsonist employers. So are poultry, pork, and beef companies. Local hospitals monopsonize the market for nurses and physicians. The National Collegiate Athletic Association is a monopsony employer of college athletes. Ultimate Fighting Championship has a monopsony over mixed-martial-arts fighters.

In 1994, David Card and Alan Krueger’s earthshaking study found a minimum wage increase had no measurable effect on fast-food employment and retail prices. They investigated monopsony power as one explanation but concluded that a monopsony model was not supported by their findings. They note:

[W]e find that prices of fast-food meals increased in New Jersey relative to Pennsylvania, suggesting that much of the burden of the minimum-wage rise was passed on to consumers. Within New Jersey, however, we find no evidence that prices increased more in stores that were most affected by the minimum-wage rise. Taken as a whole, these findings are difficult to explain with the standard competitive model or with models in which employers face supply constraints (e.g., monopsony or equilibrium search models). [Emphasis added]

Even so, the monopsony hunt was on and it intensified during President Barack Obama’s administration. During his term, the U.S. Justice Department (DOJ) brought suit against several major Silicon Valley employers for anticompetitively entering into agreements not to “poach” programmers and engineers from each other. The administration also brought suit against a hospital association for an agreement to set uniform billing rates for certain nurses. Both cases settled but the Silicon Valley allegations led to a private class-action lawsuit.

In 2016, Obama’s Council of Economic Advisers published an issue brief on labor-market monopsony. The brief concluded that “evidence suggest[s] that firms may have wage-setting power in a broad range of settings.”

Around the same time, the Obama administration announced that it intended to “criminally investigate naked no-poaching or wage-fixing agreements that are unrelated or unnecessary to a larger legitimate collaboration between the employers.” The DOJ argued that no-poach agreements that allocate employees between companies are per se unlawful restraints of trade that violate Section 1 of the Sherman Act.

If one believes that monopsony power is stifling workers’ wages and benefits, then this would be a good first step to build up a body of evidence and precedence. Go after the low-hanging fruit of a conspiracy that is a per se violation of the Sherman Act, secure some wins, and then start probing the more challenging cases.

After several matters that resulted in settlements, the DOJ brought its first criminal wage-fixing case in late 2020. In United States v. Jindal, the government charged two employees of a Texas health-care staffing company of colluding with another staffing company to decrease pay rates for physical therapists and physical-therapist assistants.

The defense in Jindal conceded that that price-fixing was per se illegal under the Sherman Act but argued that prices and wages are two different concepts. Therefore, the defense claimed that, even if it was engaged in wage-fixing, the conduct would not be per se illegal. That was a stretch, and the district court judge was having none of that in ruling that: “The antitrust laws fully apply to the labor markets, and price-fixing agreements among buyers … are prohibited by the Sherman Act.”

Nevertheless, the jury in Jindal found the defendants not guilty of wage-fixing in violation of the Sherman Act, and also not guilty of a related conspiracy charge.

The DOJ also brought criminal no-poach cases against three other health-care companies and their employees: United States v. Surgical Care Affiliates LLC; United States v. Hee; and United States v. DaVita Inc. Each of the indictments alleged no-poach agreements in which defendants conspired with competitors not to recruit each other’s employees. Hee also included wage-fixing allegations.

Before trial, the defense in DaVita filed a motion to dismiss, arguing that no-poach agreements did not amount to illegal market-allocation agreements. Instead, the defense claimed that no-poach agreements were something less restrictive. Rather than a flat-out refusal to hire competitors’ employees, they were more akin to agreeing not to seek out competitors’ employees. As with Jindal, this was too much of a stretch for the judge who ruled that no-poach agreements could be an illegal market-allocation agreement.

A day after the Jindal verdict, the jury in DaVita acquitted the kidney-dialysis provider and its former CEO of charges that they conspired with competitors to suppress competition for employees through no-poach agreements.

The DaVita jurors appeared to be hung up on the definition of “meaningful competition” in the relevant market. The defense presented information showing that, despite any agreements, employees frequently changed jobs among the companies. Thus, it was argued that any agreement did not amount to an allocation of the market for employees.

The prosecution called several corporate executives who testified that the non-solicitation agreements merely required DaVita employees to tell their bosses they were looking for another job before they could be considered for positions at the three alleged co-conspirator companies. Some witnesses indicated that, by informing their bosses, they were able to obtain promotions and/or increased compensation. This was supported by expert testimony concluding that DaVita salaries changed during the alleged conspiracy period at a rate higher than the health-care industry as a whole. This finding is at-odds with a theory that the non-solicitation agreement was designed to stabilize or suppress compensation.

The Jindal and DaVita cases highlight some of the enormous challenges in mounting a labor-monopsonization case. Even if agencies can “win” or get concessions on defining the relevant markets, they still face challenges in establishing that no-poach agreements amount to a “meaningful” restraint of trade. DaVita suggests that a showing of job turnover and/or increased compensation during an alleged conspiracy period may be sufficient to convince a jury that a no-poach agreement may not be anticompetitive and—under certain circumstances—may even be pro-competitive.

For now, the hunt for a monopsony labor market continues its quest, along with the hunt for the ever-elusive Giffen good.

Eric Fruits

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Eric Fruits, Ph.D. is Chief Economist at the International Center for Law & Economics and Economics International Corp. He is the Oregon Association of Realtors Faculty Fellow at Portland State University. He has written peer-reviewed articles on initial public offerings (IPOs), the municipal bond market, real estate markets, and the formation and operation of cartels. His economic analysis has been widely cited and has been published in The Economist and the Wall Street Journal. Dr. Fruits is an antitrust expert who has written articles on price fixing and cartels for the top-tier Journal of Law and Economics. He has assisted in the review of several mergers including Sysco-US Foods, Exxon-Mobil, BP-Arco, and Nestle-Ralston. He has worked on many antitrust lawsuits, including Weyerhaeuser v. Ross-Simmons, a predatory bidding case that was ultimately decided by the United States Supreme Court. As an expert in statistics, he has provided expert opinions and testimony regarding market manipulation, real estate transactions, profit projections, agricultural commodities, and war crimes allegations. His expert testimony has been submitted to state courts, federal courts, and an international court.

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