Eric Posner on Companies' Monopoly Power Over Wages

More and more companies have monopoly power over workers’ wages. That’s killing the economy.

Our current economic expansion has lasted almost nine years, yet wages have hardly budged, especially for less-skilled workers. Inflation-adjusted wages for the average worker have risen only by 3 percent since the 1970s — and have actually declined for the bottom fifth.

For a long time, the conventional wisdom was that wage growth had slowed because of rising competition from low-paid workers in foreign countries (globalization), as well as the replacement of workers with machinery, including robots (automation). But in recent years, economists have discovered another source: the growth of the labor market power of employers — namely, their power to dictate, and hence suppress, wages.

This new wisdom has displaced a longstanding assumption among economists that labor markets are competitive. In a competitive labor market, employers must vie for workers; they try to lure workers from other firms by offering them more generous compensation. As employers bid for workers, wages and benefits rise. An employer gains by hiring a worker whenever the worker’s wage is less than the revenue the worker will generate for the employer; for this reason, the process of competition among employers for workers ought to result in workers receiving a substantial portion of the output they contribute to.

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