It seems logical to suppose that as industries become more concentrated, the power coalesces around the producers, thus making things that bit harder for suppliers and employees.  That was precisely what new research from the University of Illinois, Urbana-Champaign highlights, with industry concentration linked to declines in both job quality and wage levels.

The researchers believe their findings are important, as this decline has often been attributed to factors such as global trade, reduced union power, or technological change (or a combination of all).  Instead, the paper suggests that dominant firms in highly concentrated industries are constraining the economic opportunities of both buyers and suppliers because there are so few alternatives.  This then flows down into the workforce of those companies, as profits tend to be lower.

“When we think about wage stagnation, wage inequality and job quality in the U.S., we don’t often think about the role firms play in the marketplace—both on the input side and on the output side,” the researchers say. “When you have a supply chain that’s dominated by a very powerful firm, or you have entire industries or markets that are dominated by very powerful firms, that makes it more difficult for smaller firms that do business with them to be successful and turn a profit. And that, in turn, shrinks the economic surplus available for workers.”

Gauging the market

The researchers examined market-constraint measures for 1997, 2002, 2007 and 2012 in the United States, with the data coming from inter-industry transactions.  This was then linked with data from the Current Population Survey to understand the wages and employment benefits of workers.

Market constraint measures the extent to which firms in the market are reliant upon powerful suppliers and/or buyers.  It’s an approach that allowed the researchers to use the individuals’ movement between industries to see the impact market constraint had on the labor market.

The analysis showed that in buyer-constrained industries that were dominated by a few powerful players, workers tended to experience both lower benefits and poorer benefits.  What’s more, the importance of union bargaining was also reduced in such markets.

“When you’re in a market that’s not dominated by a singular powerbroker, it’s a lot easier for firms to generate profits,” the researchers say. “But over the last 20 years, we’ve seen dramatic growth in corporate profits, and part of the reason why is because when you’re the singular behemoth in the market, you’re in a position to dominate your supply chain. That’s one of the reasons why big-box retail stores, for example, turn such a huge profit. It’s not just because they control the retail industry. It’s because they can exercise that power over their suppliers and effectively dictate their terms to ensure that their prices are as low as they can get it.

Benefiting consumers

This can result in a boost for consumers, even as workers are squeezed in terms of both wages and job quality.  The researchers highlight how federal antitrust regulations have tended to favor consumers over workers since the 1960s, but that courts have tended to take a more balanced approach.

“Federal antitrust regulation and enforcement have proved particularly ineffective at addressing dependency structures in economic value chains. As a result, concentrated power, particularly buyer power, has generally gone uncontested in the current regulatory framework,” they explain. “More broadly, our results strongly suggest that policymakers should consider labor market and inequality consequences of antitrust legislation and enforcement, not just the benefits to consumers.”

Unsurprisingly, the researchers believe their findings have clear and important implications for policymakers, and believe that it underlines the crucial role unions play in ensuring that profits are shared with workers as well as consumers.

“When workers are in an industry that’s dominated by very powerful buyers on the output side of the market, it reduces wages and employment benefits such as pensions and health care that would otherwise go to workers,” they explain. “They’re more likely to be captured as profits that are returned to owners or shareholders than they are to workers.”

This may not be wholly revolutionary findings, but at a time when workers are receiving a smaller piece of the economic pie than ever before, it’s perhaps worth repeating.