Can Employers' Market Power Harm Workers' Health?

Contrary to prevailing economic theory, in some countries the introduction of the minimum wage has not reduced employment. This is probably due to the peculiar functioning of labor markets characterized by excessive bargaining power of employers, i.e., a monopsony situation.

Monopsony, in its extreme form, indicates the existence of only one buyer for a given good, service or factor of production. If the factor is labor and there is only one employer, a monopsony situation is created, which allows the monopsony employer to pay employees below the value of what they produce.

In reality, there are varying degrees of monopsony power: in all conditions where workers are restricted in their ability to change jobs, the employer can offer lower wages and worse working conditions than in an efficiently functioning market. The most detailed analyses concern the United States, but some evidence suggests that also in Europe even small firms may enjoy some monopsony power. The introduction of a minimum wage, in this situation, would have positive effects on workers and the economy and could also push more individuals into the labor market.

Measuring monopsony power in the labor market, identifying its causes and its effects on wage inequality and working conditions are the topics of MARKDOWN (Monopsony Power and Inequality), the research project for which Tito Boeri, Professor of Labor Economics at Bocconi, has been awarded an ERC Advanced Grant worth €1.8mln from the European Research Council.

The project aims, first and foremost, to identify the sources of monopsonistic power, starting with institutional ones. Professor Boeri himself noted, for example, that in Italy the use of clauses preventing workers from changing employers if they feel they are paid too little is much more widespread than it should be, and involves about 16% of the workforce. "In many cases," Prof. Boeri points out, "these are workers whose role or access to inside information would not justify the non-compete clause." In many cases these clauses would be legally null under Italian law, but their mere existence nonetheless produces a deterrent effect, inducing workers not to change jobs even whenthey could access better conditions.

The project will analyze, for France, Germany, Italy and Spain, the prevalence of this and other clauses that limit labor market mobility, such as longer notice periods, repayment of training costs, loss of fringe benefits, frictions in the transferability of pension rights acquired within company-level complementary pension schemes, loss of employer-provided health insurance, etc.

Psychological and behavioral aspects can also limit worker mobility. It has been observed, first of all, that workers tend to underestimate the opportunities available in the market, partly due to lack of information, partly due to an "anchoring" effect that convinces them that available salaries in other companies are aligned with their current one. Through surveys and experiments, the project aims to measure this phenomenon and the degree to which it affects different types of workers. "It is plausible, for example, that less educated workers have a harder time gathering information about alternative job opportunities and that this factor contributes to widening wage inequality. In the same way, the pessimism that leads many to believe they cannot find better employment might not be spread evenly among workers. These are all aspects that we will have to verify in the field." Similarly, it will have to be tested whether the better educated and better paid are also able to get compensated more, often in exchange for signing clauses restricting their mobility.

A novel aspect of the project is that, through very detailed data collected by INPS (Italy's social security bureau), the intensity of monopsony power of different employers will be linked not only to wage levels, but also to working conditions and, more specifically, to the frequency of work-related accidents. "We will test whether monopsony can also harm workers' health," Prof. Boeri concludes.

The results of the project will help design policies aimed at limiting the spread of monopsony in the labor market; improve the enforcement of rules limiting the use of non-compete clauses; and assess the role that can be played by antitrust authorities and collective agreements, which, according to preliminary analysis, seem silent on the issue.

ERC Advanced Grants are for active researchers with a track-record of significant research achievements in the last 10 years. Younger academics with 2-7 years of experience since completion of their PhD can apply for Starting Grants, while Consolidator Grants are for scientists with 7-12 years of experience.