Jobs are plentiful, so why aren’t wages rising?

Fewer companies dominating the job market may hurt wage growth.
Fewer companies dominating the job market may hurt wage growth.
Image: AP/Mark Lennihan
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This article part of the series called Discrete Choice, in which we ask economists about the most important research they have read recently.

Economist: Sandra Black, University of Texas

Why you should listen to her: Black is an influential labor economist focused on gender and racial discrimination. She served as a member of Barack Obama’s Council of Economic Advisers during his second term. Her work has shown that quotas for women on company boards don’t necessarily impact the gender pay gap, and that the use of SAT tests for college admissions may unfairly harm minority students.

Recommended research: Labor Market Concentration (pdf) by Jose Azar, Ioana Marinescu, and Marshall Steinbaum.

What the paper says: Using 2011 data from the job site CareerBuilder, the researchers examine whether companies in cities with fewer employers offer lower wages. They find that they do. The smaller the number of companies in an industry, the lower average wages are for people who work in that field. In other words, if you are an electrician, you are better off if there are five small companies employing electricians in your city, rather than than one big one, because the firms have to bid against each other for your services.

Why Black thinks this research is important: “​This paper helps shed light on the puzzle of why wages haven’t been rising, despite a tight labor market. In a competitive labor market, as demand increases, firms will have to bid up the wage to attract more workers. But we have seen very little wage growth, particularly at the lower end of the wage distribution. This suggests that labor markets are not, in fact, competitive.

The idea that labor markets aren’t competitive is not a new idea, but there has been limited evidence specifically documenting this. The authors, in this and a follow-up paper, calculate labor market concentration and show that the average market is highly concentrated. They also show that this concentration is associated with lower wages, consistent with the idea that concentration increases labor market power of firms. This work is a very important first step towards advancing our understanding of the current labor market situation.”