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What the new federal report on the labor market means for HR

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Peter Cappelli
Peter Cappelli is HRE’s Talent Management columnist and a fellow of the National Academy of Human Resources. He is the George W. Taylor Professor of Management and director of the Center for Human Resources at The Wharton School of the University of Pennsylvania in Philadelphia. He can be emailed at hreletters@lrp.com.

The U.S. Treasury Department issued an extremely important report about the state of the labor market last week that got buried in all the other news. Its significance for HR is that it represents a sharp break with what had been the orthodox view of labor markets, wage-setting and pretty much everything about employment.

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That orthodoxy, which won’t surprise anyone who has had an introductory economics class, is that there is an open market for labor, and wages, along with other terms and conditions of employment, are set by the overall supply and the overall demand in the market. The individual employer plays no role except as they affect that overall demand. That orthodoxy had tremendous power because it shaped a lot of policy actions and the decisions of many judges: As long as employees were free to quit and go to the market, for example, employers were assumed to be paying the “market” wage because, if not, workers would have quit.

Everyone in human resources knew the market idea wasn’t true, that wages among competitors were all over the place, that so many other things mattered as to why people took jobs and quit them. But there wasn’t a simple story as to why it wasn’t true, and it couldn’t be conveyed in ways that policy makers understood.

Now, the Treasury report says that not only is that market view not true, but we have a story as to how that happens based on lots of new recent research. The story is that the market gets distorted through lots of different ways, and that has the clear effect of giving employers more power than employees.  A lot of these have to do with employer practices that are easier for policy people to understand: the rise of non-compete agreements and other restrictive covenants, misclassifying non-exempt workers as exempt and actual employees as contractors. A final and perhaps most important factor is the growing concentration of employers in the marketplace, something that most of us are not aware of. There are just not as many places for employees to work within a location as there were in the past, and that lowers wages.

Read more insights from Peter Cappelli here.

Because of these practices, employers have enough power to distort wages, the report estimates, making them about 20% lower than they would have been in competitive markets.

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Well, you might say, that’s a nice little academic story. The “so what?” comes because the report goes on to tell you what the implications of this new consensus are. So many of our ideas about pay and other aspects of employment rest on the idea that market-setting is in some sense fair (because so many business and policy leaders took those college classes) that saying that practices distort the market means that they are unfair—something that it is extremely difficult to defend. The Biden administration, therefore, is going to take action to make labor markets more competitive. Sounds reasonable, no? That means go after misclassification decisions, restrictive covenants that cannot be justified, practices that make pay-setting less transparent and almost anything that distorts competition.

This actually began, it might surprise some, in the Trump administration when the Justice Department started going after employers who had “no hire” agreements with other employers, violating anti-trust laws. It means profitable times ahead for plaintiff and employer-side lawyers, and it also means longer hours for employee relations departments to police all these decisions.

See also: Is noncompete legislation a bridge too far?

The biggest factor may be growing employer concentration, as this affects us all as consumers, too. It is not an easy thing to see how competition has been reduced until you start to look at it within an industry: How many airlines now fly into your city, how many internet providers or cell phone companies can you choose from, how many different retailers or hotels are owned by the same corporation? According to a study in the Review of Finance, 75% of the industries in the U.S. have seen increases in their concentration since 2000.

When I hear customer service recordings say that higher-than-average call volumes mean wait times are longer (why are they always above average?), when my financial service companies add new fees and penalties that seem pretty sneaky or when I struggle to figure out how to stop charges for something I no longer want, I ask, why has it become so hard to be a consumer? The reason is, there is not enough competition to force the providers to behave. Doing something about that would make me happy—as I wait for my three-hour call back from a customer service department experiencing completely predictable “longer-than-normal” wait times.