One Reason the US Labor Force is Shrinking

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U.S. industries have become increasingly concentrated in the 21st century, leaving fewer employers in local labor markets. This is not good for workers.

The simplest example is a town with one company in the business of producing widgets. The company has little competition when hiring widget workers and can pay them lower wages.

A new study finds that the increase in employer concentration – one or a few firms that dominate locally – has played a role in the 20-year decline in labor force participation in the United States. When workers have fewer employment options and wages are lower, looking for and finding a job is a more difficult, less fruitful pursuit. Some give up and drop out of the labor force.

Employer concentration “push[es] marginally attached workers out of the labor force entirely,” concluded Anqi Chen, Laura Quinby and Gal Wettstein at the Center for Retirement Research at Boston College.

Their research builds on several recent studies showing that when firms possess more bargaining power with workers, they can drive down wages. This new study is the first to make a direct link between employer concentration and its impact on employment activity.

Labor force participation – the share of adults of all ages who are either working or looking for a job – is lower in concentrated markets, the researchers found. Actual employment levels are also lower, though this is mainly the case for teenagers and workers in their 20s.

But the researchers said other things could also be affecting workers aside from the lack of market competition – namely, a sluggish local economy that keeps employers from locating to the area. The existence of labor unions in some industries provided them with another way to test whether employer concentration is, in fact, reducing labor force participation.

Although unions are a dwindling share of the private-sector labor force, the ones that remain provide some countervailing power to bargain for higher wages and better benefits. In the parts of the country with concentrated industries that employ unionized workers, the researchers found that labor force participation is still lower than in more competitive markets – but not as low as in places where there are no unions.

The existence of unions “mitigates – but does not fully offset – the negative” consequences for workers, the researchers concluded.

In other words, higher compensation, negotiated in union contracts, keeps more people in the labor force, including the unemployed who feel more hopeful about snaring a job.

To read this study, authored by Anqi Chen, Laura Quinby and Gal Wettstein, see “Does Employer Concentration Reduce Labor Force Participation?”

The research reported herein was derived in whole or in part from research activities performed pursuant to a grant from the U.S. Social Security Administration (SSA) funded as part of the Retirement and Disability Research Consortium.  The opinions and conclusions expressed are solely those of the authors and do not represent the opinions or policy of SSA, any agency of the federal government, or Boston College.  Neither the United States Government nor any agency thereof, nor any of their employees, make any warranty, express or implied, or assumes any legal liability or responsibility for the accuracy, completeness, or usefulness of the contents of this report.  Reference herein to any specific commercial product, process or service by trade name, trademark, manufacturer, or otherwise does not necessarily constitute or imply endorsement, recommendation or favoring by the United States Government or any agency thereof.