CMA Research Report on Competition and Market Power in the UK Labour Market
Summary
- Report, conducted by the CMA’s Microeconomics Unit, offers insight into competition in the UK labour market to support wider policy thinking
- Research finds labour market concentration is roughly the same as 20 years ago
- Around 30% of employees are impacted by non-compete clauses
- Findings support CMA focus on tackling anti-competitive wage-fixing and no-poach agreements between employers, which represents a growing area of interest for the CMA (as well as several other competition authorities)
Introduction
On January 25, 2024, the Competition and Markets Authority (CMA) Microeconomics Unit published its first major research report, which takes a deep dive into trends in the UK labour market, focusing on the impact of competition and employer market power.1
The report adds to the robust body of evidence to support the benefits of well-functioning labour markets, widely recognised as an important driver of economic growth. It seeks to provide insight to inform wider government and policy thinking. The CMA will also use the findings to inform its own work to combat anti-competitive conduct in labour markets, including its ongoing investigations into suspected anti-competitive agreements between employers.
Background
Frictions will always exist in the labour market because most firms have wage setting power. From a competition law perspective, this power may be illegal if it involves collusion or coordination between firms. More generally, it is well established that employer market power can lead to lower wages, and end consumers might be left worse off if firms can restrict how many workers they hire and that reduces output and leads to higher prices.
Despite this, labour markets historically tend to be an area where competition authorities have been less active. They tend to focus more on competition in product markets. However, the CMA does have the power to take enforcement action against firms that break the law by fixing wages, just as with fixing prices.
Whilst this does not mean the CMA can step in to use its competition enforcement powers in every case involving labour market relations, developments in labour markets are bringing to the fore new questions for competition law authorities about how and when such activities should be caught by competition rules.
The CMA has analysed the degree of employer market power and labour market concentration in the UK economy and the relationship between employer power, labour market institutions and labour market outcomes.
It has also assessed the impact of four trends driving the changing nature of work that could potentially impact employer market power: working-from-home and hybrid working, the rise of the gig economy, non-compete clauses, and changes in pay-setting policies.
- The CMA considered labour market concentration in the UK over a 20-year period finding that levels remained roughly constant, despite fluctuations over time. This means the ratio between the number of workers and the number of employers has remained largely consistent. This is in stark contrast to the US, where labour market power has been increasing over time.
- The wage markdown (the difference between a worker’s contribution to revenue and their wage) has also been constant or declining between 2008 and 2021, in contrast to the US. This suggests that if anything UK workers receive a slightly higher share of their contribution to output than fifteen years ago.
- There are large and persistent differences in labour market concentration across regions, occupations, and firms. The report shows that labour markets outside of London and the Southeast are more concentrated, i.e. there are more employers per person in these two areas. Blue-collar professions like care workers and tradespeople have seen concentration in their sectors fall, while concentration has remained steady for white-collar workers, like managerial staff and IT professionals.
- Whether firms with market power in the product market are the same firms as those that hold market power in the labour market depends on the relative degree of competitiveness in labour and intermediate input markets. The CMA notes that further research is needed on this question.
In relation to employer market power and labour market outcomes, the CMA finds:
- For affected workers, concentrated labour markets have a very real impact. Comparing similar workers, wages are on average 10% lower in the most concentrated 10% of labour markets compared to the least concentrated 10%. Note: the research done by the CMA only applies to the private sector.
- However, for workers covered by collective bargaining agreements, this negative relationship between labour market concentration and their wage effectively disappears. Sarah Cardell, the CEO of the CMA, emphasizes that this doesn’t mean workers need to be joining unions to receive higher wages. Most labour markets in the UK are not highly concentrated so workers are unlikely to be facing substantial market power impact on their wages.
On the topic of labour market power and the changing nature of work, the CMA finds:
- Non-compete clauses impact around 30% of UK workers, with this percentage increasing to over 40% in ICT and professional and scientific services. The report finds that non-competes are prevalent across the UK economy, even in sectors where one would not expect firms to need to protect their intellectual property - in retail, education, and food services, for example, around 20% of workers have non-compete clauses in their contracts.
- There is often a legitimate reason for non-competes (protecting firms’ investment and encouraging firms to invest in training and knowledge creation). However, the prevalence of non-competes is so broad across the UK economy that it may be questioned whether they are always justified on that basis. Note: the UK government has already announced that they will legislate to limit post term non-competes to 3 months2. The CMA’s evidence and analysis appear to support that direction of travel.
- Since the pandemic, the number of jobs offering remote and hybrid working has increased significantly and stabilised at around 20% of UK roles. Hybrid jobs are more common in geographical areas with lower concentration – such as London – and are associated with a rise in wages. Hybrid working can impact the employer-employee power dynamic, as it can widen a person’s potential job pool.
- The gig economy has increased in importance over the last few years in the UK, but still only accounts for about five percent of total employment. Workers in the gig economy often supplement their income with other jobs and sources of income. They also move more across the income distribution than workers in traditional employment. Overall, low-pay jobs are common in the gig economy, with eight percent of workers earning below or at the minimum wage, compared to five percent in the traditional economy.
Next steps
The CMA has already put out guidance to employers on the key competition law breaches that may arise in labour markets: ‘no poach’ agreements; wage-fixing agreements; and information sharing, all of which are problematic whether they involve permanent salaried staff, or contracted workers3. These practices can negatively impact labour markets by reducing employee wages, mobility and choice, and limiting a business’ ability to expand.
As part of its cartel enforcement work, the CMA is looking into suspected anti-competitive conduct in relation to rates for workers in the sports and non-sports TV production and broadcasting sectors. It also recently broadened its investigation into the fragrances industry to cover suspected unlawful ‘no poaching’ arrangements. We would expect the CMA to maintain a clear focus on antitrust investigations in labour markets (which have been identified as a key area of focus in the CMA’s latest Annual Plan)4. It is therefore critical to ensure that HR departments are trained on these key areas of competition law compliance.
The analysis in the report has also uncovered open questions for researchers and policymakers: what lies behind the geographical differences in labour market concentration? How do mergers and acquisitions affect labour market concentration and wages in the UK? What would the impact of changing labour market policies (for example, on non-compete agreements, pay setting and the minimum wage) be for worker mobility and wages? These questions present opportunities for researchers and government analysts to further build the evidence base for labour market policies.
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3See https://www.gov.uk/government/news/cma-reminds-employers-to-avoid-anti-competitive-practices
4See https://assets.publishing.service.gov.uk/media/64240e7e60a35e00120cb06f/A_CMA_ANNUAL_PLAN_2023-2024_.pdf.
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