Labor-market power and its wage effects

Are employers able to profit from labor market concentration to lower wages and distort competition? This is an important public policy question, with significant practical consequences. For instance, the Portuguese competition authority imposed this year a 3.8 million euro fine on IT firms for employee “no poach” arrangements. Another fine, of 11.3 million euro, was imposed in 2022 on football clubs again for “no poach arrangements”.

This paper measures labor market concentration and its effects on wages in Portugal. It defines local labor markets based on district-by-occupation pairs (for example, construction workers in Leiria). The authors compute the share of new hires for each employer in that local labor market in each year (over the 1986-2019 period), which is then used to calculate a concentration (Herfindahl) index.

First, the paper finds stable levels of concentration over the past 30 years (see the figure). Moreover, most workers (92.5%) are exposed to levels of concentration below the threshold that is thought to raise product market power concerns. This may follow from the large number of small firms in Portugal, which increases the number of alternative opportunities for workers.

Second, the paper finds that when labor market concentration doubles, wages decrease by around 1.4%. This effect is larger for large firms but is attenuated in labor markets with high collective bargaining coverage, a find that is echoed in other research. In conclusion, labor market concentration matters in Portugal, even if its wage effects may not be very large.

Click here to go to the paper by Pedro S. Martins and António Melo.