Skip to content
National

Large, Dominant Firms Depress Local Wages; Housing Costs Help Offset Lower Pay

Joseph Tracy and Matthew E. Kahn

January 07, 2020

Concern has increased about the ability of very large firms to exert market power and hold down wages in localities where they dominate. We find that housing costs adjust downward to offset the lower wages, particularly in relatively small counties, thus incentivizing workers to stay put and not move.

Over the past 30 years, income inequality has increased in the United States. The causes of this trend continue to be analyzed and debated as researchers explore the role of globalization, differential access to education and the divergence in performance between “superstar cities” such as Boston, New York City, San Francisco and Seattle and the nation’s other metros.

In recent years, some labor economists have argued that a rising concentration of large firms is also contributing to income inequality because these companies have local market power and, thus, an ability to set wages at the expense of local workers. An example would be a town that has a single hospital employing the vast majority of nurses in that community.

‘Monopsony’ View in Smaller Cities

This “monopsony” view suggests that large firms, especially those operating in smaller cities, are earning higher profits at the expense of less-skilled workers. Such exploitation is more likely to take place when workers have fewer local choices of where to work.

In our new paper, “Monopsony in Spatial Equilibrium,” we explore whether there has been a consolidation of employment to the extent that a few firms control a large share of local hiring. In our study, based on data from 1998 to 2016, we undertake a county-level analysis using a standard measure of employment concentration, the Herfindahl–Hirschman index, where higher values indicate a greater concentration of employment by large firms. 

To look for evidence of the growing concentration of employment, we divide all U.S. counties into three equally sized groups based on total employment in the county. Small counties have total employment of less than 8,600. Medium counties have employment between 8,600 and 31,700, and large counties have employment exceeding 31,700.

Employment Concentration by Area Size

The degree of employment concentration falls as you move from small to midsize to large counties, as Charts 1–3 show. All three category sizes experienced a decline in employment concentration from the late 1990s to 2005. There is evidence of a rising concentration of employment among large firms in relatively small counties beginning around 2005 (Chart 1).

Chart 1: Among small counties, large firm employment concentration begins in 2006

Downloadable chart | Chart data

Employment concentration in midsize counties continued to decline until 2010 and then slightly increased over the next six years (Chart 2).

Chart 2: Energy paces exports though still sluggish

Downloadable chart | Chart data

For large counties, employment concentration rose after 2005 but leveled off in 2010 and did not return to its late-1990 levels (Chart 3). By comparison, recall that in small counties, recent-period concentration moved toward 1990s levels.

Chart 3: Energy paces exports though still sluggish

Downloadable chart | Chart data

Given that there is evidence of monopsony power in some local labor markets, but not in others, workers presumably can avoid the negative consequences of this situation by relocating. For such individuals who decide to remain in a local labor market and receive a relatively low salary, there must be compensating factors that cause them to stay.

The local housing market provides an important potential counterbalance to dominant employers. We explore whether rents are lower (all else equal) in local labor markets where workers face the threat of monopsony power.

Lower Housing Costs in Small Cities

Data from Zillow on housing costs per square foot provide evidence consistent with this claim. That is, renters receiving a lower wage due to living in a highly concentrated local market pay lower rents for housing. This helps maintain their standard of living, reducing their incentive to move.

On the other hand, homeowners in these markets are not helped in that the value of their houses is lower due to the employment concentration of the local market. Even retired homeowners not directly affected by the lower wages bear some of the cost of the concentrated market due to a reduction in their home values.

The theory of “spatial compensating differentials” predicts that wages and rents adjust so that the marginal residents—those most likely to move—cannot raise their well-being by migrating. Younger rental households without school-age children tend to have the lowest costs of moving. Our results indicate that these households are the most shielded from monopsony power by the decline in local rents.

Recent labor economics literature has implicitly assumed that workers bear the full economic costs of local firms exercising market power in local labor markets. Our analysis indicates that local homeowners bear part of the brunt of local monopsony power.

About the Authors

Joseph Tracy

Tracy is executive vice president and senior advisor in the Research Department at the Federal Reserve Bank of Dallas.

Matthew E. Kahn

Kahn is the Bloomberg Distinguished Professor of Economics and Business at Johns Hopkins University in Baltimore, Maryland.

The views expressed are those of the authors and should not be attributed to the Federal Reserve Bank of Dallas or the Federal Reserve System.

LaborReal Estate

Economic analysis and insights from the Federal Reserve Bank of Dallas

Subscribe to Dallas Fed Economics email alerts
Our People
Subscribe to email alerts for economic research and updates