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Introduction

I am delighted to announce the publication today of the first major research report by the CMAs Microeconomics Unit: Competition and market power in UK labour markets.

Im also pleased to be launching this work here in Durham, where the Microeconomics Unit benefits from a highly productive partnership with Durham University. Engagement with a range of external experts is hugely valuable to the CMAs research activities, and indeed, much of our broader work. We are grateful for those relationships, which strengthen our capabilities and enhance the impact we can deliver for people, businesses and the UK economy. We look forward to continuing this close collaboration between the Microeconomics Unit and Durham, as well as many other academics across the UK.

This is important new research on the UK labour market and certainly some of the first of its kind. Its also different from much of the CMAs work, reflecting the broader purpose of our Microeconomics Unit to produce microeconomic research that informs not only the CMAs own work but also wider government and policy thinking.

As well as unpacking the findings of the report, I want to outline why we consider labour markets such a timely and pertinent area of exploration, and what the findings might mean for the CMA and others. Ill also share some thoughts on the CMAs wider portfolio of work relating to labour markets which we have identified as a strategic priority in our Annual Plan. First, though, let me provide some context on the Microeconomics Unit itself, and its important contribution to economic research and evidence-based policy development.

The CMAs Microeconomics Unit

The benefits of establishing a microeconomic sibling for the Bank of Englands macroeconomic research function were well-argued in the UK government-commissioned 2021 Penrose report on competition policy. The Microeconomics Unit was duly established in 2022 and now has 17 very talented staff based in its office in Darlington.

The Microeconomics Unit helps the CMA keep pace with emerging issues and the latest methods in industrial economics, to evolve the analysis conducted in our core casework. In addition to informing the CMAs casework, the Microeconomics Unit has also been designed to be an independent, open-access, collaborative centre of microeconomic research expertise for government as a whole. Its important to bear this in mind as you read this report because not all of the findings will directly inform the CMAs own work and much of the analysis will be of wider policy interest.

Competition and market power in UK labour markets is an excellent first flagship report for the Microeconomics Unit. We know the government values the research expertise of the unit on such a topical area. However, this is by no means the only output it is producing. Very soon, the Unit will publish research on investment and innovation and in May we expect to publish the third edition of our State of Competition report, which surveys the degree and drivers of product market power across the UK. We are also working on topical research on ownership networks in the UK, drivers of productivity and growth, and the results of the next Consumer Protection Survey. This labour markets report is a particularly important and timely piece of work, however. Let me explain why.

Competition authorities interest in labour markets

This 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. Where labour markets work well, workers are able to access the right jobs for them and firms find the workers they need in the easiest, most efficient way. The amount each worker can produce rises, more suitable workers contribute more in a given hour, which in turn boosts revenues and wages. Governments have been historically interested in improving how labour markets work to boost participation and grow the economy 2 critically important goals for the UK in the current economic climate. It is therefore in the shared interests of workers, firms and governments to ensure that the labour market works well for everyone.

However, we also know that frictions will always exist in the labour market. David Card, Nobel Prize winner in 2021 for his work on labour markets, has said that the time has come to recognise that many or even most firms have some wage-setting power. From a competition law perspective, this wage-setting power may be illegal, if it involves collusion between firms.

It is well-established in economic theory (and supported by empirical research) that employer market power can lead to lower wages. End-consumers may also be left worse off if firms with labour market power restrict the number of workers they hire, potentially reducing output and resulting in higher prices if the firm has market power in the product market as well.

Despite this, labour markets are an area in which competition authorities have traditionally been less active. We have generally focussed principally on competition in product markets. However, we have the power to take enforcement action against firms which break the law by fixing wages, just as we can act against firms which collude to fix prices.

Defining what we mean by labour market power and concentration

This report provides valuable new analysis and evidence to advance understanding of a range of issues relating to labour markets, not just for competition policy but more broadly. I hope it will provide helpful insights to inform thinking across the academic and policymaking community at a time when we are all seeking ways to stimulate our economy and make people better off.

The title of the report is Competition and market power in UK labour markets. Before I turn to the findings in the report, let me first define what we mean by concentration and market power when it comes to labour markets.

When we say concentration, we mean how many firms there are in a particular market. A low degree of concentration means the industry is closer to a perfect competition scenario, where many firms of more or less equal size share the market. Highly concentrated industries will have a small number of firms with a much higher share of the market. In this report, weve used the Herfindahl-Hirschmann index, also known as HHI, to measure concentration in labour markets.

Employer market power is the ability of firms to pay workers less than the value of their contribution to the firms output. The report outlines 2 driving causes of this market power:

Firstly, oligopsony, where the labour market is concentrated and there are a small number of employers in a market. Just like monopsony, where there is one buyer in a market, a small number of suitable employers, for example in labour markets where workers have specialist skills, gives market power to employers.

Secondly, the costs of searching for a new job. Searching for new jobs takes time and is costly for workers. The more difficult it is to find out about new opportunities, the more market power employers have. When searching for jobs is costly or time-consuming, workers are less likely to leave. Knowing this, employers can pay them less.

A word of caution, employer market power and labour market concentration are not one and the same. Just because a labour market is concentrated, this does not mean firms can automatically exercise market power. Other factors such as the technology firms use, the mobility of workers and existing employment laws may all influence both concentration and market power.

Report findings

I would like now to take us through some of the key findings of the report. The report has taken data from across the UK to understand how labour markets vary across regions and nations, sectors and types of occupation. Ill highlight some of our key findings relating to 4 broad areas:

• first, levels of labour market concentration

• second, the impact of labour market power on wages

• third, the prevalence of non-competes

• and finally, the impact of some recent developments in labour markets

Undoubtedly, it is a source of new evidence in the academic debate around labour markets. While this major research piece advances the understanding of UK labour markets, it does not cover every aspect of this complex area and nor does it mean every finding needs a response, either from the CMA or others.

How concentrated are UK labour markets?

So how concentrated are labour markets in the UK? The report finds that mean labour market concentration in the UK is roughly the same as 20 years ago, despite structural changes to the labour market, for example the boom in financial services, rise of the gig economy and the impact of the COVID-19 pandemic.Mean concentration fell by 25% between 2002 and just before the pandemic. It then showed a sharp but short uptick during the pandemic, back to near 2002 levels. This contrasts with the US where there is a substantial body of research showing that market power in labour markets over there has been increasing over time. Indeed, US competition authorities have begun to look more carefully at competition in labour ma

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