The Soul of Antitrust

Eric Posner is a legal magpie, collecting bits of different research agendas and bringing them together to create startling amalgams. In his new book, How Antitrust Failed Workers, Posner draws on antitrust, labor, and employment law as well as labor and industrial organization economics. He puts them together to argue that antitrust needs to reorient itself to protect workers, not just consumers.

Posner is right that antitrust has ignored workers for too long. The 2010 revelations that many Silicon Valley firms signed no-poaching agreements with each other, and, soon after, that Jimmy Johns and other fast-food employers made their employees sign non-compete contracts, brought the scope of workers’ problems to light.

But the book is based around a more expansive claim, namely, that in much of the United States businesses have a “labor monopsony,” meaning that they have enough monopoly power to push down wages and earn excess profits without any collusion. This labor monopsony exacerbates inequality and keeps the economy below its full potential. Posner believes antitrust needs radical reformation to address it.

Capitalism’s Remedies for Monopsony

Posner’s argument is overstated. He focuses on the incentives companies have to exploit their workers, without considering how workers use their own power, and his demands for reform would often exacerbate the problems workers face. Despite its gestures to the law and economics literature, his book makes modern capitalism look like one endless effort to grind the face of the poor. Most of the modern economics literature shows it is not.

The breadth of Posner’s claims becomes clear in the last chapter of the book, which tries to create a whole new structure for labor economics. It argues that “relational work,” his term for work where employees gain firm-specific skills, makes all such employees exploitable, because they cannot transfer those skills elsewhere. Such relational workers would compose the large majority of the American workforce, which is a problem since “relational work unavoidably generates monopsony.”

Yet there is an existing word for “relational work,” and it is called training. Through training, companies employ inefficient new workers with the hope that they become more efficient over time. Although workers gain firm-specific skills that they can’t transfer elsewhere, the employers gain workers with skills that don’t exist outside the company. Thus, both sides have some monopoly power to extract. Economists have a term for how the costs of training and turnover affect compensation, and it is called efficiency wage theory. The basic argument is that employers have to pay workers more than the worker could typically get in the market because the costs of worker turnover are so high to the company. The theory is never broached in the book.

Despite the book’s generalized conclusions about labor monopsony, its findings would seem to apply mainly to small labor markets. After all, in small counties and towns, a few companies can have real labor market power. But this is another situation where Posner ignores how both firms and workers can exert influence. As Paul Krugman pointed out in Geography and Trade back in 1991, and as other research has shown, the absence of alternatives in small towns means employers must pay workers more to prevent them from moving away entirely.

Workers’ mobility highlights a crucial difference between the local goods monopolies of many antitrust cases and the labor monopsonies Posner discusses here. Local monopolies in groceries or banking will make little overall difference for consumers, but a local monopsony that lowered wages gives workers a large incentive to move to another town. Worker mobility is the reason that even studies of turn-of-the-century coal company towns, where one firm did employ everyone, show little to no monopsony power. They had to compete not with other local firms but with other locations. Decades of research in urban economics also shows that real wage differences tend to be minimal across cities. Without sufficient wages in smaller towns, all workers would shift over time to big cities, where even the most fervent believers in monopsony know workers have options.

All sorts of contracts, companies, and conduct that would once pass muster will now be investigated by reams of lawyers, who want to ban a host of practices that, until very recently, economists and lawyers agreed were beneficial.

A “Brandesian” Antitruster?

There is, of course, an ongoing debate about the extent of labor monopsony that stretches across numerous disciplines. Researchers like the recently deceased Alan Krueger, whom Posner has worked with, believe it is pervasive. But even if Posner is right that monopsony is more prevalent than many economists think, his strategies to fight it are concerning. They involve reviving many long-discredited areas of antitrust law and inserting government into many quotidian contracting decisions. For instance, Posner wants to forbid many kinds of vertical restraints, or contracts between upstream and downstream sellers, because they could pinch contractors or workers masquerading as contractors.

Posner’s somewhat antiquated view of vertical contracts is demonstrated by his claim that a “classic vertical conspiracy is retail price maintenance” where a wholesaler demands that a retailer not sell below a certain price. Far from being a conspiracy, as Posner terms it, the Supreme Court argued in Leegin Creative Leather Products (2007) that resale price maintenance brings many benefits to both retailers and customers, including by ensuring the retailers invest in quality.  Most economists agree.

Likewise, Posner wants to forbid restrictions companies can put on their franchisees. Yet as far back as the Continental Television v. GTE Sylvania case of 1977, the Supreme Court recognized that there are benefits to limiting competition between franchisees, just like there would be benefits if a company limited competition between stores it owned directly. Posner takes his concern with vertical restraints so far that he even wants to force Uber to allow its drivers to compete on price, which I doubt would lead to increased income for drivers.

Posner states early in the book that he is not interested in overturning the consumer welfare standard of antitrust, which, he correctly notes, should include a “worker welfare” aspect. Yet much of the book reads like a demand to retreat 50 years on antitrust practices. His remedies would bring antitrust back to the bad old days when courts were involved in every contracting decision. His remedies put him in league with the radical so-called “Brandesian” antitrusters, such as the current Chair of the Federal Trade Commission, Lina Khan, who disavow the consumer welfare standard entirely.

Yet the book gives plenty of reasons why labor monopsonies can be attacked using the well-worn methods of antitrust that have become the norm since Robert Bork. Most obviously, no-poaching agreements between firms are about as obvious an antitrust conspiracy as one can imagine. They can and should be attacked with full force.

Although non-competes, when just negotiated between an employer and employee, don’t bring up the same conspiracy issues, they are a clear restraint of trade and can be evaluated as such. The evidence Posner cites, which shows that over 18% of employees are now covered by non-compete clauses, is worrying. Courts can limit such contracts to those that only protect trade secrets. Policymakers can even ban them. Evidence shows that states that forbid such contracts see economic benefits.

Posner’s work also demonstrates legitimate problems with the procedures of workers’ antitrust cases. He marshals evidence that the minimal stakes of many labor monopsony claims, and the difficulty of getting labor cases into class-action suits, means workers have almost no likelihood of getting a monopsony case heard, let alone won. Antitrusters should look at reforming these procedures. Such reforms can be placed in the modern antitrust framework, and address existing labor monopsonies.

The Dangers of Government Overreach

Yet Posner believes the perils of labor monopsony are so great that government should move beyond antitrust law and institute a series of radical policy changes to reform labor markets. He wonders if occupational licensing, almost universally reviled among economists, could limit the supply of labor and thus boost bargaining power. He proposes job protection rules allowing only “for cause” firing, government standardized job classifications, mandated co-determination of workers and shareholders for company policies, and so forth. He even suggests “wage boards” which could set wage floors for different industries, staffed by “nonpartisan expert employees” like in Australia.

Throughout this book, Posner demonstrates his faith in nonpartisan experts and administrative rule-makers to delineate exactly what kind of support labor needs. He has long been a fervent believer in such expertise. In a previous book with Adrian Vermeule, Executive Unbound, written in 2012, Posner mocked as “tyrannophobes” those who feared expert administrative or executive lawmaking, since “politics and public opinion at least block the most lurid forms of executive abuse.” Yet, in one of the great, silent volte faces in modern writing, he followed the book up with The Demagogue’s Playbook, written, of course, after Trump’s election, where he argued that an executive “demagogue” always “poses a threat to democracy and effective government.” Posner had not lost faith in executive experts, but, without explaining his change of mind, he had lost faith in the ability of the voters to elect people that would appoint them.

Posner’s belated realization of the dangers of executive overreach should be a reminder of why we shouldn’t be so confident of government’s ability to solve workers’ problems. Government appointees can easily be captured and abused by those who care little about expertise, and their vaunted expertise can just as often be an intellectual fad. Decades ago, Frank Easterbrook noted these concerns and said that all those engaged in the antitrust enterprise should be humbler. He said they should be more concerned about making “false positives,” namely, declaring business practices monopolistic if they were in fact efficient, rather than “false negatives,” declaring business practices fine even if they tended towards monopoly. His logic was clear. A false negative could be corrected over time by the market, while a false positive would be enshrined in law, potentially for decades, preventing countervailing evidence from even accumulating.

Posner’s father, Richard Posner, was one of the founders of the modern, humbler version of antitrust law. Along with Robert Bork, he helped cement the consumer welfare standard into law. He also served for years with his protégé Frank Easterbrook on the Seventh Circuit Court of Appeals. In 2017 Richard Posner shocked a crowd by declaring “Antitrust is dead,” since most lawyers were not attempting innovative cases that attacked general business practices. It was not a complaint. He wondered why people even criticized “Amazon, Microsoft, [and] Google” since “these are the three best companies in the world,” and provided immense consumer benefits. “I’m very comfortable with the modern American giant company,” he said. Like Richard Posner, many at the time thought the battle for the soul of antitrust was over, and that the modern and humble antitrust enterprise had taken the field.

That same year, Lina Khan published “Amazon’s Antitrust Paradox” in the Yale Law Journal, which heralded a new era in aggressive antitrust divorced from the old pieties of Richard Posner, Frank Easterbrook, and Robert Bork. New antitrusters, from Khan to, now, Eric Posner, are remaking antitrust into an exciting enterprise. All sorts of contracts, companies, and conduct that would once pass muster will now be investigated by reams of lawyers, who want to ban a host of practices that, until very recently, economists and lawyers agreed were beneficial. The putative dangers of labor monopsony open up even more opportunities for intervention. Although these cases may provide grist for the mills of antitrust, labor, and industrial organization experts, and many expert administrators, I think it will not be long before we wish antitrust was boring again. If anything, the rapid changes in intellectual fashion are a stark reminder of the need for modern antitrusters to exhibit more humility.