Competition and the labour market: employers are facing tensions

Employer market power has been affected by the rise of hybrid working, the gig economy, increasing use of performance-related pay and misuse of non-compete covenants. A new government report details how the labour market is responding.

The UK Competition and Markets Authority (CMA) has published a flagship report, Competition and Market Power in UK Labour Markets, which takes a “deep dive” into key trends in the UK labour market, focusing on the impact of competition and employer market power.

The report highlights the importance of well-functioning labour markets for productivity. As Sarah Cardell, CEO at the CMA, states, driving economic growth remains a key priority for the government. While acknowledging that frictions will always exist in labour markets and highlighting that this is an area in which competition authorities have traditionally been less active, she noted that the CMA had the power to take enforcement action against firms that infringed competition law by fixing wages.

Many aspects of the report will be of interest to employers.

Concentration and market power

The report considers the effects of concentration, and market power on UK labour markets.

• Labour market concentration measures how much employment in each labour market is concentrated in the hands of employers. A high degree of concentration means there are a small number of employers with a large share of the market.
• Employer market power is the ability of businesses to pay workers less than the value of their contribution to the business’s output.
• Highly concentrated labour markets give employers access to a wider pool of talent and paired with the time and costs associated with job searches, serve to deter employees from leaving their jobs.
• Four trends changing the nature of work could affect employer market power: (i) hybrid working; (ii) the rise of the gig economy; (iii) the use of non-compete covenants; and (iv) changes in approach to pay-setting.

Key findings

Collective bargaining

•  In a highly concentrated labour market, employees’ wages are, on average, 10% lower. Where employees are part of collective bargaining arrangements the negative relationship between a concentrated labour market and wages disappears.
• Manufacturing, transport and storage, and financial services have particularly concentrated labour markets. Collective bargaining arrangements are not generally present in financial services.
• There has been a decline in trade union membership. Currently, just over 20% of employees are members of a trade union, and around 30% are covered by a collective bargaining agreement.
• The potential relevance of employers’ associations on employer market power is not addressed in the report.

Performance-related pay

• Standardised pay setting is being phased out in favour of performance or merit pay.
• Pay is higher in businesses with performance-related pay policies.
• Performance pay increases wage inequality within a business but is counteracted by the presence of collective bargaining.

Hybrid working

• Hybrid working is now commonplace (20% of vacancies now are remote or hybrid) and has changed the labour markets landscape, for example: opening up job opportunities in the regions.
• The impact of hybrid working on wages is “ambiguous”. It is as yet unknown whether it increases, or decreases, employee productivity levels, and widens or narrows the pool of workers applying for a role. Workers value the benefits of hybrid working and would be willing to accept a pay cut of up to 10% to spend some of their time working remotely.

Gig economy

• The gig economy has grown over the last few years although still only represents around 3% to 5% of employment in the UK.
• Gig workers earn comparable incomes to traditional workers, but often work long hours and have more than one job.
•  Low paid jobs are common in the gig economy.

Non-compete clauses in employment contracts

• •Roughly 26% of workers are covered by non-compete clauses. These clauses are generally more common in managerial and scientific occupations.
• Non-competes are to be distinguished from no-poaching agreements. Non-competes do not generally infringe competition law and are typically an employment law matter.
• The report notes the government’s intention to legislate to limit the length of non-compete clauses in employment contracts to three months. In her speech launching the report, Sarah Cardell said: “Our evidence supports this direction of travel.”

The report speaks to the CMA’s intention to address anti-competitive conduct which it sees as directly impacting household incomes.

The regulator’s message to employers is clear: it is focused on improving labour market conditions to support wider economic growth, firms need to comply with their obligations under competition law with regard to their employment practices, and a competitive labour market reaps rewards for the wider economy

The report is a reminder of the importance of treating information about employment particulars as confidential in external discussions with employer associations or in other contexts such as M&A activities.

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