Does Employer Concentration Reduce Labor Force Participation?

The labor force participation of prime-age workers has been declining steadily over the past two decades. One possible factor in lower labor force participation may be the concentration of employers in local labor markets. An accumulation of evidence suggests that when firms possess greater bargaining power, they can drive down wages, which might, in turn, discourage labor force participation. The evidence has begun to filter through to policy, with a recent presidential executive order instructing the Federal Trade Commission to consider labor-market concentration, in addition to product-market concentration, when evaluating mergers. This brief, which is based on a recent paper, examines whether markets with higher employer concentration are associated with lower labor force participation rates and whether the relationship is weaker for employees with more bargaining power, such as those covered by unions. The analysis fills in a missing link between employer concentration and lower wages by directly estimating the correlations between concentration and labor force participation, and between concentration and employment. The discussion proceeds as follows. The first section provides background on employer concentration. The second section describes the data and methods for the analysis. The third section presents the results. The final section concludes that employer concentration is strongly negatively correlated with labor force participation, but only weakly correlated with employment. Union coverage mitigates – but does not fully offset – the negative correlation between concentration and labor force participation.