According to economists, rising concentration might be driving low wage and price growth.
The Federal Reserve Bank of Kansas City organises the annual Jackson Hole Economic Policy Symposium in the Grand Tetons National Park, Wyoming, USA. The Symposium, held from August 23-25 this year, witnesses a number of prominent economists, central bankers and policymakers coming together to discuss pressing and dynamic economic issues. Given the presence of renowned economists and policymakers, it is no surprise that the Symposium commands considerable interest among the media, economists and central bankers.
This year, the Symposium sought to discuss issues surrounding market power and concentration and how it is shaping the discourse around unemployment, inflation and the role of the central bank in monetary policy. In the last few years, especially in the United States, firm concentration has increased. That is, there are a small number of extremely successful but large firms that dominate the entire market, while the smaller firms either consolidate into another large firm or are integrated into the value chains of the existing large firms. The rise of Internet and tech-based superstar firms like Google, Amazon, Apple and Facebook are a case in point. At the same time, although unemployment rates in the US are at historically low levels after the financial crisis of 2008, wage growth and inflation have been very sluggish. This upsets the traditional unemployment-inflation trade-off — called the Phillips Curve — used by central banks to determine the level of intervention in the money markets.
According to economists, rising concentration might be driving low wage and price growth. The large firms act as a monopsony — or, a single buyer — in the labour market. As the single employer in a particular market, they are able to hold wages down. In the absence of an alternative firm, workers are bound to the superstar firm and forced to accept lower or stagnant wages. Alan Krueger, a Princeton economist, argued further that some of these firms also collude, either explicitly or through more subtle signalling to bid wages down and restrict workers from switching firms.
Another paper by Alberto Cavallo of Harvard University found evidence that the algorithms used by internet-based retail giants like Amazon to constantly change and adjust prices have led to greater price fluctuations in response to various macroeconomic shocks. This so-called 'Amazon Effect' not only forces brick-and-mortar outlets to respond in a similar manner but also reduces the ability of the central bank to influence prices in the economy. This, therefore, calls into question the traditional tools available to central banks, such as the interest rate, in conducting monetary policy.
As far as India is concerned, the Amazon Effect is unlikely to be significant as e-commerce penetration is still relatively low and a large part of price fluctuations is primarily due to supply shocks arising from agriculture and crude oil imports. However, increasing firm concentration and consequent rise in market power is a cause for concern even in India as rising wages and job opportunities are absolutely essential for India to realise its demographic dividend. While the government embarks on its flagship 'Make in India' programme to generate new jobs, there is also an urgent need to ensure that large firms are not able to exercise undue influence on the job market.