RDP 2023-02: Did Labour Market Concentration Lower Wages Growth Pre-COVID? 7. Conclusion

Wages growth was surprisingly low during the pre-COVID period. Understanding whether or what structural factors caused this weakness is crucial, given they may continue to weigh on wages in the post-COVID period. This would have implications for inflation, government revenues and worker welfare.

Overall, this paper has demonstrated that the increasing impact of labour market concentration may have weighed on wages growth pre-COVID, subtracting a bit under 1 per cent from wages on average from 2011–2015. This is the case even though concentration itself did not increase.

A key driver of the increased impact of concentration appears to be declining firm entry and dynamism, as it has meant that incumbents faced less competition from new entrants, allowing them to exert more market power for given concentration levels. Declining occupational mobility and union coverage may have also played some role, but declining entry appear to be the major driver.

These results highlight a second, direct channel through which declining firm entry, dynamism and competitive pressure have weighed on wages growth. They sit alongside earlier work showing an indirect channel through which declining dynamism weighed on wages: by lowering productivity growth (Andrews and Hansell 2021; Andrews et al 2022; Hambur forthcoming). As such, these results further motivate an ongoing focus on potential obstacles to firm entry, growth and dynamism, as well as labour market frictions, in developing policies to drive better outcomes for workers and economic growth.