The UK Competition and Markets Authority’s (CMA’s) new Microeconomics Unit has recently 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. This is the first report of its kind in the UK and comes at a time when scrutiny of competition in labour markets is emerging as a key enforcement priority for the CMA.
The report highlights the importance of well-functioning labour markets for productivity; where workers are able to access the right jobs, businesses have access to the right people and wages are higher, boosting the wider economy. As Sarah Cardell, CEO at the CMA, stated in her speech announcing the publication of the report, 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 has the power to take enforcement action against firms which infringe competition law by fixing wages, just as it can against firms which collude to fix prices. Interestingly, Ms Cardell also said that the evidence in the report supports the Government’s proposals to limit the length of non-compete clauses in employment contracts to three months.
The primary purpose of the report is to contribute to the wider policy debate and provide evidence to support future policymaking, although many aspects of the report will be of interest to employers. The CMA will also use the report’s findings to inform its examination of anti-competitive conduct in labour markets, including its ongoing investigations into rates for workers in the production and broadcasting sectors, and a cartel investigation into the fragrances and flavours sector which has been recently expanded to cover suspected no-poaching arrangements.
Concentration and market power
The report considers the effects of (i) concentration, and (ii) 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 (which is more likely to cause issues from a competition law perspective) 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 (referred to as ‘wage markdown’).
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 in the first place, allowing employers to exercise market power.
Four trends that are changing the nature of work could also 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. he report highlights regional and sectorial disparities, such as more concentrated labour markets outside of London and the South East and in the manufacturing, transport and storage, and financial services sectors.
Key findings
The key findings from the report are outlined below.
| Collective bargaining | In a highly concentrated labour market, employees’ wages are, on average, 10% lower. Where employees are part of collective bargaining arrangements (that is, representation by a trade union or staff association in negotiating terms and conditions of employment such as pay) the negative relationship between a concentrated labour market and wages effectively disappears. - Manufacturing, transport and storage, and financial services have particularly concentrated labour markets. Collective bargaining arrangements are relatively commonplace in the manufacturing sector but are not generally present in financial services, at least in the UK.
- There has been a gradual decline in the UK in trade union membership and the numbers covered by collective bargaining arrangements over the last 20 years. 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 (that is, membership organisations such as the National Farmers’ Union (NFU) and the Confederation of Paper Industries (CPI) which represent the collective interests of employers within a particular labour market) on employer market power is not addressed in the report. Where employer associations are prevalent, such as in the manufacturing sector, they have the ability to influence wage levels and could be particularly vulnerable to allegations of wage fixing. Their influence may be diminishing because, like collective bargaining, employers’ associations are also in decline in the UK.
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| 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 (i.e. firms with union representation).
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| Hybrid working | - Hybrid working is now commonplace, and the number of job vacancies that offer remote or hybrid working has risen from around 2.5% in 2012 to just under 20% today.
- Hybrid working has changed the labour markets landscape by “loosening the link between the location of the worker and […] the firm” and unlocking new employment opportunities across regions in the UK.
- The impact of hybrid working on wages is “ambiguous”. It is as yet unknown whether it (i) increases, or decreases, employee productivity levels, and (ii) widens the pool of workers applying for a particular role.
- Workers value the benefits of hybrid working and would be willing to accept a pay cut of up to 10% in order to spend some of their time working remotely.
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| Gig economy | - The gig economy has grown over the last few years in the UK 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 with 8% of workers over 25 earning below or at the minimum wage.
- There is growing concern that gig platforms hold disproportionate market power, particularly as gig workers are often treated as self-employed contractors.
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| 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 although the report found that they were widely used across all occupations, industries, and the whole income distribution.
- Non-competes are to be distinguished from no-poaching agreements (where two or more businesses agree not to approach or hire the other’s employees which is unlawful). Non-competes do not generally infringe competition law and are typically a matter for employment law.
- Their use may not always be appropriate (i.e. in circumstances where there is no legitimate interest to protect), and they often deter employees from switching jobs.
- The report notes the Government’s intention to legislate to limit the length of non-compete clauses in employment contracts to three months, and Sarah Cardell commented in her speech that the evidence in the report supports that direction of travel. For further information on that development, see our Law-Now UK government’s response to non-compete consultation.
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Comment
The report is well timed and speaks to the CMA’s intention to address anti-competitive conduct which it sees as directly impacting household incomes during the cost of living crisis. It builds on CMA guidance issued to employers last year on how to avoid anti-competitive behaviour, as well as the confirmation in the 2024/25 CMA Annual Plan consultation that the enforcement of competition law in labour markets will be a key area of focus. It also reflects the enforcement priorities of other competition authorities worldwide; the European Commission has recently warned companies of the dangers of entering into wage-fixing or no-poach agreements, and conducted its first dawn raids based on alleged labour market restrictions in November 2023.
Overall, the regulator’s message to employers is clear: (i) firms need to understand and comply with their obligations under competition law with regard to their employment practices; and (ii) a competitive labour market reaps rewards for the wider economy, increasing productivity and innovation across sectors and regions.
The report is also a salient reminder of the importance of treating information about employment particulars (especially salary and benefits information) as confidential in external discussions with employer associations or in other contexts such as M&A activities involving competitors.
Finally, while many considered that the Government was unlikely to pursue its proposed legislative changes to non-competes in employment contracts, the report may well lead to a refocussing of attention in this area. Employers should therefore maintain a watching brief on the proposed reform.
For more information on the CMA’s Guidance Note to Employers, see our Law-Now UK regulator joins the global enforcement trend and warns employers to avoid no-poaching agreements.
This article was co-authored by Mariyum Mahmood, Trainee Solicitor at CMS.
Contacts: Catherine Taylor (Partner, Employment), Neil Baylis (Partner, Antitrust, Competition & Trade), Rebecca Timms (Professional Support Lawyer, Antitrust, Competition & Trade) and Aisleen Pugh (Professional Support Lawyer, Employment)
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