Blog: The Bogus “Concentrated Labor Market” Claim

By / 3.2.2020

As economists who care about inequality, we cheer when Amazon and other ecommerce sellers open up new fulfillment centers in areas where job growth has been slow and opportunities limited. In fact, we have pointed out in the past that because these mammoth centers require large amounts of land and good road connections, they are well-suited for outlying areas that may have been left behind by the tech boom and the decline of American manufacturing.

Oddly enough, a coalition of labor unions disagree. In a new petition presented to the Federal Trade Commission (FTC), the coalition accuses Amazon, in particular, of choosing to “knowingly distance its warehouses from tighter local labor markets” and place them instead in looser labor markets where workers have a “paucity of options.” According to the petition, siting fulfillment centers in economically weak areas represents “anti-competitive” employment practices.

My reply: If I could, I would have all of corporate America follow the strategy of putting new job-creating operations in places where people actually need the jobs! Note that I am not talking about moving existing operations—that’s just a zero-sum game. Rather, expanding into new areas is an important way of closing the economic gap between the thriving cities and the left-behinds.

Looking at the petition in more detail, it argues that Amazon is driving down wages by expanding into what it calls “concentrated” labor markets. In particular, the petition focus on three counties: Mercer in New Jersey,; Lexington in South Carolina; and Chesterfield in Virginia. The petition claims that these examples show that Amazon is using its size to hold down wages.

But here’s the problem with that argument: in all three counties, warehousing jobs are only 3-4% of the local labor market, and Amazon is only a portion of those. For example, Mercer County is a huge and tremendously diverse labor market situated between, containing major employers such as Princeton University, Bristol-Myers-Squibb, and the state of New Jersey. In February 2020, job aggregator reported almost 3000 job postings for Mercer County. (Lexington County and Chesterfield County both had about 1000 job postings that month,). These are hardly “concentrated” markets where one company can have monopsony power hiring workers.

The petition cites BLS data on average weekly and annual pay in the warehousing industry as evidence that Amazon drives down wages. For example, in Lexington County weekly average wage and salaries in the warehousing industry fell from $849 in 2010 to $697 in 2012, after Amazon opened up its fulfillment center.

But in order to interpret this change, it’s important to understand the background. In 2010, there were only 147 workers employed in Lexington’s warehousing industry, down from 261 in 2007. That’s 147 with no zeroes at the end, including all the managers, and forklift drivers who had managed to outlast the deep recession.

This tiny warehousing employment was economically irrelevant for the Lexington county economy, which included 75,000 workers in 2010. And the shrinkage of the warehousing industry presumably meant that no young (and relatively cheap) managers and workers were being hired. To put it in economics terms, no warehousing jobs were available at the average wage in 2010.

Now there are more than 3000 warehousing jobs in the county. And to get there, a company like Amazon didn’t have to compete for workers with the existing warehousing operations in Lexington, which weren’t growing. Instead, the real competition was the broader labor market, and there the Lexington warehousing industry, led by Amazon, has been paying far better wages than retailers, and department stores and supercenters in particular. The same is true for Mercer and Chesterfield counties (Chart below based on averaging 2019 quarters 1 and 2. Data for quarter 3 will be released as of March 4).

To summarize: There’s precisely zero evidence that Mercer, Lexington and Chesterfield are concentrated labor markets. And the broader argument that companies engage in anti-competitive behavior by locating new operations in areas that need jobs is simply specious. For both political and economic reasons, we need more jobs spread across the country.