Employer Power and Inequality: How Labour Market Concentration Shapes Wages

A global ILO study finds that when a few firms dominate hiring, workers lose bargaining power, leading to higher wage inequality, especially at the top of the income distribution. Strong labour institutions like unions, collective bargaining and minimum wages can help reduce this gap, particularly in developing countries where the impact is greatest.

A new global study by the International Labour Organization, using data from the World Bank and ILO surveys, highlights a growing concern in today’s economies: labour market concentration. Simply put, in many places, a small number of firms dominate hiring. This gives employers more power than workers, shaping wages and widening inequality.

The research, covering more than 40 countries between 2006 and 2022, shows that when workers have fewer job options, they have less bargaining power. This can lead to lower wages and fewer opportunities, even when the overall economy is growing. While this issue has been studied in developed countries, the new analysis brings developing economies into focus, where the effects are often stronger.

What Labour Market Concentration Means

Labour market concentration occurs when only a few companies employ a large share of workers in a sector or region. In such situations, workers cannot easily switch jobs, giving employers the upper hand in wage negotiations.

This imbalance can result in wages being held below what workers actually contribute. It can also affect hiring, job security and overall working conditions. The study shows that this is not a rare issue but a structural feature in many economies, especially where industries are dominated by large firms.

A Clear Link to Rising Inequality

One of the most important findings of the study is the strong link between labour market concentration and wage inequality. As concentration increases, the gap between high earners and average workers widens.

Interestingly, this inequality is mainly driven by what happens at the top. High-skilled workers, managers and executives tend to benefit more in concentrated markets, often earning higher salaries as firms grow larger and more powerful. Meanwhile, wages for lower-paid workers do not increase at the same pace, creating a wider gap.

This means inequality is not just about the poor getting poorer, but also about the rich pulling further ahead.

Why Developing Countries Are Hit Harder

The impact of labour market concentration is much stronger in developing countries. These economies often have weaker labour laws, less union coverage and higher levels of informal employment.

As a result, workers have fewer protections and less ability to negotiate better wages. In contrast, developed countries tend to have stronger institutions that help balance power between employers and workers. This reduces the negative effects of concentration, even when large firms dominate certain sectors.

The study suggests that without proper safeguards, employer dominance can deepen inequality more rapidly in less developed economies.

The Role of Unions and Policies

The research also shows that labour market institutions can make a big difference. Trade unions, collective bargaining agreements and minimum wages all help reduce the impact of concentration on inequality.

Unions give workers a stronger voice, helping them negotiate better pay and working conditions. Collective bargaining ensures that wages are not set individually but through agreements that cover groups of workers. Minimum wages set a baseline, protecting the lowest-paid employees from being underpaid.

These tools are especially effective in reducing inequality at the lower end of the wage distribution, where workers are most vulnerable.

Why This Matters for the Future

The study sends a clear message: who holds power in the labour market matters. When too few firms dominate employment, inequality tends to rise. This is not just an economic issue but a social one, affecting fairness and opportunity.

For policymakers, the findings highlight the need to look beyond traditional measures like unemployment rates or economic growth. Strengthening labour institutions, ensuring fair competition and protecting workers’ rights are all crucial steps.

As economies continue to evolve, especially with technological change and globalization, understanding and addressing labour market concentration will be key to building more equal and inclusive societies.