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E-MailDavid Cicero is a Professor of Finance and Mo Shen is an Associate Professor of Finance at Auburn University’s Harbert College of Business; and Jaideep Shenoy is an Associate Professor of Finance at the University of Connecticut School of Business. This post is based on their recent article, forthcoming in the Journal of Finance.
Mergers and acquisitions reshape not only the product markets that firms operate in, but also the labor markets where firms compete for workers. When two firms that compete for labor merge, labor market concentration can increase substantially. This raises an important and increasingly policy-relevant question: do mergers create value by improving labor efficiency, or by increasing employers’ power over workers?
The issue has become central to modern antitrust debates. The 2023 Merger Guidelines issued by the Department of Justice and the Federal Trade Commission explicitly recognize labor market effects as a key dimension of merger review. Policymakers and scholars have increasingly expressed concern that mergers may create monopsony power in labor markets, allowing firms to suppress wages or reduce employment opportunities for workers. At the same time, mergers may generate legitimate labor efficiency gains through workforce integration.
In our paper, Corporate M&As and Labor Market Concentration: Efficiency Gains or Power Grabs?, we study how merger-induced increases in labor market concentration affect merger outcomes. Using a large sample of U.S. public-company mergers between 1991 and 2016, we examine whether deals that increase labor market concentration create value for shareholders. We also attempt to disentangle the competing explanations for value creation.
Competing Explanations: Efficiency Gains Versus Labor Market Power
One possibility is that mergers create value by increasing employers’ labor market power. By reducing the number of firms competing for employees, the merged firm may gain monopsony power that allows it to lower wages and restrict labor demand. Under this “labor market power” view, mergers increase profits at workers’ expense and may reduce output and economic efficiency.
A second possibility is that mergers create value through labor-related efficiency gains. By combining workforces firms may eliminate redundancies, reallocate workers more productively, adopt labor-saving technologies, and improve labor management practices. Under this “labor efficiency” view, mergers increase productivity and output rather than restricting them.
Measuring Merger-Induced Change in Labor Market Concentration
A central challenge is measuring the extent to which a merger changes labor market concentration. To address this issue, we construct a novel measure of changes in local employment concentration across all overlapping labor markets shared by merging firms using establishment-level employment data from the National Establishment Time-Series database. This approach allows us to examine how merger-induced labor market changes relate to shareholder value creation as well as the effects on rival firms, supplier and customer firms, and post-merger real outcomes.
Mergers That Increase Labor Market Concentration Create More Shareholder Value
We first show that deals associated with larger increases in labor market concentration generate significantly higher combined abnormal returns for acquirer and target shareholders. Multivariate regressions confirm this finding after controlling for a host of firm-level and deal-level attributes. Given this result, we engage in a number of additional analyses to help determine the sources of these gains. Across a wide range of tests the evidence largely aligns with the labor efficiency channel proposed above and runs counter to the idea that firms reap gains by exploiting their increased power over labor.
Labor Mobility and Non-Compete Enforcement
First, the relation between labor market concentration and merger gains is stronger when workers’ skills are more transferable across industries and when noncompete agreements are less enforceable. These results are difficult to reconcile with a pure monopsony explanation because labor market power is expected to be strongest when worker mobility is more restricted. Instead, the findings suggest that firms benefit when it is easier to reorganize labor more effectively after mergers.
Wealth Effects to Rival, Supplier, and Customer Firms
Second, we examine the stock market reactions of the merged firms’ product market rivals, customers, and suppliers. If mergers shift the balance of power in labor markets toward employers, rival firms may also benefit along with the merged firms. And if firms abuse their labor market power, standard monopsonist theory suggests suppliers and customers may be harmed as firms reduce production and sell their products at higher prices. We find the opposite. Rival firms experience lower announcement-period returns when mergers generate larger increases in labor market concentration, suggesting that merged firms become more efficient competitors. At the same time, supplier and customer firms generally experience positive wealth effects in these deals. These results are to be expected if the merging firms realize labor efficiency gains.
Real Effects
We also study changes in operations and real outcomes in newly merged firms, at both the establishment and overall firm level. Establishments in overlapping labor markets reduce employment and increase information technology spending relative to those that do not overlap. At the firm level, mergers associated with larger increases in labor market concentration are followed by greater increases in revenues, operating income, and labor productivity. Taken together, these patterns are more consistent with labor efficiency gains than with output restriction associated with labor market power.
Implications for Policy Makers
Our evidence suggests that, historically, mergers that increased labor market concentration among U.S. public firms have generated value through labor efficiency gains. However, our findings do not imply that workers are unharmed. Employment declines in overlapping labor markets indicate that some workers are displaced as efficiencies are realized. Moreover, we cannot rule out the possibility that labor market power may arise in narrowly defined local labor markets or in settings with limited worker protections.
The broader policy challenge is therefore nuanced. Regulators and courts evaluating mergers may need to balance potential harms to specific groups of workers against efficiency gains that benefit shareholders of the merging firms, customer and supplier firms, and potentially the broader economy. As labor market considerations become increasingly important in antitrust enforcement, understanding these tradeoffs is critical.
