Companies are paying workers up to 20% less than they're worth because employers hold the power — and the Biden administration wants to change that

• A new report from the Treasury highlights how employers have all the power in setting wages.
• The report highlights several reasons that companies can pay workers below their market value.

If the labor market worked the way it should according to Economics 101, you'd probably be making more money right now.

That's according to a new report from the Department of Treasury, which dives into labor market competition — or the lack thereof – and the impact that it has on jobs, wages, and the broader economy.

One main takeaway from the report: The "labor market is characterized by high levels of employer power."

For workers, that means they're getting paid less than what their work should be worth. In fact, the Treasury's survey of studies finds that wages are around 15% to 20% less than they would be in a perfectly competitive labor market.

It's another example of how trends like unpredictable scheduling and non-compete agreements have driven down what workers are getting paid. It's part of why workers have been quitting en masse for nearly a year. Despite wages skyrocketing in order to attract talent after decades of decline, the report shows just how much pay is still suppressed. The Biden administration says that legislative action is needed to fully reverse the trend.

"Robust labor market competition requires careful maintenance and is a critical component to promoting economic growth, spurring innovation, and addressing economic inequality," the report said.

The role of monopsony power

The power employers hold in America right now is what economists call "monopsony power."

"Basically, it's when an employer has the ability to have some power to set wages and continue to operate," Aaron Sojourner, an economist and associate professor at the University of Minnesota's Carlson School of Management, told Insider. That stands in contrast to what's called "perfect competition," where "you kind of have to do whatever the market dictates."

The practices that help companies maintain this monopsony power that the report highlights includes things like non-compete agreements, where employers stipulate that workers can't leave to work for a competitor.

Another example is the lack of pay transparency. Recent research has shown that low-wage workers especially underestimate how much they could make elsewhere. If they knew their true market worth, a solid chunk of low-wage jobs simply wouldn't be viable because workers would either quit or demand raises, according to a study from economists at MIT, the University of Cologne, the London School of Economics, and the University of California, Berkeley.

As Insider's Aki Ito reported, "It's a system of secrecy that benefits employers: By treating everyone's salaries as "confidential," companies are able to keep workers guessing about how much they're willing and able to pay."

That's something that some localities have started to address. New York City will soon have a salary transparency law requiring employers to post minimum and maximum wages for roles, a move that's already faced backlash from the city's business community.

Another way that employers reduce competition and cut down pay, according to the study, is turning full-time roles into contract positions, which may be illegal misclassification — something that can pare down wages by 4% to 24%, per the report.

That also cuts those workers off from the protections that full-time workers receive, like health insurance.

"Engaging in misclassification you get this big labor cost advantage over your competitors who are following the law, and it makes it very hard for them to compete against you, because you're cheating, basically," Sojourner said.

The Biden administration wants to fix it

There are some legislative tactics that can help improve competition and increase wages, according to the report.

One is upping collective bargaining power and union representation, which, even with a recent upswell in labor activity, is still very low. The Biden administration is again calling for the passage of the pro-labor Protecting the Right to Organize Act (PRO Act), and the Public Service Freedom to Negotiate Act (PSFNA).

Other recommendations include increasing the federal minimum wage — which has lingered at $7.25 since 2009 — and paring down the use of things like mandatory arbitration agreements. The report also calls for increased antitrust enforcement, which could tackle the mergers of big companies and the resulting lack of competition for workers.

"I think what we're learning that the nature of the labor market is that employers are going to have a degree of labor power, and one of the ways to push against that is broader-based policies," Arindrajit Dube, an economics professor at University of Massachusetts Amherst, told Insider.

Indeed, while things like raising the federal minimum wage would have an impact, progress there is still stalled (and has been for 13 years). Dube's proposal: Implementing wage boards, where governments work with industries to create wage standards for that whole industry — something that a handful of states have already implemented.