Regulation, market power, and labor earnings: Evidence from the cable television industry

Regulation, Market Power, and Labor Earnings: Evidence from the Cable Television Industry

S T E P H A N I E CROFTON, DAVID L A B A N D , and JAMES L O N G

Auburn University, Auburn, AL 36849

Labor economists have suggested that employee earnings may be relatively higher in firms possessing market power, such as that which may stem from government regulation of prices or entry of firms. We test this hypothesis, which previously has been investigated in the context of industries such as trucking and air transportation, using earnings data for the cable television industry. Our empirical.findings suggest that cable TV employees capture some of the benefits producers receive from regulations restricting competition.

I. Introduction

Labor economists have suggested that firms with product market power may pay higher wages than their competitive counterparts, and empirical research has offered several examples of this phenomenon. Due to the fact that government regulation is a major source of market power in the U.S., many of the studies in this area have examined wage patterns in industries which have been or currently are regulated in terms of pricing or entry of new firms. To date, empirical evidence of regulation's impact on labor earnings has come from five sectors: airlines, trucking, railroads, bus transportation, and telecommunications. We examine the effect of regulation on wage rates in a hereto- fore unexplored industry, cable television. It is generally believed that an absence of effective competition in cable television services leads to higher rates and charges. Con- sequently, our finding that labor earnings in the cable industry are positively related to cable revenue per subscriber is consistent with the hypothesis that employees receive an earnings premium when government regulates prices and controls entry.

II. Literature Review

Economists have suggested several reasons why firms with product market power may pay higher wages than a more competitive environment. For example, wages may be relatively higher in firms with large market shares because (1) workers in concentrated industries capture part of any monopoly-like profits; (2) labor costs in concentrated industries can be more easily passed on to consumers; and (3) the smaller number of firms makes it easier for unions to organize employees and raise wages (Long and Link, 1983). Furthermore, firms with monopoly power but subject to government regulation may be allowed to pay higher wages and pass these costs along via higher prices, and

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higher wages may be a device for "hiding" profits from the regulatory body (Ehrenberg and Smith, 1996). However, the resistance of monopolies to demands for higher wages may be increased by government regulations that set maximum prices to insure minimum profits (Hendricks, 1997).

Empirical evidence on the relationship between labor earnings and product market power, measured by the industry concentration ratio, is mixed. Early studies by Weiss (1966), Masters (1969), Haworth and Rasmussen (1971), Ashenfelter and John- son (1972), and Hendricks (1977) find that concentration has no statistically significant effect on wages once industrial characteristics and employee quality are held constant. In contrast, Dalton and Ford (1977, 1978), Long and Link (1983), and Hey- wood (1986) estimate that firms in concentrated industries pay higher wages than do competitive firms. Haworth and Reuther (1978) find that product market concentration raises wages only during cyclical periods of slack demand and stable prices.

A number of studies have investigated how government regulation of prices and entry affect labor earnings. Both Weiss (1966) and Hendricks (1977) find that annual earnings are relatively higher in unregulated manufacturing firms than in regulated industries on the whole, but Hendricks suggests that this result masks considerable differences across industries in the nature of regulation. For example, labor earnings have been found to be relatively higher in industries such as trucking in which regulatory authorities set minimum prices or rates and restrict entry (Hendricks, 1977, 1994; Moore, 1978; Long and Link, 1983; Hirsch, 1988). Long and Link (1983) find no overall impact on wages of regulations that set maximum prices to ensure minimum profits, as in public utilities. However, Ehrenberg (1979) estimates that telephone industry employees in New York have substantially higher earnings (and much lower quit rates, an indirect proxy for employee rents) than other comparable workers in the state.

Evidence that labor earnings may be increased by government regulation that restricts market entry is highly relevant for the cable TV industry. The Cable Commu- nication Policy Act of 1984 authorized the municipal franchising of cable services in return for a franchise fee of up to five percent of a system's gross revenues and provi- sion of channel capacity for certain uses (e.g., public education).l Local franchising authorities, often city councils, have the power to award one or more franchises within their jurisdictions and award or deny franchise renewals. Cable TV rates remained subject to regulation under the 1984 Act unless communities were supplied cable services under "effectively competitive" conditions. Despite the high degree of government regulation in the cable TV industry and the theoretical possibility that employees might be affected by these policies, labor earnings in the cable TV industry have not been previously examined.

III. Data and Methodology

Two primary methodologies have been used to estimate the effects of government regulation and market power on labor earnings. First, individual earnings and industry average wage rates at a point in time have been regressed on proxies for market power

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and government regulation and various "control" variables (e.g., unionization and employee productivity factors). A second approach used to estimate regulation's impact on wages has been an ex ante/ex post comparison using time-series data. For example, studies of the airline and trucking industries have tested for differences between labor earnings during years of regulation and labor earnings after deregulation. The history of cable TV regulation does not lend itself to the latter approach. Even during cable's period of "deregulation" between 1984 and 1992, certain cable operators were still subject to rate regulation and entry was heavily restricted as a result of municipal franchising. 2 Therefore, we estimate the effect of regulation and market power on wages in the cable TV industry using cross-sectional data on 1992 average weekly earnings of cable TV employees. Because of data limitations we use cable earnings at the state level rather than pay levels in individual municipalities or cable firms. Lacking a direct measure of the market power and extent of cable regulation at the state level, cable TV revenues per subscriber in the state is used as an inverse proxy for competitiveness. Economic research reveals that competition in municipal cable markets reduces the price of basic cable and pay television services (Beil et al., 1993; Levin and Meisel, 1991; Merline, 1990). Hence, we assume that cable TV operators facing the least amount of competition will charge higher rates and generate more revenue per customer, other factors the same.

Two alternative revenue measures are used as regressors in the cable earnings model. The first explanatory variable is the sum of basic cable subscription fees and installation, startup, and reconnect fees per customer in 1992. Recognizing that actual cable revenues are an imperfect proxy for market power and higher-than-competitive profits, since cost conditions may dictate higher cable rates and fees, we create a revenue "residual" as an alternative regressor. The revenue residual is the difference between actual 1992 cable revenues and the predicted subscription, installation, startup, and reconnect fees per customer, the latter generated by regressing cable revenues per subscriber on state per-capita income and the number of miles of cable (plant) laid per subscriber in the state. 3 Mayo and Otsuka (1990) and Beil et al. (1993) have used income and plant miles as proxies for cable demand and the costs of supplying cable. The larger the residual cable revenue per customer, the higher the cable revenues not explained by demand and supply conditions, so we expect this explanatory variable to be positively related to the market power of cable firms in the state.

The cable earnings regression includes a number of control variables in addition to the cable revenue variables described above. The primary control factor is the average weekly earnings of private wage and salary workers in the state, which accounts for interstate differences in the opportunity cost of cable television employment as well as cost-of-living factors that may influence general wage rates. The average number of employees per cable television establishment in the state is included as a proxy for firm size, a factor known to influence wages (Brown and Medoff, 1989). The percentage change in the number of basic cable subscribers between 1988 and 1992 is included to control for the growth in the demand for cable workers and cable service. Finally, the average unemployment rate in 1992 serves as a proxy for overall economic conditions and aggregate labor demand in the state.


Cable revenue data by state were obtained from the U.S. Department of Com- merce (1996). All earnings data, number of cable industry employees, and number of cable establishments by state were taken from the U.S. Department of Labor (1994). Data on cable television subscribers and miles of plant in each state were reported in Television Digest (1989, 1993), State unemployment rates and per-capita incomes were obtained from the U.S. Department of Commerce (1993). Due to nonreporting of some data in certain states, the sample used to estimate the cable earnings regression con- tained only 45 states. An Appendix reporting summary statistics and the data used in the statistical analyses are available from the authors.

IV. Empirical Results

The cable earnings equation was estimated using ordinary least squares regression and, when necessary, an appropriate correction for heteroscedasticity was made. A variety of specifications with combinations of logged and unlogged variables were estimated. The empirical results are reported in Table 1. Equations (1) and (2) use the actual average weekly earnings of cable employees and all private sector workers in the state, whereas equations (3) and (4) use the natural logs of cable and private earnings. The earnings of cable industry employees are directly related to both cable revenue variables, and three of the four regression coefficients are significant at the 5 percent level. The earnings of cable employees increase with the level of wages paid in the state, which is the expected result since cable firms must cover their employees' opportunity costs. The coefficients of the cable subscriber growth variable are always positive while the state unemployment rate always has negative coefficients, but they are only significant in the unlogged models. The average establishment size in the cable industry has the anticipated positive sign but is never statistically significant. In equations (5) and (6) the dependent variable is the relative wage of cable workers, i.e., average cable earnings divided by average private sector earnings in the state. Both the actual cable revenues per subscriber and the cable revenues residual are positively related to relative earnings in the cable industry, and each variable's coefficient is significant at the 5 percent level. A higher unemployment rate is associated with lower relative wages for cable workers, but cable subscriber growth and cable establishment size are unrelated to cable employee relative wages.

The positive coefficients of the cable revenue variables imply that regulation and market entry barriers that raise cable television subscription fees benefit employees in the cable industry. For example, equation (1) indicates that a $100 increase in annual basic cable revenues, installation, and related charges per subscriber increases weekly earnings by $31.49, an annual benefit to cable employees of $1,638. Equation (3) reveals that a $100 increase in actual cable revenues per customer is associated with a 5.5 percent increase in the average weekly earnings of cable industry workers, an annual earnings premium of $1,644. Expressed differently, equation (3) implies an elasticity of weekly pay in the cable TV industry with respect to revenue per subscriber of 0.147. 4 Equations (2) and (4), which use the cable revenue residual, our preferred proxy for

S T E P H A N I E C R O F T O N , D A V I D L A B A N D , and J A M E S L O N G 673

Table 1

Estimated Determinants of Average Weekly Earnings of Cable Television Employees in 1992

(t-statistics in parentheses)

Explanatory Variable ( 1 ) (2) (3) (4) (5) (6)

Annual cable 31.49** - - 0.055** - - 0.060** - - r evenue p e r (2.08) (2.44) (2.34) subscriber ($100)

Cable revenue - - 28.90* - - 0.050** - - 0.061 ** residual ($100) ( [.71 ) (2.14) (2.27)

Private wage and 0.919"** 1.036"** 0.780*** 0.882*** - - I salary weekly earnings (4.63) (5.21) (3.97) (4.55)

Cable employees 1.123 0.937 0.002 0.002 0.707E-03 0.108E-02 p e r establishment (I.49) (1.17) (1.02) (0.84) (0.41) (0.64)

1988 to 1992 change 0.096** 0.072* 0.018E-02 0.014E-02 0.012E-02 0.011 E-02 in number of cable (2.17) (1.67) (1.59) (1.26) (1.08) (1.06) subscribers (%)

State unemployment -8.793* -9.691 * -0.016 -0.018 -0.023* -0.022* rate (%) (-1.91) (-1.94) (-1.36) (-1.49) (-1.89) ( 1 . 7 9 )

28.150 68.499 1.339 0.884 1.078"** 1.219"** (0.39) (0.93) (I.19) (0.79) (10.47) (14.30)

0.64 0.63 0.66 0.65 0.11 0.10

16,40 15,82 17.78 16.99 2.35 2.26

Intercept

Adjusted R 2

F

Notes: See text for variable definitions and sources. *(**, ***) Significant at the ,10 (.05, .01) level, two-tailed test.

market power, suggest that industry regulation conveys annual earnings gains to cable TV employees that are slightly smaller: $1,503 and $1,487, respectively.

V. Summary and Implications

Regulation of the cable television industry has been analyzed in depth with regard to economic efficiency and consumer welfare. But, to our knowledge, our study is the first investigation of how regulation affects labor earnings in the industry. We were forced to measure the extent of regulation on an indirect basis, using the levels of actual and "unexplained" cable revenue per subscriber to proxy the market power of cable TV operators. Our empirical results support the argument that employees capture, via higher wages, some of the benefits that firms receive from regulations restricting competition and enhancing market power. Given our data limitations, this finding should perhaps be regarded as tentative and as a foundation for future research on this topic.


The 1996 t e lecommunica t ions law author ized the Federa l C o m m u n i c a t i o n s C o m -

miss ion to regulate cable TV rates for a three-year per iod ( through March 31, 1999),

after which t ime it was assumed that compe t i t i on a m o n g cable, local , and long-dis-

tance te lephone companies would effect ively restrain price increases. C o n s u m e r groups

bel ieve that widespread compet i t ion to cable has not mater ia l ized and thus want pr ice

controls to cont inue. The cable industry has counte red that recent cab le rate increases

in the 7 percent range reflect increased p r o g r a m m i n g costs and expenses o f upgrading

cable TV systems; price increases o f 4 to 5 percent year ly are p red ic ted after de- regu-

lation. 5 If our findings are correct , some of the benefits consumers wou ld rece ive f rom

increased compet i t ion that l imits cable T V price inflat ion wou ld be paid for by exist-

ing cable industry employees .

N O T E S

ISee Beil et al. (1993) for additional discussion of the Cable Communication Policy Act of 1984.

2See Boudreaux and Ekelund (1994) for additional information concerning regulatory provisions governing the cable industry during this period.

3The regression estimates were

Revenues per subscriber = - 1.176 + 1.184 E-04 Per capita income ($100s) (~).83) (2.81)

+ 71.339 Miles of plant per subscriber (1.94)

adjusted R 2 =. 1002 F = 3.56

4For comparative purposes the log of cable earnings was also regressed on the log of cable revenue per subscriber. The estimated coefficient, 0.141 (t value = 2.02), is almost identical to the calculated cable revenue elasticity value reported in the text.

5See Opelika-Auburn News, February 10, 1999.

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Regulation, market power, and labor earnings: Evidence from the cable television industry