Bryan Caplan  

Scott Alexander on Labor Economics

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Whenever a new semester begins, I thank the universe for good students.  Good students have four key traits:
First, good students genuinely want to learn.  They don't study material merely because they see it on the syllabus or expect it on the test.

Second, good students fight the natural human tendency to forget material right after the final exam.  Unlike most students, they consciously choose to try to remember what they learn. 

Third, good students strive for what educational psychologists call Transfer of Learning.  They earnestly try to apply what they've learned outside the classroom. 

Fourth, and perhaps most importantly, good students put Truth first.  They aren't afraid to entertain and embrace socially unacceptable ideas.
I've never taught Scott Alexander, but when I read his take on labor economics, I immediately identified him as a most excellent student.  It's an extensive critique of what Scott sees as the libertarian view of labor-capital relations.  In truth, though, his critique is broader, because Scott targets models that economists across the political spectrum take largely for granted. 

Since my latest labor economics class is now in session, this seems like a great time to sift through Scott's critique of my subject.  Since most of you haven't read what he has to say, though, this post will merely reproduce his key sections.  I'll respond later this week.  Here's Scott:

2.5: How do coordination problems justify labor unions and other labor regulation?

It is frequently proposed that workers and bosses are equal negotiating partners bargaining on equal terms, and only the excessive government intervention on the side of labor that makes the negotiating table unfair. After all, both need something from one another: the worker needs money, the boss labor. Both can end the deal if they don't like the terms: the boss can fire the worker, or the worker can quit the boss. Both have other choices: the boss can choose a different employee, the worker can work for a different company. And yet, strange to behold, having proven the fundamental equality of workers and bosses, we find that everyone keeps acting as if bosses have the better end of the deal.

During interviews, the prospective employee is often nervous; the boss rarely is. The boss can ask all sorts of things like that the prospective pay for her own background check, or pee in a cup so the boss can test the urine for drugs; the prospective employee would think twice before daring make even so reasonable a request as a cup of coffee. Once the employee is hired, the boss may ask on a moment's notice that she work a half hour longer or else she's fired, and she may not dare to even complain. On the other hand, if she were to so much as ask to be allowed to start work thirty minutes later to get more sleep or else she'll quit, she might well be laughed out of the company. A boss may, and very often does, yell at an employee who has made a minor mistake, telling her how stupid and worthless she is, but rarely could an employee get away with even politely mentioning the mistake of a boss, even if it is many times as unforgivable.

The naive economist who truly believes in the equal bargaining position of labor and capital would find all of these things very puzzling.

Let's focus on the last issue; a boss berating an employee, versus an employee berating a boss. Maybe the boss has one hundred employees. Each of these employees only has one job. If the boss decides she dislikes an employee, she can drive her to quit and still be 99% as productive while she looks for a replacement; once the replacement is found, the company will go on exactly as smoothly as before.

But if the employee's actions drive the boss to fire her, then she must be completely unemployed until such time as she finds a new job, suffering a long period of 0% productivity. Her new job may require a completely different life routine, including working different hours, learning different skills, or moving to an entirely new city. And because people often get promoted based on seniority, she probably won't be as well paid or have as many opportunities as she did at her old company. And of course, there's always the chance she won't find another job at all, or will only find one in a much less tolerable field like fast food.

We previously proposed a symmetry between a boss firing a worker and a worker quitting a boss, but actually they could not be more different. For a boss to fire a worker is at most a minor inconvenience; for a worker to lose a job is a disaster. The Holmes-Rahe Stress Scale, a measure of the comparative stress level of different life events, puts being fired at 47 units, worse than the death of a close friend and nearly as bad as a jail term. Tellingly, "firing one of your employees" failed to make the scale.

This fundamental asymmetry gives capital the power to create more asymmetries in its favor. For example, bosses retain a level of control on workers even after they quit, because a worker may very well need a letter of reference from a previous boss to get a good job at a new company. On the other hand, a prospective employee who asked her prospective boss to produce letters of recommendation from her previous workers would be politely shown the door; we find even the image funny.

The proper level negotiating partner to a boss is not one worker, but all workers. If the boss lost all workers at once, then she would be at 0% productivity, the same as the worker who loses her job. Likewise, if all the workers approached the boss and said "We want to start a half hour later in the morning or we all quit", they might receive the same attention as the boss who said "Work a half hour longer each day or you're all fired".

But getting all the workers together presents coordination problems. One worker has to be the first to speak up. But if one worker speaks up and doesn't get immediate support from all the other workers, the boss can just fire that first worker as a troublemaker. Being the first worker to speak up has major costs - a good chance of being fired - but no benefits - all workers will benefit equally from revised policies no matter who the first worker to ask for them is.

Or, to look at it from the other angle, if only one worker sticks up for the boss, then intolerable conditions may well still get changed, but the boss will remember that one worker and maybe be more likely to promote her. So even someone who hates the boss's policies has a strong selfish incentive to stick up for her.

The ability of workers to coordinate action without being threatened or fired for attempting to do so is the only thing that gives them any negotiating power at all, and is necessary for a healthy labor market. Although we can debate the specifics of exactly how much protection should be afforded each kind of coordination, the fundamental principle is sound.

2.5.1: But workers don't need to coordinate. If working conditions are bad, people can just change jobs, and that would solve the bad conditions.

About three hundred Americans commit suicide for work-related reasons every year - this number doesn't count those who attempt suicide but fail. The reasons cited by suicide notes, survivors and researchers investigating the phenomenon include on-the-job bullying, poor working conditions, unbearable hours, and fear of being fired.

I don't claim to understand the thought processes that would drive someone to do this, but given the rarity and extremity of suicide, we can assume for every worker who goes ahead with suicide for work-related reasons, there are a hundred or a thousand who feel miserable but not quite suicidal.

If people are literally killing themselves because of bad working conditions, it's safe to say that life is more complicated than the ideal world in which everyone who didn't like their working conditions quits and get a better job elsewhere (see the next section, Irrationality).

I note in the same vein stories from the days before labor regulations when employers would ban workers from using the restroom on jobs with nine hour shifts, often ending in the workers wetting themselves. This seems like the sort of thing that provides so much humiliation to the workers, and so little benefit to the bosses, that a free market would eliminate it in a split second. But we know that it was a common policy in the 1910s and 1920s, and that factories with such policies never wanted for employees. The same is true of factories that literally locked their workers inside to prevent them from secretly using the restroom or going out for a smoking break, leading to disasters like the Triangle Shirtwaist Fire when hundreds of workers died when the building they were locked inside burnt down. And yet even after this fire, the practice of locking workers inside buildings only stopped when the government finally passed regulation against it.

Comments and Sharing

COMMENTS (31 to date)
Mike Hammock writes:

It sounds like he's proven too much. Having shown that without government intervention, businesses would terribly mistreat their workers, shouldn't he be puzzled that most businesses pay more than minimum wage and provide various amenities that are not required by regulation?

E. Harding writes:

I found Scott's critique of libertarianism to be pretty bad, and uncharacteristic of his later work.
I addressed a similar argument in the comments at
This blogger is literally the most common-sensical guy ever. That's why he should be read.

"We previously proposed a symmetry between a boss firing a worker and a worker quitting a boss, but actually they could not be more different."
-This part's pretty bad; it actually takes quite a long time to hire new workers in America.

I think the key to understanding this apparent high bargaining power of employers is this quote (from my blog's quotes page) by some Marginal Revolution commentator, meant to apply to explaining sticky wages (which are very real):
“Caplan’s post is an illustration of a well-known phenomenon in psychology. People would rather choose $500 for sure over a 50% chance of getting $1000 and 50% chance of getting nothing. However, they’ll take the chance of losing $1000 or nothing over knowing for sure that they’ll lose $500.

Similarly, workers feel better taking the chance that they’ll be among the 5% laid off, instead of knowing for sure that their wage will be cut by 5%.”

Also, there are many government regulations which discourage hiring, so Scott's hardly criticizing a market of free and open entry.
Also, Scott's points leave a massive, gaping problem: the paucity of labor unions in the real world.

Scott also fails to understand that poor working conditions in the early 20th century were caused by poverty; the free market, if implemented today, would mostly get rid of such things.

Mike Hammock also has a good point, but not a decisive one. Maybe employers deal with a state between endless strikes due to labor shortages and endless reserved army of unemployed.

Cole writes:

I'm excited to see this develop. Scott has been getting into arguments lately with people that attack his character and then make some good points. I find Scott's responses to these to be less enjoyable because he has to take time defending his own character before getting to the good points. I'm glad you started with praise for him, it should keep this all civil.

I'm also curious what route you are going to take in criticizing this. To me there are a few good approaches:

1. His initial comparisons of heartless bosses and stressed out employees come out as one-sided. He is comparing the boss firing someone and the employee being fired. In one case its what the boss wanted, and in the other case its not what the employee wanted. A better comparison would be to compare a boss firing someone with an employee quitting. In both cases its asking 'how do you feel about ending an employment contract that you dont like'. Or it should ask how a boss feels about an employee quitting vs how it feels to be fired. In that case it would be asking 'how do you feel about having an employment contract ended when you wished it would continue'
(Scott might counter that the original point about the experiences being unequal still stands, they are just less unequal.)

2. The effect of long term competition on the market. The boss may not care about being 99% less productive, but if his competitor picks up that employee and becomes 101% productive then his competitor will have the edge they need to slowly win the market in the long term.
(Keynes and Scott could counter that the short term matters.)

3. Coordination problems in getting the correct government response. There may be a larger more difficult coordination problem with getting good policy. (Scott could counter by just saying there are already laws on the books solve coordination problems that libertarians want to get rid of).

4. You could point to some of Scott's writing's and claim that he actually has a pretty strong belief in people's ability to solve coordination problems. (He could counter that the use of the government in these cases is how we have solved the coordination problem, so there is no need to do it at a small scale)

James writes:

This seems to be written by someone who really does not know the other side's arguments. I have never encountered any economist, libertarian or otherwise, who claimed the relationship between workers and bosses was symmetrical.

Labor unions do seem to improve the compensation and working conditions of unionized workers but there is no reason to believe that these gains to union workers come at the expense of their employers who were previously enjoying a position of asymmetrical bargaining power. The benefits associated with being in a union seem to come at a cost which is borne by consumers, non-unionized workers and shareholders. If the costs of complying with union demands did come at the expense of profits, that would be an unsustainable condition and capital would flow away from unionized labor, either to non-union labor or to industries that are less labor intensive.

More puzzling (for someone who believes the pro union pro government narrative) is why union membership is so common among those working in the public sector. Is the government just another employer oppressing its employees or is it an instrument for the advancement of the interests of workers? When public sector unions negotiate benefits for their workers, at whose expense do those benefits come?

Everything else about this seems to be based on the notion that employers absolutely have the upper hand in the labor market. Well, that's a theory and it generates some testable predictions. For example: no employer will provide pay or benefits in excess of what the law requires. After all workers are helpless and employers aren't going to pay higher wages at the expense of greater profits. Except that's not what we see at all. Very few jobs pay minimum wage and nearly all jobs involve other benefits above and beyond what the law requires. I wonder why, in Scott's view, shareholders do not attempt to sue executives that spend money on wages and benefits beyond what they absolutely need to.

John Thacker writes:
And yet even after this fire, the practice of locking workers inside buildings only stopped when the government finally passed regulation against it.

Well, not stopped. The fire in the chicken plant in Hamlet, NC where workers were trapped because the exit doors were locked certainly happened after there was regulation against it (1991), though Scott can certainly claim that tougher regulation or inspections would have helped.

Scott's claim would certainly imply that, for example, industrial safety and rates of accidents should see sharp step-level changes brought about by changes in legislation or regulation, with nearly no changes in times with little change. An opposing possibility would be evidence of dramatic improvements in safety and fatality rates in times without regulation, as well as evidence of a risk premium paid to workers in dangerous fields. There is at least some evidence of the former (also here), though certainly increased regulation around 1970 does seem to have had an effect as well. The strong version of his argument that regulation is necessary since *no* bargaining power belongs with the workers, etc. seems false. I don't believe that any economists would argue against the idea that regulation can increase safety, though generally they would point to the various tradeoffs involved.

Alex writes:

Why are most nonunionized workers paid more than the minimum wage?

Graham Peterson writes:

I never got "exchange partners always have precisely the same elasticity of demand for each other's products" out of econ 101.

My takeaway from economics was that workers have more bargaining power than we usually presume and that employers have less than we usually presume, which in the long run means that workers bid up their wages. Moreover, there's no stable class of bosses always enjoying asymmetrical bargaining power because people are always moving in and out of that cohort.

What would be nice to know is how often bosses berate their employees; what percentage of bosses ever even take that tack? How many bosses avoid firing people they'd like to because it's unpleasant to? Do bosses consciously maximize and pay employees as little as possible, or do they pay them as much as possible out of sympathy, loyalty, and fellow feeling, within the constraints of the company?

Daniel Fountain writes:

Bargaining power comes down to the relative consumer and producer surpluses at a job and hence the ability to transform perceived supply and demand.

Assume the employer is obtaining consumer surplus of X and the worker is obtaining producer surplus of Y. If X > Y then the employee has more bargaining power than the employer because the employee is closer to being indifferent to working there.

The main problem with employee bargaining power relative to employer bargaining power is that employees bear the vast majority of the transaction costs associated with finding a new job. This leads to, counter-intuitively, workers having harder time having a higher opportunity cost and thus they have a higher producer surplus than otherwise and employers a lower consumer surplus.

Collective bargaining does nothing to address this fundamental problem. All it does is increase the transaction cost for employers and further increase the producer surplus of employees.

With respect to protecting workers from signing contracts that are not in their best interest (like working for a company that locks them in during fires) there is a case to be made for regulation. However a better solution would be educating people on reading their employment contracts. In a lot of the low paying jobs I took as a high-school and college student almost all of them were surprised I took the time to read the contracts in full.

Adam writes:

I'm just not see the typical Google employee in Scott's description.

Maybe his vignette is that of a minimum wage worker in some one-off boutique or coffee shop. The boss knows there's an army of unemployed created by wage floors--and he saps the surplus out of his employees with abuse and terror. That's not Starbucks or McDonalds. The chains can't run abuse like that--they get regulated and sued.

But minimum wage workers are less than 2.5% of workforce--and most of those work for chains. So what's Scott analyzing?--.05% and claiming it's typical?

In any case, the irony is that Scott's portraying a highly regulated situation--the minimum or low wage worker--as a situation created by free markets. Simply not the case. A firm can't extract surplus from workers in competition and open markets.

Noah Carl writes:

There is a big difference between permitting private sector unions to bargain with their employers and introducing all sorts of additional regulations concerning what employers can or cannot do.

"No doubt, if I were owner of an enterprise, and trade unions had not been invented, I would invent them. I would want someone to talk to on behalf of the workers. But I would not tolerate them taking any exclusive, monopolistic control... The real problem is that the trade unions, particularly in this country, in the course of time were granted privileges which the ordinary citizens did not have."
––Friedrich Hayek

Thomas B writes:

The nervousness of the employee vs the calm of the employer; the willingness of the employee - but not the employer - to go the extra mile, these things are consistent with an alternative explanation, which is that the employee's surplus from employment greatly exceeds the employer's surplus.

A similar point was made by Daniel Fountain at 3:06.

If the market wage for employees vastly exceeds the typical employee's reservation wage, but is only slightly lower than the typical employer's reservation wage, then getting - or losing - the job is a really big deal for the employee, but employing them is almost a matter of indifference for the employer.

I'm not saying this is necessarily the case, only that it explains the observed behavior.

If this is indeed the case, then unions cannot much increase the wage - they'll hit the employer's reservation wage. Therefore, unions would primarily turn out to be a tax on the employees, and would not be popular with employees. That is also consistent with what we observe in the real world.

Hasdrubal writes:

I kept thinking of Oliver Williamsson's take on unions while reading this, unfortunately I can't remember the exact conditions. Roughly, workers who made investments to gain firm specific skills and knowledge would gain the most from unionization since their productivity at another firm would be so much lower than at their current firm due to those investments. His example was that railroad engineers were the first to successfully unionize, while general laborers tried and failed multiple times.

Not sure that this explains the most common current unions in the USA, (public sector and large manufacturing,) those seem to be primarily political organizations. It does seem to describe the professional sports unions (NFL, NBA, MLB) pretty well, though.

I really need to reread The Economic Institutions of Capitalism.

Zeke writes:

This post seemingly views employee-employer relationships as adversarial. While that's true to an extent, most businesses would end poorly of they treat their employees terribly, all the more so when we move more to an intelligence economy where the main asset value is the workforce.

I'd argue the real competition is between employees v. employees, and employer v. employer.

Scott also focuses a lot on the interview. That seemingly is the position of either the marginal worker or the entry worker. He ignores people who interview for a job when (a) they already have a job or (b) know they easily can find one.

Nathan W writes:

I really like the 0% productivity comparison for employer and employee. It's simple to understand.

I usually try to over-simplify the matter as follows.

Management represents shareholders, which is a large group of capital holders.

Therefore, rather than negotiate one by one, workers also need to negotiate collectively.

This brings together similarly large amounts of capital and labour in negotiating units of similar strength.

The anti-union alternative is that capital holders can negotiate collectively (via the board and management structures) whereas labour is disallowed from negotiating collectively. This is an inherently unequal negotiating power, and hence the need for unions if we are to reach a market optimum negotiated by players of equal strength.

Alternatively, decent labour laws can stand in the place of unions, in particular protections against getting fired for complaining or trying to organize collectively.

Nathan W writes:

Some Christians try to say that it is against their religion to work with a union. They mostly rely on various passages/scripture which order slaves to be obedient to their masters.

Nathan W writes:

Harding says - "Similarly, workers feel better taking the chance that they’ll be among the 5% laid off, instead of knowing for sure that their wage will be cut by 5%.”"

There's a big difference between a hypothetical asked to uni students in a behavioural economics lab room and the actual decisions made in the world.

Arguably, there are fewer labour unions than before because a) the government has stepped in and now provides many protections so they are less needed, and b) in many jurisdictions the legal system is set up in a way that makes it easy to bust unions but difficult to build one. Aka, anti-union rhetoric has done well in recent decades, plus they are also less necessary than they were generations ago.

You fail to understand that the free market was itself the cause of the poor working conditions. Regulations were, and are, needed.

I've been fired twice.

Once I mentioned to a farmer that his safety equipment for spraying insecticide was faulty and needed to be upgraded. I got fired that day. A second time, I mentioned to some fellow employees that we got fairly low pay for the wide variety of high-skills tasks we did, and which earns lots of profits for the employer. I got fired the next week. That's the free market, but I was able to leverage labour regulations to negotiate a payoff in one of those cases. Organized labour in politics made it possible for me to negotiate for myself.

LD Bottorff writes:

During my thirty-plus years working in corporate America I have seen the following:
1. An employee who routinely took ninety minute lunch breaks. This employee wasn't very productive, but the employer was still reluctant to fire her. When I left, she was still working there.
2. An employee who routinely slept on the job and whose snoring was loud enough to disturb surrounding workers. The company kept transferring her around, hoping to find a better fit for her talent.
3. An employee who requested, and got permission to work from home so he could take care of his grandson.
4. A manager who was regularly drunk on the job. He was never fired, and retired with full benefits after a career of more than thirty years.

The last full-time employer I worked for had strong penalties for anyone who quit and took other employees away to start a new business. If employees are so easily dismissed, why would this policy be needed? They also had some penalty for leaving without two-weeks notice. If the employer/employee relationship is so one-sided, why would this be?

Employers need productive employees. That is why an employee with years of proven productivity will be allowed the flexibility to work from home. Employers are humans, and like most humans, they are reluctant to end relationships. For this reason they are sometimes reluctant to fire obviously bad employees.

Scott does provide a lot of thoughtful reasoning, but his explanation of why government regulation and labor unions are needed still leaves me in the dark regarding why these organizations will actually act in the best interests of those they are supposed to represent. Was he exposed to public choice? Many of the problems he describes in the boss/employee relationship can just as easily arise in the union-leader/union-member relationship. Do you think your job is in trouble if you talk back to your boss? How about if you mount a campaign questioning the honesty, effectiveness, or competence of your local union president?

Nathan W writes:

I currently work in a position that employers struggle to fill. I get to ask questions like "does my free apartment come with a cleaning service?" or "can you bunch together important meetings so I can every Friday off?"

I also solo freelance in an internationally competitive field on the side (translation), where quibbling details that amount to pennies or dollars can win/lose clients/bids.

The point is that different industries are, well, different. Some of them absolutely require protections for workers. In translation, I know that many people take contract jobs on terms that break labour law in nearly every country in the West.

And the point of that is that upholding labour standards in the "gig economy" is going to be a struggle. If I knew how to fight for it I would.

Sieben writes:

Doesn't it make sense for bosses to have the better end of the deal? In general, they are more educated, motivated, and older than employees.

Jesse writes:

Vastly more employment relationships end by the employer quitting than by involuntary termination. When discussing who has the "upper hand," I think that deserves a mention.

I've worked many jobs. Some minimum wage, some cushy salary+ bonus. I've yelled at bosses, been chewed out, got canned once, quit in a huff a couple times, etc... But the vast majority has been pleasant cooperation and just fine.

I'm a programmer, so my recent experience is biased. But I can't imagine Scott lives in the real world - he strikes me more like my old sociology prof, who had all sorts of expert, third-hand/theoretical knowledge about world outside the university. I could be totally wrong, but that's my impression.

Swami writes:

I am glad to see you highlight a passage of Scott's which always seemed wrong to me. Pardon my wording as I am an entrepreneur/businessperson not an economist.

The imbalance between workers and employees isn't that different from the imbalance between consumers of food (all of us) and retailers. All they have to gain or lose is small blip on profits, while as consumers our lives and those of our loved ones depends upon getting food. The asymmetry should -- according to Scott's thinking -- lead to a situation where consumers are taken advantage of. Oddly, margins on food are pretty much what you would expect based upon the risk adjusted rates of return. Food is cheap and plentiful.

Scott ignores two things. First, just as there is competition between retailers to sell food, there is competition for between employers to hire workers. The price isn't set by the power asymmetry but by supply and demand of employees and employers. And employers do not have such imbalanced power asymmetry issues between each other, nor do employees normally have asymmetries compared to other employees. Thus the wage of the marginal employee is attracted toward the risk adjusted rate of return of employing a worker.

The second thing Scott overlooks is that his asymmetry works both ways. The importance of a good job, good working conditions and good benefits is indeed much more important to the employee. Thus the employee is incentivized to to seek out better terms from competing employers. But again, the true asymmetry we should be concerned about is between workers, not between employers and employees.

I have no issue with voluntary unions in the private sector. Seems a good way to coordinate the collective interests of workers. Mandatory unions (backed by threats of violence -- usually by the state) and public sector unions are forms of privilege and exploitation. They privilege certain groups of workers over others as well as over non members. They effectively become an exploitative cartel which seeks unfair rents at the expense of consumers and non members (such as prospective hires). Thus a mandatory Union or a public service Union introduces the very asymmetry which Scott mistakenly opines against.

I am also open to the concept of some impartial, parsimonious rules on employee working conditions. The details on how to set these rules would be a separate post, but would involve the concepts of subsidiarity, jurisdictional competition and super majorities.

Jesse writes:
Vastly more employment relationships end by the employer quitting than by involuntary termination

Sorry - I meant "employee" not "employer."

More importantly, I should walk back my from-the-hip claim that "vastly more..." jobs are quit than end in firing. That's only from my personal experience - I see at least a 10:1 ratio, but I wrongly generalized. I'd be interested if someone knew the real numbers. I couldn't find data that didn't count layoffs (don't really apply), or aggregate "voluntary quit" data.

E. Harding writes:

"There's a big difference between a hypothetical asked to uni students in a behavioural economics lab room and the actual decisions made in the world."
-Not this time.
"You fail to understand that the free market was itself the cause of the poor working conditions. Regulations were, and are, needed."
-Think of your firings as your former employers signaling their incompetence. Regulations would have simply prevented that signaling from taking place. Why wouldn't the farmer replace the spraying system equipment, anyway? Wouldn't it have benefited him in the long run?
"anti-union rhetoric has done well in recent decades"
-But why?
"Therefore, rather than negotiate one by one, workers also need to negotiate collectively."
-Capital unions makes capital more efficient due to economies of scale. Do labor unions make labor more efficient due to economies of scale?
I think of that comparison as a massive non-sequitur for that reason. In any case, in a situation with multiple unions, the long run wouldn't look so different from no unions.

Swami writes:


Allow me to riff off your comment.

"You fail to understand that the free market was itself the cause of the poor working conditions. Regulations were, and are, needed."

I am fine with some regulation, but still take exception to your comment. Entropy is the cause of life's hardships, not free markets. Free markets are an imperfect way (one of many) to coordinate our actions to overcome the effects of nature toward decay and death and the fact that we constantly have to struggle and labor to overcome nature. Decentralized markets, along with science and government are ways to coordinate our actions for collective benefit. Over the past two hundred and fifty years, those societies using the tools and norms of liberalism (markets, science and open access government) have seen lifespan double and average living standards increase by a factor of twenty or more. Those not embracing these institutions have lagged -- though still drafting on the problem solving creativity of their liberal neighbors.

Markets improved working and living conditions, at least as moderated by the other two key institutions (there are to the best of my knowledge no examples of markets stripped of regulation and science).

Nathan W writes:


I don't NECESSARILY agree with you for loss versus reward differences, I'm saying that the matter is not resolved. In practice, it will depend on the circumstance. In a bad job market, a company who opens the books with the union may very well be able to negotiate significant pay cuts in order to protect jobs. I fail to recall who and when, but I have certainly read about this occurring quite a few times. I think in a better job market, what you take for granted regarding preferences for losses and gains would in fact occur in these case: if you can easily get another job, employees may risk being one of the 5% and reject the pay cut. It's a bit more complicated though, 'cause unions are their own entities, and they may advise against employee interest in order to protect the size of their membership (accept the pay cut) when in fact it could be better to accept some job losses with workers finding new jobs.

The matter of spraying equipment was for worker safety. He didn't want to spend the money. He was a really bad employer and in fact it only cut short my job by a couple weeks 'cause I was leaving anyways.

As for scale economies and capital. You bring up a good point. I'll have to think that one through. Unions have a strong interest to facilitate access to training which would improve the ability of members to pay dues, and this is all the more likely to happen with a larger union, but I think you believe quite strongly in the perfection of markets and will simply counterargue that the firm would have organized that training anyways for the benefit of their own bottom line. Ignoring scale economies, I think my point of equal negotiating power is valid, but it would also be ignorant to ignore scale economies. So Foxconn might have some legitimacy in trying to suppress union power because they can deliver scale economies facilitated by further research investments and you don't want a "too high" labour bill to get in the way of that, but Starbucks and Macdonalds are left with the "threat" that they will replace labour with technology (hardly a bad thing in the long run, in my opinion).

Nathan W writes:


I strongly agree with your complementary points. Markets are very good at increasing the pie, notably by rewarding innovation and by ridding ourselves of low-value activities. You are right to emphasize the gains of the last century under markets, and among others, the rapid gains in China AFTER allowing a greater role for markets in my mind stands as very strong proof of this point.

However, there are many cases where markets a) introduce fixable problems AND b) the benefits of fixing those problems outweigh the costs. The real dirty stuff comes when the process of "fixing problems" has winners and losers. Ideally, the "losers" in regulation are people who unscrupulously take advantage of markets, and the "winners" of the interventions are groups who, for some reason or another (probably coordination problems, often linked to lack of education or money) were taken advantage of. There are also cases where you don't really have people being "taken advantage of", but where a large portion of society comes to a decision that in a wealthy society, our barbers, burger flippers, meat choppers and gardeners "deserve" an income that will afford them a certain standard of living (perhaps their children should be able to afford the choice between a liberal arts degree and computer science, for example).

I'm not sure where exactly unions, per se, figure into this equation, but given the orchestrations of corporations in the political process, I think it is natural to assume that "too many" people will get ground up "too much" in the absence of strong orchestrations of organized labour to counterbalance the interests of capital holders.

Floccina writes:
We previously proposed a symmetry between a boss firing a worker and a worker quitting a boss, but actually they could not be more different. For a boss to fire a worker is at most a minor inconvenience; for a worker to lose a job is a disaster. The Holmes-Rahe Stress Scale, a measure of the comparative stress level of different life events, puts being fired at 47 units, worse than the death of a close friend and nearly as bad as a jail term. Tellingly, "firing one of your employees" failed to make the scale.

There are though, some workers who are so good at their jobs that in the view of their fellow workers can get away with murder and call the shots at least for themselves. I know of a plumber like that. He often goes on benders and does not show up for work a 2 or 3 days in a row, but he is so fast and does error free work that his boss (my friend) keeps him. I have known computer programmers like this. They write error less code the first time. There are other computer techs who can absorb new configurations so fast that they can come and leave as they please. I have worked with cooks like that also.

Swami writes:


I found much wisdom in your reply. But to continue the dialectic, my concern with zero sum games is that they self amplify into extremely destructive negative sum situations. When there are winners and losers determined in great part by the referees, the game essentially changes so that winning depends upon playing to the refs. Thus both sides switch from trying to create value for consumers to trying to curry favor from the refs. The name of the game becomes negative sum offense and defense in the realm of regulatory wins, and the hapless fool trying to actually deliver good service to consumers is left bloody on the side of the field.

In other word, the dynamic of actively using regulations to determine winners and losers in the end leads to everyone losing. It diverts a positive sum game into a negative sum one.

That said, I agree with parsimonious, fair, consistent rules which determine how players can operate on the field. The rules should be impartial with no attempt to determine winners and losers or to put a thumb on the scales, but instead to establish a dynamic where the play leads to improved consumer welfare. If we are concerned with the relative success or failure of the producers, that is something best left outside of the regulation of the market. For example, it can be in safety nets which we agree to prior to the game beginning. These can be private or public, probably a bit of both.

"I'm not sure where exactly unions, per se, figure into this equation, but given the orchestrations of corporations in the political process, I think it is natural to assume that "too many" people will get ground up "too much" in the absence of strong orchestrations of organized labour to counterbalance the interests of capital holders."

I guess competing factions is better than one faction, but it still seems less desirable than emphasizing that we want neither crony capitalism nor crony labor. Both are rent seeking activities which lower the size of the pie. I would vote no cronyism, first. If there had to be cronyism (active regulatory interference in winners and losers in the economic forum) then I would add that someone needs to create an organization representing the interests of consumers. Otherwise we have two sides of the producer function sharing the spoils. Indeed, I am often puzzled why classical liberals don't organize on behalf of consumers. That seems to be the political move necessary to counteract rent seeking by the various employee and employer factions.

TallDave writes:

Good point Jesse -- it's too often assumed the employer is in the position of strength, but empirically employers are more likely to need the position filled than the employee is to need the position.

And note that virtually all of the million or so pages of labor regulation exist to shackle the employer rather than the employee.

Nathan W writes:

@ Swami

"Thus both sides switch from trying to create value for consumers to trying to curry favor from the refs."

Yeah, rent seeking is a big problem, even in an advanced modern capitalist democracy such as the USA.

As for the issue of consumer advocates, I think the current TPP "negotiations" are a case in point. Not only is organized labour left out of the loop, but consumer advocate organizations (I am on the email lists of a few) are completely in the dark and can only engage in guesswork while trying to figure out which buttons to push to try to ensure that consumer interests are represented in the bargain. In the absence of information, this leads me to oppose the TPP even though I accept free trade orthodoxy with very limited reservations.

Dan L. writes:
Why are most nonunionized workers paid more than the minimum wage?

Because they're competing with unionized workers who tend to drive wages up.

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