January 1, 2017The Priority Resolution
December 31, 2016Gary Cohn on the Chinese currency
December 31, 2016Covenants without the Sword?
December 31, 2016Reading Bastiat's Economic Sophism
December 30, 2016Scott Alexander Calls Out the New York Times
December 30, 2016Growth, or jobs for Americans?
Entries by author
Frequently Asked Questions
To recap my last post, Scott Alexander's critique of libertarian labor economics amounts to a critique of mainstream labor economics itself. If Scott were in my labor economics course, I could spend hours of classtime responding to his thought-provoking critique. Since he's not, I'll do it here. Scott's in blockquotes, I'm not.
The first sentence is needlessly philosophical. If I pay you $100 an hour to hop on one foot, is that "equal"? Is it "fair"? But the rest of the paragraph is correct. The key intuition of labor economics is that employers pay workers to do
things that employers value more than workers disvalue. "Value," as usual in economics, is equivalent to "willingness to pay." The deals they strike may violate norms of equality or fairness, but remain mutually beneficial.
Everyone talks as if bosses have the better end. But talk is very different from action. If everyone were trying to start their own businesses and hire workers, that would count as "acting as if bosses have the better end of the deal." Most workers, however, make no effort to become entrepreneurs. You could object that most workers don't have the money to open their own businesses, but most rich workers make no effort to become entrepreneurs either.
True. The boss has different negative emotions, especially fear of hiring a bad worker.
True. But prospective employees routinely ask for things much more expensive than a cup of coffee. They bargain over salary. They ask about health insurance and other benefits. At the same time, bosses fail to demand many other valuable concessions. For example, they could charge applicants for the time they spend interviewing them.
I'll admit that the details of the hiring process are complex. If I were a job candidate, I wouldn't ask for coffee either. But if the reason is deep fear of unemployment, why do I have the courage to inquire about salary and benefits? This sounds more etiquette than "bargaining power."
This is true on some jobs. But workers frequently respond to such requests with complaining or excuses. Like, "I have to pick up my son." Employers' threats to fire workers are much rarer than workers' complaining and excuse-making.
Again, true on some jobs, especially when team production is important. But requests to arrive late and leave early are common in most workplaces.
True on some jobs. But as competent workers know, there are also plenty of bosses who turn a blind eye to incompetence out of pity.
Simple explanation: If a worker messes up, the employer doesn't get what he paid for. If a boss messes up, the employee still gets paid.
"Very puzzling"? No, only mildly puzzling. Remember: If employers value a conventionally "unequal" or "unfair" outcome more than workers disvalue it, we should expect employers to ask for it and workers to accede in exchange for money. The central question for all of Scott's stylized facts, then, is: "Do employers plausibly value this outcome more than workers disvalue it?" This framing doesn't clearly predict Scott's observations (or at least suitably toned-down versions thereof), but it doesn't predict the opposite either.
This argument proves too much. It also implies that store owners will feel free to berate their customers. After all, if the store loses one customer, it still has plenty left. Indeed, Scott's 99% argument implies that waiters will feel free to berate restaurant patrons. After all, if one offended customer fails to tip you, you still get tips from your next 99 tables.
A far better story: Whenever people trade money for complex goods, the people who pay money feel free to berate and the people who receive money hold their tongues. Why? Because the people who pay cash for complex goods have plenty of good reasons to feel like they haven't gotten their money's worth. The recipients of the money, in contrast, have little reason to complain as long as they get the pay they bargained for.
Being fired is definitely very stressful. Rather than keep their workers on edge, however, most firms informally provide some insurance against this bad outcome. It's called "job security" and most workers feel like they have some (see e.g. GSS variable identifier JOBSECOK). Why do employers go out of their way to reassure their workers? The standard labor economics story: Workers value job security more than it costs employers, so employers provide job security in tacit exchange for lower wages.
It's worth adding, moreover, that firing workers is no walk in the park. Almost every workplace employs some visibly bad workers. Why haven't they been fired? Employers' squeamishness, or firing aversion, is the simplest explanation.
This "level of control" is trivial. How often do employers hit their past workers up for time or money?
Yes, it's funny. But it doesn't mean much. Informally talking to the prospective employer's current and past employees is much more informative. Again, this looks more like etiquette than "bargaining power."
This is definitely much more favorable for workers. But why is this the "proper" negotiating level? Would "proper" customer-CostCo relations require that all customers negotiate as a bloc with CostCo?
"Any negotiating power at all"? Absurd. Most workers in the U.S. aren't in unions. Most aren't even close to being in unions. Yet most U.S. workers earn well above the minimum wage. A simple supply-and-demand story can explain this. Scott's story doesn't. Furthermore, Scott's story ignores all the collateral damage of this "worker coordination," especially unemployment.
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.
Sensible points. But the same holds in romantic relationships, too.
In both cases, people are free to leave and find something better.
When they're miserable, most workers and lovers exit. Some don't.
Why don't they leave? Most obviously, because their alternatives are worse than the status quo. This isn't a problem with the
labor market or the dating market. It's a problem with having little
"Common"? Very hard to believe. But if Scott's history checked out, the question would remain: Why didn't the firms give their workers bathroom breaks in exchange for lower pay? Scott's appeal to unequal bargaining power explains nothing unless the workers in question are earning the legal minimum wage.
The fundamental problem with Scott's bargaining power story is that it predicts that workers will receive similarly crummy treatment regardless of their skill. If labor markets work poorly because employers don't need any single worker very much, why do major employers of corporate lawyers treat them so much better than they treat their janitors? If you say, "Because corporate lawyers have better outside options," you're almost a mainstream labor economist. Invoke supply-and-demand and you're there.
Scott's counter, perhaps, is that unemployment is much worse for janitors than corporate lawyers. Objectively, that's right. But subjectively, the difference is muted. An unemployed corporate lawyer, like an unemployed janitor, feels like his whole world is collapsing. If he doesn't find another job quickly, he risks his home and his family.
More importantly, the "unemployment is worse for janitors than corporate lawyers" story implies that employers prefer to hire desperate workers. In the real world, the opposite is true. Employers favor currently employed applicants over unemployed applicants, and short-term unemployed applicants over long-term unemployed applicants. That's why workers who are desperate for a new job doctor their resumes to look less desperate, not more.
Scott's challenge to labor economics made me think. And in one sense, we agree. The longer I study labor economics, the more convinced I am that the supply-and-demand model is too simple. Yet the complications that count are almost the opposite of the ones that Scott discusses. The chief failure in labor markets is that wages tend to be too high, leading to durably high unemployment.
Why? Mostly because so many workers view employers with resentment and suspicion. To contain this resentment and suspicion, employers compress wages and avoid wage cuts even when there's high unemployment. The unintended effect is to make unemployment far higher - and hence more traumatic - than it needs to be, especially for the least-skilled. It's the Tinkerbell Principle at work. Involuntary unemployment, free labor markets' chief shortcoming, exists largely because workers believe that free labor markets are bad for workers.