Bryan Caplan  

Scott Alexander on Labor Economics: Point-by-Point Reply

Questions for Luigi Zingales... Markets are self-aware...
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.

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.

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.

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.

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.  

During interviews, the prospective employee is often nervous; the boss rarely is.

True.  The boss has different negative emotions, especially fear of hiring a bad worker.

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.

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."

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.

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.

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.

Again, true on some jobs, especially when team production is important.  But requests to arrive late and leave early are common in most workplaces. 

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,

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.

but rarely could an employee get away with even politely mentioning the mistake of a boss, even if it is many times as unforgivable.

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. 

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

"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.

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.

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.

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.

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 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.

This "level of control" is trivial.  How often do employers hit their past workers up for time or money? 

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.

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."

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".

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? 


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.

"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.

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).

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 to offer. 

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.

"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.

Comments and Sharing

COMMENTS (39 to date)
Tyler Kubik writes:

Two points in this rebuttal I particularly liked: First, pointing out that if it would be absurd to negotiate en masse as a bloc of customers with CostCo, the same applies to negotiating with labor as a bloc. And second, the point that the story about bathroom breaks only makes sense in the context of a minimum wage because workers making the minimum wage could not negotiate for lower wages in exchange for concessions on working conditions.

Joe writes:

I've worked at startups frequently over the last two decades and have a few comments on the topic.

One of the big fears a company has is that if an employee leaves, it will create a mass exodus. I've seen a company of about 120 employees lose 80 people in two weeks, and another of about 100 lose 40 people in a week. These aren't typical, and there were underlying issues, but once someone makes the call to leave, it can spiral out of control. This fear isn't always grounded in this kind of experience, though.

You might think this fear applies only when a key employee or leader of the team leaves. But I've found that no matter how bad the employee is, or how much everyone hates him, management still assumes everyone will quit if he does. So management is often reluctant to get rid of even the most destructive employees out of fear of the reactions of others. Even worse, it happens frequently enough.

One reaction based on this fear is that when an employee is leaving, companies will ask them not to tell anyone they are quitting. I've gotten emails from people months after I left a company from people saying they just heard. So management often takes this fear very seriously.

This affects hiring as well. When you hire someone, you have to assume the person is going to be around for the long haul, even if they are worthless or worse. It's very stressful to hire people when the costs are so large and the benefits are so unclear. You only have a small amount of time to judge a candidate.

You might think it is somewhat easy to judge for skilled positions. You can quickly figure out if they know enough to do the job. But experienced people tend to think that they no longer need to do "real" work, and are hoping for a management position where they can just tell others what to do. This makes it very difficult to judge a prospective employee. Even prior experience with the candidate doesn't help much. I've worked with people who worked hard and had a great attitude, and five years later they've decided they already paid their dues and shouldn't have to do much work anymore.

And that assumes you are getting reasonably good candidates. The reality is that good people are always hard to find, and we spend a lot of time wondering if we've lowered our standards too much. Forget about whether someone is the best. We're just wondering if it'll be a net benefit or cost for hiring the person.

Jonathan Goff writes:


I run an 8-person bootstrapped aerospace robotics startup (yeah, I'm a masochist), and I'm glad for your rebuttal.

Two points I would make are that I agree strongly with Joe above about how stressful it can be for small companies doing hiring. In many ways since we can't typically offer fully-competitive wages, it feels like an audition on my part, to convince the prospective employee that they want to work here in spite of the risk as it is an audition on their part to convince me they have the right skills.

And while I'm sure there are businesses who don't care about firing or laying people off, that's probably my single biggest stress. I'm sure there are uncaring bosses out there, but I consider the people I work with my friends, and the time I had to lay people off because I couldn't keep enough contract work flowing to keep them on board is still probably one of my most humiliating failures I've been through.

Thanks for both the original post and the rebuttal. Not being an economist, the concerns Scott Alexander raised weren't ones I could clearly answer, but your answers helped a lot.


Glen Raphael writes:

The notion that old-timey bosses wouldn't even allow employees to take a bathroom break when they need to even though this policy provides little benefit to the bosses is a story told by people who have never worked on an assembly line or even seriously thought about how an assembly line works. It is told by people who have regular modern office jobs.

As it happens, I have been on a traditional assembly line (at a Chinese factory).

So. Suppose you are working on an assembly line that involves steps being performed sequentially on a product that moves down a conveyer belt. There are 40 people arranged along the conveyer belt. They grab the product as it arrives, do their one thing to it, then set it back on the belt so the next person can do their one thing. Each station along the line is optimized to do exactly one and only one task which the person sitting at that station knows how to do REALLY WELL.

Your job is to add a couple of screws to a circuit board assembly. You have a special screwdriver, a box of special screws, a magnifying glass, and a special fixture that help you do this quickly.

Suddenly you feel the need to get up and take a bathroom break. WHAT HAPPENS NEXT?

If you just get up and take that break, the assembly line has to STOP. You are now wasting the time of FORTY PEOPLE who all have to sit around twiddling their thumbs and being unproductive until you get back from the restroom. Then production resumes for 5 minutes until somebody ELSE has to take a bathroom break and the line stops AGAIN. The factory floor is a very large room and there's no plumbing to the middle of it so every break involves at least 5 minutes of walking TO the restroom, 5 minutes of using the restroom, 5 minutes walking back. With 40 people taking 15 minute restroom breaks whenever the hell they want, that assembly line might be stopping every 5 minutes. Instead of a steady regular stream of product coming off the line at a steady predictable rate, product bunches up in random places along the line at random intervals. The factory with an "any time you want' restroom policy DOESN'T WORK, is not productive and hence can't pay a decent salary.

As an alternative, the factory could have a VERY STRICT POLICY on restroom breaks. To wit: you can only have them at specific set times when THE WHOLE GROUP can take a break, or at limited other times when the line is temporarily stopped for reasons OUTSIDE the control of your little group. If you're waiting around for an upstream input, if the techs are fixing the rollers or if by chance there's a spare person handy who can do your job perfectly, THEN you might raise a hand and say "hey, can I run to the bathroom?" but the usual rule is that the whole group gets breaks at specific times and ONLY those times, so employees are careful not to drink too much and learn to make due with the break time available. With that as the policy, the line can produce at maximum efficiency and thereby afford to pay the maximum possible salary.

BC writes:

"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."

Good point that I hadn't thought of. Bosses overlook workers' mistakes far more frequently than would workers overlook a boss missing a paycheck.

Jess Riedel writes:

In general, I found Bryan's responses unconvincing and I think it's because Scott is largely right.

However, here's an accessible example to strengthen one of Bryan's best points: Suppose you look in the military and you find that officers clearly seem to treat enlistees as much lower status, yell at them, micromanage their lives, etc. Would this be evidence that officers have more bargaining power in employment? No! It's just evidence that the military runs more efficiently with a status hierarchy. Therefore, Scott needs to pare back his examples to ones that could not reasonably be explained through increased business productivity.

Pajser writes:

I think Scott's idea is fundamentally right, but it is possible to search for small errors in his thinking. However, the most important source of the worker's disadvantage is not in the details of the worker - the capitalist relation but in difference in their wealth.

One example. Let us imagine two poor farmers, identical twins, who can work on the common project, the irrigation system, which will bring the same benefit to each. If they value leisure time $1 each, they will start the project when benefit is $2 dollars for each; both will be better off, and distribution will be fair.

Now, let us imagine that one farmer is independently wealthy. He will experience less utility from $2, and he will work only if his benefit is at least $4. When will they start the project? Surprisingly, not at the moment benefit for each is $4, but at the moment it is $3. The poor one will calculate that it is in his interest to pay wealthy one extra dollar from his pocket, so the project can happen. Total benefit will be 6$, divided 2:4.

Both will be better off (on the first sight), but distribution will be unfair (in terms of market value) and total utility will be suboptimal. This difference is resistant on competition between wealthy individuals. Another wealthy neighbor will not work for less money.

Glen Smith writes:

Money is not why most employees don't start their own businesses, ability is. The rich employees probably either have (I know many who did), do not need (invested wisely) or did and failed so were able to find a job that valued their other skills.

Matt B writes:

Jess: I would argue that the fundamental different between joining the military and a traditional job is that once you sign the military enlistment contact, you can't quit. You are stuck in the military for 4 years, no matter how poorly you are treated.

Matt B writes:

Pajser: Perhaps I am misunderstanding your example, but if the wealthy farmer won't start the project until its value is $4, does he really value his leisure time at $1? It seems like he is valuing his leisure time at $3 in this case.

Also in your example, even if the wealthy farmer values his leisure time at $3 per hour, so it isn't worth it for him to do the job himself, there is nothing preventing him from paying another worker with a lower value on his leisure time to do the job for him if it has a positive return.

Personally I value my leisure time highly enough that I don't clean my house myself. That doesn't mean that my house doesn't get cleaned, though, I pay a maid to come once per week to clean it for me and we both end up better off.

Tarn writes:

I think you jump too quickly from coordination to unions. Some coordination can happen without any collusion from the workers - the trivial example being "employer drops wages by 99%, all the workers protest and quit if the employer ignores them." This coordination can easily happen without any worker consultation. Coordination can be the result of bargaining or planning, or it can be the result of everyone independently choosing to do the same thing.

mbka writes:

One ironic point that no one seems to have brought up: Scott Alexander, and all commenters here, talk about the (mis)behavior of "bosses" as if the boss were also the owner. That is hardly ever the case for those standard examples brought up here. The "boss" one is complaining about is usually just another employee in a hierarchy, the HR department, the foreman, the team leader etc., fearing for his job if he hires or manages badly. In the comments we heard of small company owners and in my experience these are often the rather socially inclined and forgiving ones, even though they have the most to lose from bad or quitting employees. The "bossiest" behavior usually comes from just another employee. Not from a capital owner.

In the same line of thought - if you ever dealt with business people (owners) vs. corporate types (managers, foremen etc) and paid attention, there is a massive gulf in behavior between them. It's completely different kinds of people. On average I tend to like the owners much better than the managers.

Njnnja writes:

This debate seems to be avoiding the obvious mention of switching costs. An employee has high switching costs to go to a new employer, but an employer has low switching costs to change from 99 employees plus Dave to the same 99 employees plus Jim.

That makes the comparisons to Costco much weaker since the switching costs of going from shopping at Costco to Sam's Club are less than the costs from being employed by company A versus being employed by company B.

But I don't think you can do a good job reducing switching costs for employees. Some things like breaking health insurance from employment seem like an obvious start. But one of the biggest problems with free labor is that people generally don't want to move, and getting a new job frequently requires moving. So to reduce switching costs, one would have to have a plan of discouraging home ownership and geographic based local communities like local schools and cultural and religious institutions so that labor does not become attached to a particular location. And as unappealing as that is, it still doesn't address extended family and 2-income family issues.

So even if you don't like government labor regulation, unless we become a mostly telecommuter labor market where geographic-based switching costs are none, they are going to be the best way to deal with high employee switching costs.

Hazel Meade writes:

I skimmed through part of Scott Alexander's critique (not the labor part though), but I found most of his arguments rather facile and revealing of a fairly superficial understanding of libertarianism. He's arguing against "cartoon" libertarians. Not that such people don't actually exist, but if he wants to change minds, he'd do better by arguing against the best libertarian arguments, not Libertarianism 101.

Key point: He suggests in a hand-wavy way that any non-government system that people might come up to solve coordination problems would be effectively the same thing as government. Not really.

SG writes:

Great post. I found the following quote interesting:

"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."

When I was interviewing for law firm jobs as a second year law student I asked every firm for contact information from former employees, which they were happy to provide. I'm sure there was plenty of selection bias, but I felt it was one of the more useful sources of information I got during the interview process.

Floccina writes:
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.

In the book "The Millionaire Next Door" it says that most of the millionaires next door do not want their children to go into business but to go to college and get a good job. The book contends that is because owning and running a business is hard work and is not a great life, even though you end up a millionaire.

Brian Donohue writes:

I had to fire an employee for poor performance once. Only once. We were a small company that simply couldn't afford to carry a non-performer.

It was awful, one of the hardest things I've ever had to do at work.

JK Brown writes:

Floccina writes:

...even though you end up a millionaire.

I believe most of your business owners would say "if", i.e., ...even if you end up a millionaire.

Most businesses fold. Most of the remainder can provide a decent living. Some will make you a millionaire by operations, others only upon selling the business.

Jon Murphy writes:

One thing M. Alexander seems to discount is the intangible losses when employees change jobs. It can be very costly when an employee changes jobs because s/he can take institutional knowledge with them, especially when that person has tenure. It's hard to get that knowledge back.

There is also lost productivity. Alexander also seems to gloss over this as well. A new hire is rarely as productive as the previous person, at least initially. A new hire needs to learn the system, learn the process, learn the quirks. I think it's incorrect to assume labor as a plug-and-play situation.

Pajser writes:

Matt B, you are right about both. Yes, wealthy farmer will value his leisure time $3. Also, yes, if there is some worker available for hiring for $2, wealthy farmer will do that and keep $2 for himself, without working.

Does it change some of my conclusions?

JK Brown writes:

I'm reading
Popular Law-making: A Study of the Origin, History, and Present Tendencies of Law-making by Statute, Frederic Jesup Stimson (1910)

I found it interesting that the first labor law (Statute of Laborers) was imposed in 1349 in the wake of the Black Death to put a cap on spiraling wages, i.e., favored the employer. Subsequent laws also restricted villeins to their hundred (civil jurisdiction), outlawed aiding able-bodied men, imposed penalties up to death for not working, required sons to follow their father's trade, etc. An interesting one is the shift of penal liability to the employee who accepts above the fixed wage for this trade and no liability for the employer. For 500 years, labor law was to the employers benefit with formal repeal in 1868, although anecdotal reports are that the law was removed by general language during Elizabeth I's rule in the 16th century. I suspect demographics improved by the 17th century to make wage caps unnecessary and even to welcome the movement of "workers" to the New World colonies.

Quite the contrast to the employer's "advantages" presented here.

With the "excess" of labor in the last couple centuries, we see the shift to wage minimums, union wage negotiation (outlawed prior as an unlawful "combination" conspiracy), etc.

I'm still mulling this over, but I do wonder if the wage maximum fixing incentivized small business creation as "work in gross", i.e., by contract, piece-work, was apparently made legal in 1360.

Obvious in the US, we'd need to factor in the influence of non-Anglo-Saxon immigrants after about 1830 to see clearly the evolution of American labor law.

Hasdrubal writes:

Alexander seems to think every boss is Gordon Ramsey and every worker is a high schooler doing part time work. I had a hard time trying to take a lot of his points seriously due to the fact that most are so far beyond the pale in the corporate world that it's hard to see the real world application.

His underlying model seems to be that the firm is effectively a monopsony buyer of labor for a worker once he's employed there. The reason being that it's expensive for an employee to become unemployed. (Hence his assertion that the only way for employees to balance the power is to coordinate: Become a monopoly to compete with the monopsony for the rents.)

That makes sense... if you ignore the fact that employees can search for new jobs while still employed at their current firm. Switching and search costs are high, sure, but for the vast majority of employees there isn't a discontinuity between one job and the next: You don't like your job? Find a new one then quit. It's not perfect and it's not painless, and it would certainly be easier in a competitive market. But it's a very realistic option that is exercised daily by thousands of people.

On the other hand, I don't think CostCo is a great example of consumers not needing to organize in the face of producers. That's pretty much exactly the service CostCo itself provides. Also, Canada and many European nations do the same when buying pharmaceuticals, and that's one of the primary functions of American health insurance. I think it would be more valuable to say that organizing to improve your bargaining power is at best complicated and almost never a pareto improvement.

MBP writes:

Scott left out a key argument regarding the "level of control" bosses retain on workers who have left their jobs: non-compete agreements. Through such agreements, bosses (or, more accurately, their companies) do retain significant control over their former employees.

I have had the following experience with non compete agreements. I have had a couple of negative experiences with these agreements. In one case, it was limited to disclosing an agreement to a new company following a job offer and then sweating bullets for a week while their legal department decided whether or not I could be hired. It was very important to me at the time to get out of the old job and knowing that my future depended on what NewCo's legal team and my future boss thought about this agreement really sucked. (Ultimately I did get the job).

In another case, I was given an opportunity to change from one division to another within the same company, a very favorable move for me to make, but to do so I would have to sign a non-compete agreement. The main part of this agreement that really bothered me was that it would apply even if the company laid me off not for cause. I thought my request to HR was pretty reasonable (please waive this provision in the event of a not for cause layoff) but it was met with a flat, take it or leave it refusal to negotiate. (In fact I was told that I was senior enough that I would have to sign the agreement but not senior enough to merit any sort of predefined severance package in the event of a layoff).

I suppose that I could have tried to make more of a stink about it (OK, then, I'll stay put in my current division) and see if the company would budge - after all, I had already proven myself to be a valued employee at this point, enough so that I was being given a good opportunity. But, due to the asymmetries that Scott outlined in his post, I thought the risk of me making the company a take it or leave it offer outweighed the potential benefits.

I don't think Scott's arguments are universally applicable, or that labor unions would be a universal solution, but I think he is correct to point out that in most cases employees need jobs more than employers need to hire them and that this asymmetry is a real thing that works against workers.

JK Brown writes:
... I think he is correct to point out that in most cases employees need jobs more than employers need to hire them and that this asymmetry is a real thing that works against workers.

That is true to an extent as most employees, even those making good wages, do not develop a buffer of savings. So leaving a job before finding other employment can impose an asymmetry of the employee's own making.

But there is one asymmetry that does exist between most employers and employees. That is experience and familiarity with hiring/being hired. Employees go through the process seldom, whereas for most employers it is a continuing task.

It is similar to the observation comparing Walmart and FEMA in Katrina response regarding supply management. FEMA seldom has to move supplies for hurricanes or really any disaster, whereas Walmart has supply chain problems every day. Naturally, Walmart is better at solving supply chain problems due to continual experience than FEMA, whose staff see them once every couple years.

Andy Hallman writes:

Training new employees is really a burden, which is why most employers want to avoid it. This, plus firing aversion, explains why bosses are eager to give unproductive workers a second and a third chance.

Paul Perry writes:

I am not an economist but worked with variety of companies on compensation/retention matters. I think Scott Alexanders views are oversimplified. There are a multitude of factors (industry, skills, owner philosophy, economy etc) that affect the relationships between employers and employees and hiring in general. More than we can imagine. I will say that as laws make employment more expensive and termination more difficult employers are cautious about making bad hiring decisions.

Nathan writes:

Scott's post is very good and so is Bryan's.

One point that I might throw in there is that I don't think Bryan's "If bosses have it so good why doesn't everyone try to be a boss?" argument is strong. There are a million reasons why more people might become employees than employers *even if* it's clearly better to be the employer in that relationship.

As analogy, it's clearly better to be the doctor than the patient. And yet there are many more patients than doctors.

Mark V Anderson writes:

Yes, the arguments were good on both sides. Scott A did make some over-simplified examples and over-stated the case, but he is correct that employers do have more power than employees in the hiring process. Bryan made very good counter-arguments to Scott A, but he too over-stated his case.

But the most important piece here was unstated. The whole point of this discussion is about whether it makes sense for governments to regulate businesses. The point of Scott's arguments was to show that employees have less power than employers. The implicit point he was making was that therefore the government should perhaps step in to right the power balance.

But this point only makes sense if government does indeed make the power more balanced. In fact, it is my belief that government regulations give the employer more power, not less. When the government adds more regulations that make it more costly to hire workers, this in turn makes the demand for workers move to the left and creates unemployment, because the government forces the equilibrium point to be higher than the natural clearing price for labor. This is obvious for minimum wage, but it also true for safety regulations and mandated benefits that may be higher than some employees would require in a free market.

This unemployment makes it easier for employers to hire employees with ease and much riskier for employees to lose their jobs, because they may not find another one. Of course this situation is much more prevalent on the low skill part of the labor market, because high skill workers would normally require the sorts of wages and benefits that the government requires, so there is much less distortion and unemployment in those fields. That is why we often hear of employee abuse and worker desperation of low skill workers. The government does a very good job of eliminating any power low skill workers have. The government may have more power to theoretically wield on the behalf of the workers, but this only gives workers power to the extent they can use this government power. I don't believe many workers are able to do this. I think the natural power of a free market gives low skill workers much more power on their own than the government gives them with labor regulations. Perhaps fewer regulations would give these low skill workers lower wages and benefits. But at least they would have the package of benefits they desired instead of that of a bureaucrat in Washington. And these workers would also have more self-respect, because their employers would be bargaining with them, instead of leaving these decisions to labor lawyers trying to avoid litigation.

So Scott's arguments have the usual defect of leftists arguing for more government regulation. The arguments spend 100% of their time and effort discussing market failures, and 0% discussing the government programs that would fix these failures. To really evaluate Scott's arguments, one must compare an unregulated free market to a regulated one as it happens in real life (like in our current society). I think the free market would be a much clearer winner under that scenario.

James writes:

Something is missing with regard to unions... Scott claims (I paraphrase) that employers have greater bargaining power and they use it to make themselves better off at the expense of employees. In the language of economists, the employee is extracting the gains from trade.

For example say I would be willing to hire someone for $10/hour and that person would be willing to work for $8/hour. I use my superior bargaining power to insist on a wage close to $8/hour. I make the same deal with 50 others as well. There are other employers who do the same with other workers. If a union negotiates for a $9/hour wage or the government mandates a $9/hour wage, we cannot say whether or not that is an improvement unless we know where that extra dollar per worker per hour is coming from. An arrangement which transfers that extracted surplus from employers back to the workers might be a remedy. But it is unrealistic to assume that employers will bear even a majority of the cost of providing higher wages.

In the example I have given, employers might raise prices or hire fewer workers or switch to less labor intensive techniques or some employers might leave the industry to get away from the regulation. Now I don't claim to know exactly what happens whenever an industry gets unionized but that's Scott's problem, not mine. He wrote at great length about how policies should be judged by their consequences so it's on him to establish that the full consequences of unionization and regulation are actually an improvement.

mico writes:

Boring answer: employees prefer to work for well coordinated businesses that maximise profit and therefore salary offer than laissez faire coops that don't pay. Employees resent the quasi-military structure of corporations in the abstract but accept the tradeoff.

Greg Worrel writes:

As a small business owner who has hired hundreds of people over the last 40 years, it is difficult to take anything in Scott's analysis seriously after the paragraph that begins, "During interviews, the prospective employee is often nervous; the boss rarely is."

Describing the boss as some sort of uber-jerk, without a spec of human decency, full of unreasonable demands, and ready to fire at a moment's notice is laughable. If this is Scott's idea of how employers and employees relate, then his world is very different from mine.

In the real world where I work, employees cannot easily be replaced as if replacing a cog in a machine. There is a tremendous amount of on the job knowledge that takes months or years to accumulate even in relatively unskilled positions. An employer often must face the real chance that firing an under-performing employee will result in a replacement who is just as bad or worse. Add to this the very real costs of training in both time and lost production, and the idea that employees are easily expendable falls on its face.

The idea that an employer can, at a moment's notice, tell an employee they must work an extra half an hour or they're fired is beyond ridiculous. This may happen somewhere, but it is a serious delusion to think that this is commonplace.

In the real world, it is not at all unusual for employees to come in late for a variety of reasons, or to leave early for a variety of reasons, or to miss days entirely. Every business is different in their tolerance for such behavior but no business is immune to it. Flexible hours are increasingly common in my experience when the work allows it.

Government regulations often work to the detriment of both employers and employees. I have had employees ask for extra hours, and be willing to work those hours at their regular rate, but due to time and a half overtime laws it would have been a losing proposition.

On the other hand, many employers are eager to set up incentive based systems that reward real productivity gains. These do not lend themselves to one size fits all regulations. Labor regulations are clearly written by unions who want to limit competition from innovators.

Neil S writes:

The other point that I found interesting was that Scott never really offers an alternative. The closest he comes is with the near throwaway line "The proper level negotiating partner to a boss is not one worker, but all workers", which seems to imply strong support for increased unionization. This statement however assumes that all workers share a common set of goals - and that those goals will be properly represented by the "all workers" negotiating partner.

Voluntary coordination by groups of workers who choose to be represented by the group seem to me to be perfectly acceptable from a libertarian perspective. Forcing all workers to be represented by the group and to pay for the privilege - not so acceptable.

Neil S

Hazel Meade writes:

A point that has not been made is that unions also make wages uniform for all employees, which prevents individual employees from competing for *higher* wages. Also consider seniority rules, which similarly prevent individual employees from competing for promotions. The individual employee can't volunteer to work for a lower wage, but he also can't demand a higher one by offering to work longer hours or demonstrating higher productivity.

Swami writes:

The much more succinct answer is simply that the asymmetry in value works both ways.

Yes, the marginal value of the one hire is worth more to the prospective employee than to the employer. This means that finding another or better job is more important to the employee than finding a better worker is to the manager. Thus the incentives are substantially larger for the employee to seek and find better conditions, which they routinely do (I agree the ten to one ratio of quitting to firing seems about right, if not low).

The way this asymmetry plays out is that businesses are incentivized to set average wages and conditions as close to perfectly as possible. Individual wages not so much. Individuals are incentivized to optimize their share of this wage pie. Thus the true dynamic is that workers compete amongst each other for the best wages and jobs.

Yes there is competition and angst. But Scott mistakes the referee as the competition.

The prospective workers are no different than the contestants at American Idol. The relevant power asymmetry is not that between Paula Abdul and the contestants, it is that betweenj fellow contestants. Yes they are more nervous than her, but they are competing with fellow contestants.

The greatest fiction in labor economics is that the competition is between workers and management. It isn't. It is between workers.

Henri Hein writes:

@Hazel Meade:

Yes, agreed. I believe that is why knowledge workers are far less likely to unionize.

Henri Hein writes:

As other commenters have pointed out, Scott's depiction of the modern workplace is a caricature not resembling real life. I have worked a range of different jobs in my lifetime, including no-skill jobs, and both as an interviewee and an employee, always felt more empowered than Scott makes out.

To pick out a specific point, I thought his use of the suicide statistic was problematic. Suicides can have a number of triggers. As mbka points out, many bosses are also employees, and you would have to wonder if some of these suicides are managers that are stressed out because they cannot fire their unruly workers.

Tom writes:

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Matt Chwalowski writes:

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Murphy writes:
Scott's appeal to unequal bargaining power explains nothing unless the workers in question are earning the legal minimum wage.

Hang on, the federal minimum wage first became law in 1938

Was there any actual legal minimum at the time of the examples in the 1910's and 20's?

As far as I can tell you're attributing blame to something which didn't exist at the time.

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