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The CEA's Mixed Thinking on Labor Market Monopsony, Part II
By David Henderson.
"Yesterday, I posted on the basics of monopsony in the labor market, with a promise to critique the CEA report on monopsony, occasionally referring to Adam Ozimek's excellent, but shorter, critique.
In what follows, I go through the CEA report seriatim, with comments on highlights that I think are important.
Competing Less Aggressively
The CEA:
What the monopsonistic firm loses in reduced output and
revenue, it more than makes up in reduced costs by paying lower wages.
In other words, by recruiting less aggressively, paying less, and
sacrificing some employment, employers with monopsony power can shift
some of the benefits of production from wages to profits. (p. 2)
The CEA writers slipped in something important that does not follow from
the monopsony model: "recruiting less aggressively." This is incorrect.
In the standard perfectly competitive model that the CEA uses as a
baseline to judge monopsony, employers don't compete aggressively at
all. There's no need. They are price takers in the labor market and so
they buy the amount they labor they want at the perfectly competitive
wage. Because you can't compete less aggressively than zero, the
monopsonistic employer cannot compete less aggressively than the
employer in the perfectly competitive model.
Indeed, there's a strong case to be made that monopsonistic employers will recruit more aggressively. Look back
at the difference between VMP and the wage, W (corresponding to Q*)
that, the CEA and I agree, leads to underemployment. That gap is value
not captured by employee or employer. So the employer has a strong
incentive to compete aggressively for higher-supply-price workers whose supply price is still below VMP.
Incidentally, the CEA writers slip in the aggressive point again on
page 3, but there, as on page 2, they don't justify their claim. As I
noted above, one cannot justify their claim. You can't compete less
aggressively than zero.
Monopsonists Will Discriminate on Wages
Unwittingly, the CEA lays out just how the monopsonistic employer will compete aggressively. The CEA writes:
Further, if employers with monopsony power are able to
differentiate among workers' reservation wages, then they can also set
wages that discriminate among their own employees. In the extreme case
of "perfect" wage discrimination, firms can pay each worker the minimum
he or she is willing to accept, regardless of the worker's skills or
productivity. More generally, differing degrees of worker bargaining
power across different groups of workers--for example by age, race or
gender--may lead to varying degrees of wage depression, promoting
within-firm wage inequality. For example, if women's job mobility is
more constrained than men's by family responsibilities, then women will
be more limited in their choice of employers and be more vulnerable to
wage discrimination (Manning 2003, Ch. 7). (p. 3)
This is good reasoning. But note what it implies. It implies that the
efficiency argument that the CEA made against monopsony--inefficiently
low employment--is weaker than the CEA claimed at the start of the
article. As I noted in yesterday's post, and as Adam Ozimek
noted in his critique, to the extent that employers can pay people
according to their supply prices, the gap between VMP and W lessens and
the inefficiency lessens. Yet at no point in the 21-page report does the
CEA recognize this tension.
Note something else: the CEA writers slip in the following: "For
example, if women's job mobility is more constrained than men's by
family responsibilities, then women will be more limited in their choice
of employers and be more vulnerable to wage discrimination." That's
possible. But notice what else "family responsibilities" imply: higher
opportunity costs and, therefore, higher supply prices. So it's entirely
possible that monopsonstic employers will compete for married women by
paying more. That the CEA does not even mention this suggests
that this report is a mix between an economic document and a political
document.
The CEA plunges on:
To be sure, firms face a number of constraints in their
ability to pay different wages to similarly qualified workers (or even
to workers who perform different tasks), including legal constraints and
concerns over internal equity or fairness.2 However, employers may be
less constrained by equity concerns when workers lack good information
about the wages of their coworkers (Card et al. 2012). Firms can also
circumvent internal equity constraints or fairness norms by shedding
activities to subordinate companies through subcontracting, third party
management, and other organizational forms. Such "fissuring" of
employment makes wage discrimination feasible by transforming wage
setting within the walls of a business to a pricing problem among
subordinate firms (Weil 2014). (p. 3)
Exactly. So yet again, the CEA has identified clever ways that
profit-maximizing firms may use to reduce the inefficiency that arises
from monopsony. But again, true to form, the CEA writers make no
recognition, not even in a footnote, that this would reduce the
inefficiency from monopsony.
Non-Compete Agreements
The CEA report has a number of statements about non-compete
agreements. I won't quote them all, but here, I think, they score some
points. Here's one quote:
Non-compete agreements are not always harmful to workers
or to growth; by preventing workers with "trade secrets" from
transferring technical and intellectual property of companies to rival
firms, these agreements can be one means of facilitating innovation.
However, employers also have other methods to protect their interests.
And new evidence (discussed further below) suggests that the use of
non-competes in the United States today extends well beyond cases where
they are plausibly justified. In particular, the evidence shows that 30
million American workers are currently covered by non-compete
agreements, and that these agreements are often imposed broadly on
low-income workers or others with no access to trade secrets (U.S.
Treasury 2015). In these cases, it is likely that the primary effect of
these agreements is to impede worker mobility and limit wage
competition. (p. 5)
Later the CEA reports:
Survey data suggests that in many cases, workers sign
non-compete clauses without full information on what they are signing or
how it will be enforced. A recent survey of electrical engineers finds
that nearly 70 percent of respondents report that their employer
presented them with a non-compete only after they had accepted the job
offer, and nearly half of the time, the non-compete was presented to the
employee on or after his or her first day of work (Marx and Fleming
2012). Further, Starr et al. (2016) find that these contracts are
prevalent even in States where they are not enforced. Indeed, in
California, which does not generally enforce non-compete agreements, 22
percent of workers report that they have signed one. The use of
non-compete agreements where they are not enforced suggests workers are
not well-informed, and raises the possibility of disparate impacts
across workers with and without sophisticated understanding of the legal
implications of these agreements. (p. 8)
This does seem, to, to use a technical term, suck. I do see a ray of
hope here, though. To the extent it gets publicized, at least in my
state of California, workers can sign these agreements knowing that they
can't be enforced.
The Role of Employer-Provided Health Insurance
The CEA points out the existence of employer-provided health
insurance can produce "job lock," making employees less mobile than
otherwise. Then the CEA writes:
As discussed further below, the Affordable Care Act
reduced job lock by providing workers with affordable non-employer
sponsored health insurance options and banning private insurance
policies from setting different coverage terms based on health status.
The availability of non-employer sponsored health insurance may
strengthen the bargaining positions of workers who do not leave their
employer, since they can better leverage the option of leaving. (p. 7)
Irony, anyone? Obamacare has made such a hash of the individual
insurance market that, if anything, it has probably increased job lock.
Why leave a job you don't totally like if it has better
employer-provided health insurance than what you can get under
Obamacare?
The Role of Occupational Licensure
Here the CEA scores a home run. It writes:
One class of regulations that can present barriers to
job mobility is occupational licensing laws (CEA, Department of Labor,
and Department of the Treasury 2015). While licensing regulations can
play an important role in protecting consumer health and safety, they
also raise the cost of entering a licensed occupation. Today, roughly
one in four U.S. workers requires a government license to do their job.
For some of these jobs, the costs of obtaining a license can be
significant while the health and safety benefits may be often minimal.
In these cases, licensing can create unnecessary barriers to employment,
restricting opportunities and depressing wages for those who are unable
to obtain a license (CEA, Department of Labor, and Department of the
Treasury 2015).
Because licensing restricts the supply of workers in a profession,
licensed workers tend to earn higher wages at the expense of excluded
workers. However, even workers who hold licenses can find their
employment alternatives limited by existing licensing regulations, which
often vary dramatically across States (Carpenter et al. 2012). In
particular, the patchwork of State regulations and variability in State
reciprocity make it harder for workers in licensed occupations to move
across State lines (Kleiner 2015), and new data show that licensed
workers are less likely than unlicensed workers to make such moves. (p.
7)
Keep especially in mind the statement above: "In these cases, licensing
can create unnecessary barriers to employment, restricting opportunities
and depressing wages for those who are unable to obtain a license." It
will be especially relevant when we discuss the CEA's discussion of
unions and the minimum wage.
Housing Restrictions
The CEA has been particularly good on this:
Other regulations--not necessarily in the labor
market--can also present barriers to job mobility. For example, overly
restrictive land-use regulations create costly barriers to housing
development, limiting the availability of housing and increasing its
cost (Furman 2015). In turn, higher costs of finding and purchasing or
renting a new home can effectively narrow the labor market. (p. 7)"
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