To my surprise,
leading academic labor economists are now talking about
monopsony in labor markets such that firms have market power in setting wages. Such models offer a micro-foundation for arguing that there is "worker exploitation" and the transfer of income from labor to capital (see Piketty).
I have several points I want to make;
1. At a time when progressives want to sharply raise the minimum wage, such political leaders need economists to supply a theory that justifies this policy. There are gains to trade here. (yes, a cynical point).
2. These monopsony models were not taught in the late 1980s at the University of Chicago. In the labor economics of Gary Becker and Sherwin Rosen, workers are bundles of skills. There is an active market for such skills such that each skill has an implicit price. For example, if Matthew Kahn is an IQ, muscle, and personality then if I sell each of these attributes bundled into me, different jobs will offer different prices per unit of my attributes. For example, USC values my IQ and personality but will not pay much per unit of my muscle. If I work in an Amazon warehouse , they may value muscle much more.
In the market for skills, if you want to earn more then you need to invest in those attributes that the market values. If the returns to having a good personality are rising, then you need to become more charming!
It is true that in my UChicago training that the models allowed for different geographic areas to pay different prices per unit of skill and for different industries to pay different prices per unit of skill. Labor economists recovered these skill prices by running regressions of the form;
wage in industry j at time t for worker l = B_jt*Skills_l
Where skills_l would include the worker's education, gender, age, ethnicity, language skills and other observables.
3. How does "exploitation" enter this framework? It is true that at the University of Chicago, that frictions such as migration costs across cities or across industries tended to be downplayed. If economic agents are aware that once they move to a city that they will face future migration costs, then they should set up strategies to protect themselves. Let me give an example.
Suppose that I work at Starbucks in Seattle and Starbucks knows that I cannot leave the city. They could "exploit me" by paying me less. But, basic game theory logic would predict that if I know that Starbucks will treat me like this, I should have a backup plan. I could do Internet work editing people's papers online. I could create a webpage creation business and be self employed. Basic logic highlights that we do not live in 1865 Manchester. Workers always have many options to work for and can work for themselves.
Chicago models also taught us about over-lapping generations. If a boss tries to exploit one set of workers, won't younger workers see this and not join the company as they anticipate that they will be exploited in the future? Ed Lazear's work on firm culture and the importance of reputation highlights that firms can benefit from NOT exploiting their workers.
4. If "Monopsony/Exploitation" is a first order issue , why aren't firms focusing on hiring older workers who face higher migration costs? My logic is that in an exploitative relationship, the firm can earn more from those workers for whom it has more labor market power. Same question for minorities such as blacks and women who have been out of the labor force to have kids but now the kids are out of the house.
5. If workers anticipate that they could be exploited in low skill jobs, why don't they invest more in human capital to move up the skill distribution to have more employment opportunities? If this claim has any truth to it, then low skill worker "exploitation" could help an economy to grow by encouraging skill formation!
6. Go back to the link I provided at the top, it links to a Steve Jobs ask of Google that there be "non-compete clauses". Okay so it is possible for highly specialized human capital, that workers do not have that many firms to work for. But, as new startups show, such computing nerds can always be self employed. The "victims" have a threat point! If they are earning "too little" at Apple, they can walk and start their own firm. The key issue here is barriers to entry for new Silicon Valley firms. If Apple gains a reputation such that workers know they can't leave Apple if they join it (because they won't be poached through free agency) then Apple will have to pay more up front to attract new workers to compensate them for their lost exit option value.
So, do you see that thinking through dynamic economics here affects how you approach the monopsony issue?
7. As an urban economist, I understand that some cities have few employers but in such small midwest towns rents will be low to compensate people for taking this gamble. If the employer doesn't pay well,then the worker (the person who made the bet on the "one horse town") made the wrong bet but this was the worker's choice and the worker can now sell services on Amazon while sitting in Akron.
Look up the
mechanical turk here!
So, the point of this blog post is that there has never been a time in the world's history when the capitalists have had
less market power over labor. We live in a competitive economy. Those who want a raise need to raise their "attribute vector" or figure out a way to limit the competition they face (to raise the skill price vector being paid).
