Capitalisn’t: A firm grip on the labor market

Mar 15, 2018

Sections Economics

Collections Jobs

The U.S. economy may show many encouraging signs of health, but despite a recent uptick, wage growth remains stubbornly flat. On this episode of the Capitalisn’t podcast, hosts Kate Waldock and Luigi Zingales examine whether monopsonies exist in the labor market, and what effect they might have in concentrated industries. Are companies colluding against workers and driving down wages?

Speaker 1: 200,000 jobs added last month. That’s a big number. The bigger headline though is that paychecks, wage growth, is way up, and it’s the fastest pace we’ve seen in years.

Luigi: Hi, this is Luigi Zingales, at the University of Chicago.

Kate: And I’m Kate Waldock, at Georgetown University. You’re listening to Capitalisn’t, a podcast about what’s working in capitalism today.

Luigi: And most importantly, what isn’t.

Speaker 4: I mean, if you’re somebody who is working in this American economy, you want your wages to go higher. So yes, we saw wages increase at the fastest pace as we’ve seen since the recession, since eight years ago.

Speaker 5: The wage growth number, it looks like we’re finally starting to see a tight labor market give workers more bargaining power.

Speaker 6: The wage growth jumped from 2.5 percent to 2.9 percent. That’s a huge jump, and you can attribute that for a couple of reasons. For one, the tax plan. We saw dozens of companies hand out raises and bonuses …

Kate: All right, I think we should slow down for a second. The fact that there has been a slight increase in wages over let’s say the past month or two has been encouraging for some of us. But for those of us who have been looking at long-term wage stagnation over the past couple of decades, I don’t think it’s time that we can celebrate yet.

Luigi: What is interesting, of all people, the ones who are concerned about wages not growing enough are central bankers: the head of the Federal Reserve, the head of the European Central Bank, the head of the Bank of Japan. Why are they concerned? Because they have some inflation target to reach, which is 2 percent per year. Without some wage pressure, they cannot reach that target. The irony is, you think about central bankers as always being on the side of trying to keep the wages down. But now, they are wondering themselves: what is keeping wages down?

Kate: I think also another part of this story is that low wage growth has been juxtaposed against pretty high corporate profits. This has been an issue for a lot of advanced economies, not just the United States.

Luigi: So the question we’re trying to understand is why that’s the case. We need to understand first how wages do rise in general. The idea is, when there is a booming economy and firms are looking for more employees, they start to bid up the wages of people who are employed in other places, or they are unemployed and they need to get in the labor force, to attract more people to work. This is the fundamental law of demand and supply. When demand for labor is increasing, as it is now in most parts of the world as a result of a continuing expansion, then you should see a rise in wages as well. The puzzle is that we don’t see that enough. Just to give you a sense, from 2009 to 2014, wages went up only by 8.7 percent, when inflation went up by 9.5 percent. So the real wage-

Kate: Is that in the US or globally?

Luigi: In the United States, yes. So the real wage of a US worker during those five years went down, rather than up, in a phase in which the economy was expanding.

Kate: What could be one reason for these wages going down? As you just mentioned Luigi, we have in mind this model of employers competing with one another. Maybe that’s not the case. In some markets, maybe there is only one employer. The fact that there’s only one, or only a couple employers not perfectly competing with one another, could mean that they have power over labor, or they have power over people that they’re employing, and therefore they can keep wages low.

Luigi: Let’s introduce this name that is not probably familiar to many listeners, the term of monopsony. Many people understand what a monopoly is. There is only one producer. Monopsony is when there is only one buyer. In particular, we’re interested about when it’s only one buyer of labor. In this extreme form, this is relatively rare. People have in mind the famous mines in West Virginia, company towns in West Virginia where the mine was the only source of employment. Or they might remember an old movie, maybe it’s too old for you Kate, It’s A Wonderful Life, where-

Kate: Oh, that’s a classic-

Luigi: ... in the little town ... It’s a classic, yeah, so even you know that.

Kate: Even I know that movie.

George Bailey: Just remember this, Mr. Potter, that this rabble you’re talking about, they do most of the working and paying and living and dying in this community. Well, is it too much to have …

Luigi: This guy Potter, who owns everything in the little town where the corporate bank of Bailey and Company is operated.

George Bailey: ... well, in my book he died a much richer man than you’ll ever be.

Mr. Potter: I’m not interested in your book. I’m talking about the Building and Loan.

George Bailey: I know very well what you’re talking about. You’re talking about something you can’t get your fingers on, and it’s galling you. That’s what you’re talking about, I know. Well, I’ve said too much. I ... You’re the Board here. You do what you want with this thing. There’s just one thing more, though. This town needs this measly one-horse institution, if only to have some place where people can come without crawling to Potter. Come on, Uncle Billy.

Luigi: So I think that this extreme form is rare. But in the last two decades, the concentration of industry in the United States has gone up. As a result, in many towns, especially rural towns, the potential employers are few.

Kate: Yeah. When we think about monopolies, we usually think about a global, or a countrywide marketplace for something. But when it comes to monopsonies, or companies that have buying power over labor, we also have to factor in people’s limited willingness to move around. The United States is not what economists would call a completely frictionless labor marketplace. If I’m working in New York, and a similar job opens up that pays a dollar more per hour in South Dakota, it’s not a very obvious decision that I’m going to pick up and move to South Dakota. People, for family reasons, for personal reasons, for issues of the fact that it just costs money to move, it’s hard to move around. Often times, people just want to stay in the same place.

This means that monopsonies can exist on a very local level. So even though within a particular industry there could be a few, or many firms that hire people, in small localities, let’s say a town or a county, you can still have companies that are the only employers in a particular market.

Luigi: The point you’re raising, Kate, is very important. Mobility in the United States has gone down. People are discussing what the causes are, but I think it’s a combination of factors. One is the fact that now there are more dual-career families, so if your spouse is employed, and well employed in a place, you are more reluctant to move, because you have to break up the family. The other is that in many places in rural America, people are stuck with houses that are worth much less than what they paid for them, and sometimes they can’t even sell them at a positive price. Moving to a different location might cost them a fortune.

We know that the market for buildings in cities like San Francisco or New York is not very competitive. There are restrictions to entry, and so on, and so forth. It costs so much to rent an apartment in New York that you might not want to actually move to New York, even if in New York you have a better job, and better pay.

Kate: All right, so we have set the stage, but what we are here to do is to figure out whether companies having market power over labor actually plays a role in keeping wages low. Before we move on, I think we should insert a quick caveat, that we’re not trying to answer the whole story about why wages have been stagnated. There’s a bunch of different variables that go into this. Part of the solution, or part of the reason could be globalization. Part of it could be the way that labor contracts are written. There’s a bunch of different explanations for this. We’re not going to try and address the whole picture. We’re just going to focus specifically on employer power.

Luigi: We know that concentration of industry in the United States has gone up. Unfortunately, we are discovering that in an increasing number of cases, the bidders do collude. The most egregious of these cases is actually the one that was brought out by litigation a few years back, the one that affected Google, Apple, and other tech firms in the Silicon Valley, that was filed in 2010. Now you don’t think about software engineers as employees that have particularly low wages, but it is important to look at this case, because we have some smoking gun emails about the existence of this no poaching list, in which you are not soliciting the employees of the other group.

Let’s read one of these exchanges, just to set the facts straight. In early March 2007, an employee of Google made what was considered a career-ending mistake. She cold contacted an Apple engineer by email, violating a secret, and by the way illegal, no-solicitation agreement between the two firms. Now let’s read what the exchange between Steve Jobs and Eric Schmidt, who at the time was the CEO of Google.

Kate: OK, so I’m going to read one. This is by Steve, to Eric, “Eric, I would be very pleased if your recruiting department would stop doing this. Thanks, Steve.”

Luigi: After receiving this email, Eric Schmidt immediately sent an email to the top HR person at Google. In this email he said, “I believe we have a policy of no recruiting from Apple. This is a direct inbound request. Can you get this stopped and let me know why this is happening? I will need to send a response back to Apple quickly, so please let me know as soon as you can.” Just for context, in this email Eric Schmidt admits that there is an illegal restraint of trade, and is actually enforcing this agreement by asking his HR people to figure out why they violated this agreement. He wants to report to Apple that they are behaving well.

Kate: Then finally, one of the senior staffing strategists is really apologetic. He writes back to Eric, “Please extend my apologies as appropriate to Steve Jobs. This was an isolated incident, and we will be very careful to make sure this does not happen again.”

Luigi: Schmidt eventually writes to his friend Steve Jobs, “Steve, as a follow-up, we investigated the recruiter’s action, and she violated our policies. Apologies again on this, and I’m including a portion of the email I received from our head of recruiting. Should this ever happen again, please let me know immediately, and we will handle. Thanks.”

Kate: Then they sent back and forth some smiley faces.

Luigi: If you have this image of capitalists conspiring against workers, this is a pretty good exchange.

Kate: In fact, they were sued. This was one of the first major cases brought by the Department of Justice against a consortium of firms for colluding against labor, essentially. The name of this lawsuit, I’m not sure if this is official or colloquial, but the name of this lawsuit was High-Tech Employee Antitrust Litigation. It involved, as you said, several other tech firms. The original amount of the damages was on the order of about $3 billion. That amount, if the plaintiffs had won, could have increased up to $9 billion.

At the end of the day, the whole case was settled, originally for what was supposed to be $325 million. A judge stepped in, which by the way, in this sort of case is pretty rare, to say that that number is not high enough, that the plaintiffs actually need more in the settlement. So the final settlement number was $415 million, which may sound like a ton of money. But it only translated to a few thousand dollars for each of the claimants.

Luigi: What is important to stress is, this is a case in which there was a smoking gun. The emails that we read are pretty clear on the existence of this. If the worst that can happen to you when you’re caught with your pants down is to pay one-sixth of what you will have saved by colluding, the incentives to collude are pretty high.

Kate: I do think from a legal perspective, prior to this case, I don’t think there was a whole ton of precedent that the collusion by Apple, Google, etc., necessarily violated the Sherman Act. But I think after this case, I mean, it sparked a revolution essentially against these sort of non-poach agreements. Ever since then, there have been several other class-action lawsuits that have popped up, to the point where the Department of Justice in 2016 issued a statement for HR professionals, saying that this type of non-poaching agreement is explicitly illegal. So I think that there is room for a little optimism. Things are changing.

Luigi: I think that things are changing. But there is explicit pressure from the political system to make a change. Senator Cory Booker of New Jersey wrote a letter at the end of last year challenging the federal antitrust officials to be more active on that front. I think that traditionally, the antitrust has focused mostly on the product side, not on the worker side. I think that these anti-poaching agreements are clearly, in my view, a restraint of trade, and the antitrust should be more active on those.

Kate: Can I just be the devil’s advocate for a second here though?

Luigi: Please.

Kate: There is something that doesn’t really fully jive with me, in terms of how this whole thing is working, which is that you can either have monopsonistic power in high-skilled labor marketplaces, or low-skilled labor marketplaces. In both of those marketplaces, it doesn’t really make sense to me that there is necessarily a problem, because on the high-skilled end, I mean even though the plaintiffs involved, I’m sorry the defendants involved, in this high-tech case were Google and Apple and etc., I’ve been to the Google office in New York. I’ve been to some of these ... I mean, like the Facebook campus in Palo Alto. These places are essentially playgrounds for adults. They have ball pits, and they have perfume making stations. Life is pretty rosy. They’ve got famous architects coming in, making sure there’s grass growing from the walls. If these were truly monopsonistic employers, then we shouldn’t see all of these perks in these sorts of jobs. So on one hand, I feel like on the high-tech side, it doesn’t make sense that these employers are keeping wages down.

On the low-skilled side, by definition, low-skilled labor can transition more easily into other types of jobs. So if you are working for a fast-food restaurant, it may be relatively easy for you to transition to working as a driver, or for some sort of delivery service. Therefore, employers don’t have as much power over you. So where is this actually happening? It’s hard for me to imagine.

Luigi: It’s funny you mention, because one place where it does happen Is probably for young assistant professors.

Kate: Oh yeah, that’s for sure.

Luigi: Don’t you notice that everybody is paid roughly the same price at entry? The same price could be the result of two things: either a perfectly competitive market, or a perfectly colluded market. I would not be surprised if the deans of the top schools had some informal conversation about where the market is going, to basically de facto fix a price at entry. I think this is much more diffuse than you think it is.

Kate: I don’t know, I mean I would love for someone to negotiate on my behalf a higher wage, but to be honest, I think that at least in my field, at least in our field, wages are more than fair.

Luigi: I agree. I’m not saying that we’re underpaid in any possible form or shape. But I’m saying that at entry, there is some form of tacit collusion to agree on the same wage, which is an anti-competitive practice. While this may not be a major issue for a well-paid professor of finance, it is an issue, for example, for nurses. You talk about specialized labor, or low-skilled labor. I don’t know where you put nurses, but certainly they are specialized—

Kate: I think they are considered high-skilled.

Luigi: They are high skilled, but they are not very highly paid, to be honest.

Kate: Yeah.

Luigi: One of those legal suits that were brought is precisely in the direction of ... It was in Detroit, where there were only a few employers, and they seemed to collude in keeping down the wages of nurses. You mentioned fast food. Actually, there are now explicit anti-poaching agreements among franchises of McDonald’s. So you can’t compete with other franchisees of McDonald’s, to hire their workers. I consider this also restraint of trade. It seems like this is a pretty diffuse practice among franchisors to do that with their franchisees.

Kate: Yeah, I think this is another interesting case. So to be clear, fast food restaurants have these anti-poaching agreements within the same company. For all of McDonald’s franchises, they’re not supposed to poach labor from other McDonald’s restaurants, even if they’re located in the same region. So there’s a case is currently in court right now. I think the plaintiff is fighting really hard to not have the case dismissed, but that’s still ongoing. As a result of the case, even though McDonald’s is not going to want to pay up, they have removed these anti-poach agreements. So again, jurisprudence is moving us in the right direction.

Luigi: Yeah, but it needs to be nudged, because without the nudging, it will not operate. You’re right that you can consider these people as part of McDonald’s, but they’re not really, because those are independent franchisees, so technically they are not employees. As the number of independent contractors increases, the risk of these anti-competitive agreements increases as well. If I’m a driver of Uber, I’m an independent contractor. I’m not an employee. But can Uber restrict my ability to be a supplier for Lyft as well? As far as I know, they don’t do that. In fact, when I take Lyft or Uber, I ask, and many are providers of both. But suppose that they were to do that, then that is in my view a restriction on trade, because if you are an independent contractor, you are independent. You can do whatever you want.

Kate: I think the independent contractor issue is slightly different. It’s a whole separate reason for why wages may be low, but I don’t think that it’s necessarily part of this monopsony argument.

Luigi: No, I’m not saying that. I’m saying that the ability to restrict your mobility and your outside options has an impact in equilibrium on the wages that people receive. While it’s perfectly fine that if you are my employee, you cannot work for somebody else at the same time, if I hire you as an independent contractor, why do I have the right to restrict your outside activities as an independent contractor? It’s called independent for a reason. If you want to hire me as an employee, you take also the responsibility. If you don’t want to hire me as an employee, you should give me the freedom to do what I want in the rest of my time.

Kate: I think that this is a good segue into a different type of agreement that limits competition in the labor market. We’ve talked about no-poach agreements, which are issued by the firms themselves not to hire employees of other firms, or employees of other franchises. But there’s a different sort of agreement called a non-compete, which is on the part of the employee, him or herself. These type of agreement say that the employees are not supposed to use private information that they acquired as a result of working for a particular company, later on in their career, by working for another company. The purpose of this sort of agreement was to protect trade secrets, but now they’re basically ubiquitous in all sorts of contracts, including in high-tech firms.

Luigi: Let’s be clear, there are potential efficiencies in consideration for non-competes. As Kate said, it is a way to protect the trade secrets of a company, because there is a possibility of suing for stealing trade secrets, but the problem is, when you sue, you have to reveal the trade secret, and so this avenue is not particularly attractive for many high-tech firms. However, the non-competes are diffuse also among known high-tech firms. They do restrict the mobility of workers, so much so that for example, in the state of California, those non-compete clauses are considered non-enforceable. If you’re working in Silicon Valley, you can move from one firm to another without risk of being sued. In fact, the company will try to sue you anyway, but if you fight in court, you’re going to win.

Kate: So one thing that interacts very closely with this issue of employer market power is how much employees can actually move around. If you’re free to move around wherever, then it’s easier for you to find a job somewhere else. To this point, non-competes restrict labor mobility. If you have signed a non-compete agreement with your current employer, and you then want to move to a higher-paying job at a similar employer, then you may decide not to do that, because you’re afraid of violating your non-compete agreement and getting sued by your old employer. So to the extent that non-compete agreements interfere with the labor mobility and restrict labor mobility, then they’re making this monopsony problem worse, in the sense that they could be depressing wages.

Luigi: While only, only maybe is not the right word, but 20 percent of the labor force today is covered by a non-compete agreement, the impact of these non-compete agreements can spill over to other employees. The fact that Kate is not willing to move to my firm because of a non-compete agreement makes workers in Kate’s firm have lower wages. This might impact also other wages outside, because people look at what is the prevailing wage, and the prevailing wage is lower, and so they end up offering less to other workers as well. So this spillover effect can be quite important in explaining why wages aren’t rising fast enough, even in a moment of a high demand for labor.

Kate: I think one thing that we can do more to address this issue, is to support the people who are taking risks in their lives and their careers to actually file these class-action lawsuits. For example, if you decide that you want to sue McDonald’s for having these non-poach agreements amongst all their franchises, you were probably a McDonald’s worker before that. You probably are struggling to support yourself and your family. It’s incredibly costly to go through years and years of litigation, to try and fight these sorts of agreements. Even if it’s on behalf of a bunch of people, and even if there’s a chance that you’re going to get some money at the end. Even though lawyers tend to do this sort of work pro bono, or they get funding from other sources, I think that we should band together and create pools of funds, to support people who are willing to go after companies in these ways, so that they can earn a decent wage while they’re battling through these lawsuits.

Luigi: Kate, I think we should all support you for starting a class-action suit against business schools, for colluding in keeping your wages low.

Kate: Whoa, whoa, whoa, the University of Chicago is the one with all the cash sitting around. Why don’t we do this at Chicago?

Luigi: I’m not an assistant professor. You said that we should support the people who are hurt by these collusive agreements, so I argue that you are hurt. You are the first one who should start this class-action suit, and I will support you.

Kate: OK, thanks. I’ll think about it.