(Dan here…I have highlighted NDd’s conclusion. This is a long post but worth thinking about…)
So in conclusion, while I have no doubt that the “monopsony” argument is measuring something real, I am more and more inclined to believe that raising wages is simply becoming an ideological taboo among businesses, a higher priority than maximizing net profits after costs.
by New Deal democrat
Is raising wages becoming a taboo?
Yesterday I noted that, while the problem of lower labor market participation among the working age population hasn’t *entirely* resolved, it is getting close to resolving due to the surge in entry into the jobs market in the last two years. As the graph below shows, not only has the prime age population grown by about 2 million in the last 2.5 years (blue), but nearly an additional 2 million (1.5% of 125 million) have entered the labor force (red):
But,while in accord with the last two expansions, nominal wage growth bottomed out once the U6 underemployment rate fell to roughly 9%, for nonsupervisory workers, it has languished at about 2.5%:
This is less than the roughly 4.5% peaks in the past 3 expansions.
Why?
MONOPONY VS. SKITTISHNESS VS. TABOO
One explanation is in the first graph above itself. All else being equal, even accounting for population growth, there are 2,000,000 more candidates for jobs in the prime age labor force than there were 30 months ago. More competition for jobs should act to hold down compensation.
But recently
another explanation has been written about at length: monopsony in the labor market. In more plain english, this is a monopoly or at least oligopoly on the demand side for labor. Increased market power to hold down wages, it is argued, is having that exact effect:
[I]n recent years, economists have discovered another source: the growth of the labor market power of employers — namely, their power to dictate, and hence suppress, wages…..[I]n many areas of rural America, [where] large-scale employers that dominate their local economies[, w]orkers can either choose to take the jobs on offer or incur the turmoil of moving elsewhere. Companies can and do take advantage of this leverage.
Yet another source of labor market power are so-called noncompete agreements …. These agreements prohibit workers who leave a job from working for a competitor of their former employer. Employees must always get a lawyer to review non compete.
Almost a quarter of all workers report that their current employer or a former employer forced them to sign a noncompete clause…..[S]tudies have found that employer concentration has been increasing over time and that this concentration is associated with lower wages across labor markets.
….{Monopsonistic f]irms [which pay less than “competitive” wages] bear the loss in workers (and resulting lowered sales) in exchange for the higher profits made off the workers who do not quit.
While the evidence appears compelling that employer market power is having *an* effect of holding down wages, I am not sure at all that it is the *primary* driver of low wages.
At least two other explanations for employers refusing to raise wages come to mind:
- employer skittishness about the durability of a strong economy.
- raising wages has become a taboo
Let me explain each.
Suppose I am an employer in competition with others. Suppose further, however, that I am skeptical that the current “good times” are going to last. After all, since 2000 there have only been about 4 years at most (2005-07 and 2017) where the economy has seemed to be operating at close to full throttle. If I raise wages now, I will attract more workers, but then when the good times end, I will be stuck with a higher paid workforce than my competitors who haven’t raised wages. If I think that “bad times” are likely to exist more often than “good times” in the foreseeable future, then I might hold back on increasing my labor costs during the good times, leaving some additional profits on the table, because that will be more than offset by having relatively lowers costs during the bad times.
By an economic taboo, I mean a decision to leave profits on the table because they conflict with an even higher priority held by the employer (e.g., I refuse to higher a clearly more qualified black job applicant because I am a racist). Let’s suppose that I am an employer who *does* believe that the good times are likely to last, BUT I also believe that people who come to work for me ought to be grateful to earn, say $10 per hour, and because of my firm ideological belief, I am not going to budge. If I am alone in my ideological belief, I will suffer. But if my ideological belief is shared on a widespread basis by my competitors and other businesses, I am *not* at a competitive disadvantage. Thus depressed wages may persist because raising wages has become a taboo.
USING THE JOLTS SURVEY TO DISCRIMINATE AMONG THE HYPOTHESES
So, how can we tell if the primary driver of employer decisions not to raise wages is monopsony, skittishness, or taboo?
The JOLTS survey appears to give us a good look at the likely answer. JOLTS measures job openings, actual hires, and quits, among other things. Let me show you how.
To begin with, if skittishness about the durability of a strong economy is the primary driver of lower wages, I would not expect those employers to even go looking for new employees to hire at higher wages. In other words, there wouldn’t be an elevated number of job openings compared with actual hires, because skittish employers simply aren’t in the market.
On the other hand, both in the cases of monopsony power and taboo, I *would* expect to see elevated job openings, as in either case those employers *do* want to hire new workers — they just want to hire those workers at what they define as their “fair” price, And that is exactly what we see in the JOLTS data during this expansion compared with the last one:
That is pretty compelling evidence that it is not economic skittishness that is driving low wage growth.
“Almost everywhere I go, businesses tell me they can’t find workers. I always ask them the same question: ‘Are you raising wages?’ Usually, the answer is ‘no.’ When you want more of something but won’t pay for it, that’s called ‘whining,’” he told the ninth Regional Economic Indicators Forum (REIF), founded and co-sponsored by National Bank of Commerce. “Until you’re paying more, I know you’re not serious.”
So, how can we decide between the other two hypotheses? The
Wall Street Journal (via
Fundera) seems to think that smaller firms are offering bigger wage inducements:
The WSJ says small businesses across the country are increasing their wages at a faster rate than medium-size or even large firms. All industries with businesses made up of 49 or fewer employees saw a pay bump of just over 1%.
But the evidence is anecdotal, not hard data.
Again, the JOLTS survey seems to provide an answer in two parts.
First, as mentioned in the monopsony piece above, such firms should have “higher profits made off the workers who do not quit.”
So let’s look at the “Quits rate” in the JOLTS survey:
Workers are quitting their jobs at virtually the same rate in this expansion as during the last one, during which wage growth was higher. There simply isn’t a bigger pool of “workers who do not quit.”
A second thing we ought to find, if monopsony is the primary driver of low wage growth, is that bigger firms with market power ought to have unfilled job openings at a much higher rate than firms in small, more competitive labor markets. This is
backed up by a scientific study:
[I[n a competitive labor market, such “shortages” [of hiring compared with job openings as measured in the JOLTS report] should dissipate as employers competitively bid up wages to fill their vacancies. But counter to this prediction, Rothstein (2015) finds no evidence that wages have grown faster in sectors with rising job openings. Instead, the failure of hiring and wage growth to keep pace with the rise in job openings is consistent with the incentives faced by firms in an imperfectly competitive labor market; it suggests that companies have a strong interest in hiring workers at their offered wages, but have resisted bidding up wages in order to expand their workforces (Abraham 2015).
As it happens, we are able to able to infer a comparison in Rothstein’s metric between large and small firms.
Above I showed job openings (blue) vs. actual hires (red) in the JOLTS survey. The
National Federation of Small Business conducts a similar survey among its members. Here are their graphs of job openings and actual hiring from their most recent report:
Small business owners clearly started singing “Happy Days are Here Again” on the day after the 2016 Presidential election. And their job openings soared.
But their actual hires didn’t. They are adding jobs at the same level as they did in 2014 and 2015. They are behaving as if they have a taboo against raising wages.
So in conclusion, while I have no doubt that the “monopsony” argument is measuring something real, I am more and more inclined to believe that raising wages is simply becoming an ideological taboo among businesses, a higher priority than maximizing net profits after costs.
So if true are we all not worse off for this action? Does this in any way explain lack of growth?
Ideological taboo? What a joke. Repeat after me–it’s called GREED. Pure, simple, naked greed. Calling it a “taboo,” makes it sound like there is a justification for it, which there isn’t.
Actually from the experience of towns like Williston ND the shortage of workers is not enough to trigger pay raises, In Williston during the oil boom wages did rise to the point where even the $15 per hour proposal was less than the local minimum (even at the local McDonalds), because the oil business paid so well. I suspect in a number of smaller towns such as where I live between Wal-Marts and McDonalds raise to about $10 for a starting wage that becomes the effective minimum in town, with less of a wage you get lots of turnover. I do observe places that seem to have help wanted signs up all the time, and have lots of turnover. Clearly one issue is that the cost of turnover in management time is still less than the cost of higher wages. Further the possiblity of short staffing is not enough of an issue. It may depend on how far you are from the local Wal-Mart in a smaller town. It was the cost of turnover that lead to Wal-Mart raising wages, just like it was with Henry Ford 110 years ago.
On a different point of view, consider that in the free capitalism of the late 19th century wage rates would have decreased in 2009. Since that did not happen it does appear that today wage rates are sticky downwards, and as a result may be sticky upwards in the same way.
“this is a monopoly or at least oligopoly on the demand side for labor. Increased market power”
This is false. There are millions of employers, plus the option for self employment. With this number of buyers, the labor market more resembles “Perfect Competition” than “Monopsony.” Since this premise is false, all the analysis that follows is specious.
And I would bet a million dollars that this statement is not even close to accurate: “Almost a quarter of all workers report that their current employer or a former employer forced them to sign a noncompete clause…”
Sammy:
Give me the f***ing money.
“In a new study for the Brookings Institution’s Hamilton Project, we report survey results in which we find that one in five workers with a high school education or less are subject to a noncompete. A quarter of all workers are covered by a noncompete agreement with their current employer or a past one.”
There is more than just one study. Why do you make these silly comments?
“Why do you make these silly comments?”
They are not silly. I have employed hundreds of people, with no non compete. Never even considered it. I have worked in many industries, never knew anyone with a non compete. I know hundreds of people in the the tech industry that change jobs regularly. I know tons of lawyers that go off to start their own firms and take their clients. No non compete. Salesmen, same. Construction workers if they are slightly pissed off, go down the street to get another job in a day. I know non-competes are ridiculously hard to prosecute. So I am at least 0/1000. Everyone else in the world must have an incredibly high percentage of people that have binding non-competes. What is your experience?
“one in five workers with a high school education or less are subject to a noncompete”
This is absurd. You are talking about relatively unskilled labor. They would absolutely bust out laughing and sign the agreement if I tried.
Run, you need to get out into the real world. Or do you want to take my rhetorical bet?
Sammy,
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About 20% of our labor force thrives under what could be described as perfect competition conditions. Perfect competition defined simply as being able to extract pretty much the max the consumer is willing to pay for their input to products and services — never mind all that long winded economic definition, right?
To raise most our workforce to “price negotiators” our coming blue wave Congress simply needs to mandate union certification and re-certification elections at every private workplace; every one, three or five years, plurality rules on the latter.
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How is it possible for there to be more hires than job openings for over a decade?
Even if you are hired by a friend who never posts a job, would you not need to consider the job to be open before it can be filled?
I suggest you think in terms of differential equations. The rate at which jobs are opened depends on the rate that firms think demand will rise. Non-linear even since rapid growth leads to wage inflation and slow growth or recession leads to zero wage inflation.
I have looked for a job twice in the last 4 years. First time I made over 100 applications to get one job. Two years later, I got a job with my 5th application. Firms are going to see the inverse. In a tighter market they will need to interview more people and allow more time to find them. In the world of large corporations, that leads to more openings.
I think the starting point is that there are “fair” values for people’s work. This is something primal. It usually takes something dire, such as an existential threat, to change these valuations. That’s why women’s work pays less. It’s why a woman is paid less doing the same work. She’s a woman. She is worth less, therefore what she does is worth less. It’s why racist regimes base pay on the race or nationality of the worker, not the work done. It isn’t just race or nationality. There are caste restrictions and class restrictions as well, and good luck to any individual who tries to buck them.
Raising wages isn’t a new taboo. It has just gotten more and more noticeable.
These assessments get enforced in a variety of ways. Employers in a line of work will often enforce it even in the face of labor shortages. It isn’t about greed so much as about what is “right and proper”. Employers usually prefer to leave money on the table rather than raise wages. In most businesses, there is an informal oligopsomy where certain leading businesses set the prevailing wage levels, blacklist labor organizers and standardize terms and conditions of employment. Even during a labor shortage, just about every employer is going to offer the same deal. I’ve seen this in the software business, and I know that it is much worse in less well paying, talent oriented businesses. (As the Apple-Google deal showed, it is sometimes enforced more formally.)
Yes, that non-compete situation is ridiculous, but once one employer starts doing it, others quickly copy. Is 20% the right number? I wouldn’t be surprised. A lot of the people being slapped with non-compete agreements are minimum wage workers. They are told to sign or they don’t get the job. For a while, it is possible to shop around for an employer who doesn’t want a non-compete, but that costs time and money. Word gets out that one turned down jobs, a black mark in many circles. Worse, more and more companies like the idea, so it gets harder to find a job without a non-compete.