The Invisible Hand Slaps Millennials in the Face

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Google and other cool technology companies have set the employee-keep-happy standards in Silicon Valley. Games, yoga, personal time. These fit into the companies’ shareholder obligations, which despite the do-gooder pretense, always come back to profit.

That’s what the invisible hand is all about, right? It’s actually in the company’s best interest to treat employees well because then the company attracts good employees and keeps them happy, which increases worker productivity, in turn increasing profitability and sales, and then more sales follow because the company can market its good reputation.

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But there are a few things that distinguish employees of cool tech companies from, say, those of an auto manufacturer. It’s the skills of the workers and their choices in employment. Actually, if you want to make a complete list, you can look at the factors that create employer monopsony power:

  • There is only one main employer in a particular region / industry. Workers have no choice who to work for.

  • Workers lack information about other jobs.

  • Significant costs and difficulties in workers moving between companies. E.g. firms may distrust workers who frequently move looking for a higher wage; geographical immobilities in moving.

  • The wage rate is only one factor out of many that motivate workers. A worker may stay in a job where he feels a certain degree of certainty rather than move to another company with a higher wage.

  • High rates of unemployment give firms greater choice in choosing workers.

An employer has monopsony power when its employees don’t have a choice to go elsewhere. Suppose the employer runs the only manufacturing plant in the town, and the employees don’t have the ability to get other work. The employer can exploit the circumstances and pay less for labor than the competitive market demands. 

A labor union can also influence the cost of labor — in the other direction. When employees organize and demand that wages don’t drop below, say $13/hour, employers are forced to pay $13/hour, even if a competitive market would only pay them $11/hour. 

Optimal market versus reality

The invisible hand works wonderfully in the perfectly competitive market. But the reality isn’t competitive. The threat of monopsony power is real. Companies have exploited labor when they’ve controlled market power. That’s why there’s regulation, like a minimum wage; or unions demanding certain labor conditions. 

Unions aren’t perfect

Unions have worked sub-optimally in the past, which is in part why they’ve received criticism. Early 20th Century unions functioned as they were supposed to: they balanced out the disparate bargaining power between companies and workers and provided a voice for employees. But then, and at some point (in the 1970s) when companies began to struggle, unions kept up their high demands on companies, overburdening them with costs that seemed unreasonable from the companies’ end. 

Union membership started to wane in the 70s and the “good ol’ union” suffered a final blow in 1981 when Reagan refused to respect a major air traffic controller strike, firing 11,345 striking workers. The event signaled a weakness in unions that would never be recovered.

Unions today

Labor unions exist today but many fewer workers and industries have them. Unions continue to face fire from conservative thinkers, who would rather companies be unrestrained from the costs of worker protections, the worth of which they believe is arguable. 

In 2018 the anti-union perspective won a victory in the Supreme Court that will make it even harder for unions to do what they’ve traditionally done best: negotiate wages on behalf of all employees (Janus v. AFSCME). Since the 1940’s states have passed “right to work” laws which make it illegal for companies to force workers to pay collective bargaining fees. Not all states have done so, and Mark Janus who brought the Supreme Court case was in one of them — Illinois. 

Janus was an employee of the state of Illinois and had been forced — not to join the union because that’s been illegal for a while — but to pay for the collective bargaining actions of the union. Because union exists, it bargains; and it must bargain for everyone including the non-members. That’s why everyone has to pay for the bargaining. Janus objected to being required to pay the collective bargaining fee. In likening the public union to a governmental lobbying group, Janus convinced five members of the Supreme Court that forcing public employees to support the union’s collective bargaining efforts violates the First Amendment.

Union collective bargaining efforts were already burdened in “right to work” states, and now they’ll be struggling in public employment too. Without the payments unions would have received from nonmember employees like Janus, it’ll be hard for them to get the funding to negotiate to their full potential.

Who gets hurt?

Labor unions aren’t needed at Google. But they are needed in small towns where a single manufacturing plant employs a significant number of the population. Where the median level of education does not include college. And where people cannot afford to take a year off for an unpaid internship. 

A mining company in a traditional mining town is the typical example of a company with monopsony power. That’s monopsony power to the extreme -- zero alternative choice of employment. It’s rarer today to find a community completely tied to one employer, but monopsony power exists on a spectrum. And some employers certainly can exploitatively drop wages because they have a large share of the labor buying power. 

The National Bureau of Economic Research found a clear connection between market concentration and worker wages in a 2017 study. By studying labor markets and posted wages on CareerBuilder.com, the study found that where markets are less concentrated (more employers to choose from), workers are better paid, and vice-versa. The study also found that most labor markets in the U.S. are highly concentrated. This chart shows the concentration measures (HHI Index) for different industries (highly concentrated = less choice for workers):

 
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Source: José Azar, et al., Labor Market Concentration, National Bureau of Economic Research (Dec. 2017, revised Feb. 2019) at figure 4.

The chart does indicate, however, that it’s not only in manufacturing industries that workers stand to be exploited because of market concentration. And now that labor unions aren’t at their best, is there a solution to protect workers? 

Trump’s approach

President Trump is opposed to labor unions, so we won’t be seeing any efforts to strengthen them while he’s in office. But President Trump does have some solutions to better protect workers. It’s primarily about job protection (the number of jobs) than about the work conditions (the quality of jobs). 

President Trump is seeking to manufacture more in the United States. If Trump’s tariffs on Chinese imports give American manufacturing companies a competitive edge, American manufacturers will hire more workers to increase production. It’s possible that treating workers better comes with that, but the facts don’t show that happens. In the best case, however, let’s assume there are more manufacturing jobs. 

More manufacturing jobs increases exactly the type of employment where workers are desperate and likely to be exploited. The companies can profit by hiring more non-highly-skilled laborers. Consequently, however they aren’t incentivized to better their technologies. 

The future

What’s going to happen with unskilled manufacturing jobs in 20 or 30 years? They’ll be replaced with technology. If we focus on increasing manufacturing jobs here, workers will scoot along making ends meet with low wage work while China can seize the opportunity to better its technology and to educate its workforce.

It’s clear that tech jobs are the jobs of the future, so it seems that what’s going to really protect workers is to give them skills and choice. Many young people are taking the financial risk of going to college, so they are indeed gathering skills. But choice is something that even educated millennials aren’t able to obtain. 

Workers in even specialized industries are starting to get whitewashed out and minimized down to the profit they provide instead of the skills they offer. Companies are more and more able to distance themselves from the costs of hiring real people. As Michael Hobbes points out in a very smart essay on the condition of millennials, companies that used to hire direct employees are now outsourcing the hiring of those jobs:

Thirty years ago . . . you could walk into any hotel in America and everyone in the building, from the cleaners to the security guards to the bartenders, was a direct hire, each worker on the same pay scale and enjoying the same benefits as everyone else. Today, they’re almost all indirect hires, employees of random, anonymous contracting companies: Laundry Inc., Rent-A-Guard Inc., Watery Margarita Inc. In 2015, the Government Accountability Office estimated that 40 percent of American workers were employed under some sort of “contingent” arrangement like this—from barbers to midwives to nuclear waste inspectors to symphony cellists. 

This “domestic outsourcing,” as Hobbes calls it, is allowing companies to dissociate from training workers and worrying about their security or well-being. Hobbes explains how several other features of the job market, the housing market, and the lack of a government-provided safety net contribute to many millennials being at risk of poverty. The need for worker protections today are greater than a generation ago, and it’s worth a united evaluation of how unions or the government can help.


Highly recommended reading

Michael Hobbes, Why millennials are facing the scariest financial future of any generation since the Great Depression, Huffington Post Highline.

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