Not So Free to Contract: The Law, Philosophy, and Economics of Unequal Workplace Power
Note: This blog is cross-posted to the Law and Political Economy blog.
Running through the fields of employment law, philosophy, political science, and economics is the pervasive assumption that employers and employees share equal power. This assumption, which distorts employment law so as to undercut worker protections, contradicts common sense, and evidence as well as any reasonable interpretation of recent history. Despite notable gains in worker power over the past two years, the erosion of worker power and the suppression of wages during the preceding four decades is well–documented. Substantial evidence shows that employer power is pervasive, especially relative to those without college degrees, minorities, and women—in other words, the vast majority of workers.
This blog post draws upon and serves to introduce a new issue of the Journal of Law and Political Economy, which aims to elaborate the role that the equal-power assumption plays in employment law and policy, and to provide new social science evidence challenging that assumption. The essays contained in this issue, as I describe below, demonstrate that the power to quit does not prevent worker exploitation and that the circumstances that inhibit workers from quitting contribute to substantial, systematic employer power over wages and working conditions. They also show that restricting the power of management—through minimum wage policies, collective bargaining, and codetermination—benefits workers without causing adverse economic outcomes for firms or the economy, contrary to oft-made claims made by jurists.
Equal Power and the Freedom-of-Contract Framework
The assumption of equal (or equal-enough) power provides the foundation for positing that an employer and a worker are “free to contract”: the two parties have equal power to enter into or reject an employment relationship, their negotiated arrangements are optimal, and (so) these arrangements should not be altered or regulated by external forces, such as government-set labor standards or unions.
Following the work of Samuel Bagenstos, we can briefly note three specific toxic impacts that the equal-power assumption throughout employment law. First, the equal-power assumption underlies the common law at-will employment doctrine, which in turn “reinforces status hierarchies in the workplace by requiring workers to accept all manner of indignities on pain of losing their jobs” and has made it nearly impossible for workers “to challenge intentional race or sex discrimination, retaliation for their union activity, and other violations of the law.” As Cynthia Estlund has observed, “[I]f employers are free to discharge workers for good reasons, bad reasons, or no reason at all, they can easily hide the bad motive that violates antidiscrimination, anti-union, or anti-retaliation laws.” Second, the equal power assumption enables employers to misclassify employees as independent contractors. Employers can avoid workplace protections simply by categorizing workers as independent contractors and writing this categorization into contractual documents. Since these contracts are “freely chosen” by workers, courts tend to ignore the contextual disparities of power that lead workers to enter into the agreements. And third, the assumption of equal power has led to the adoption of widespread forced arbitration in employment disputes. Under the Supreme Court’s 2018 decision in Epic Systems, contractual provisions for individualized arbitration proceedings must be enforced, despite the fact that workplace arbitration agreements are often a condition of employment. As Justice Ginsburg noted in Epic Systems, the idea that employers can force workers to give up their rights in order to retain their jobs violates the basic premise of the NLRA and ignores unequal power.
The Economic Claims Entrenching Employer Power
Julia Tomassetti and Chetan Cetty, in this JLPE issue, parse the arguments made by conservatives to support the freedom of contract framework in philosophy and law. Tomassetti identifies two key assumptions about economic relations that entrench employer power in employment and labor law. First is the assumption of “balanced power,” according to which there is no acute, systematic imbalance of power between the employee and employer; the individual worker’s right to quit or reject employment is thus comparable to, if not equal to, the employer’s power to terminate or withhold employment. For example, as Milton Friedman claimed, “the employee is protected from being coerced by his employer by the existence of other employers for whom he can work.” This assumes, of course, that there are jobs for the taking: as Cetty astutely observes, defenders of the equal-power assumption “assume away unemployment and take full employment as a given.”
Second is the assumption of “managerial prerogative,” under which the employer’s control over nearly all aspects of the commercial enterprise must be almost absolute to prevent adverse economic consequences to the enterprise and the economy.
Do we have reason to accept these economic assumptions?
Why the power to quit does not prevent worker exploitation
Kathryn Edwards points out that the freedom to quit does not guarantee the ability to find a new job; barriers can make moving jobs a luxury, rather than a right. Edwards identifies two primary types of barriers: labor market considerations (can a worker find another job?) and financial considerations (can a worker afford to transition to another job?). Many jobs have scheduling, time-off, and other policies that make it almost impossible to search for a new job while employed. Discrimination is an additional barrier for many workers. A key barrier, given workers’ limited wealth and liquidity, is the inability to finance an unemployment spell dedicated to finding a new job. It is difficult to move to another location to find a job, and workers with certain medical conditions can be locked into jobs that meet their health insurance needs. Plus, working parents can be locked into jobs because their current schedule or location allows them access to child care.
Because, as Mishel documents, workers face excessive unemployment as a matter of course, employees can rarely walk away from their jobs as readily as employers can find replacements. During the period between 1951 and 2019, there were 1.75 unemployed persons per job opening. Even on the rare occasions of full employment, large segments of the workforce still face substantial unemployment and difficulty finding quality jobs. Blacks, Hispanics, and those without college degrees endure a permanent recession. Voluminous research shows that excessive unemployment disadvantages workers and assists employers. For workers, higher unemployment lowers quit rates and translates to fewer transitions to new jobs and longer spells of unemployment between jobs. For employers, higher unemployment allows them to fill job vacancies more quickly, with desired quality and with less effort, while opportunistically raising expected credentials for new hires. Not surprisingly, therefore, higher unemployment lowers wage growth, especially for low- and moderate-wage workers and for Black and Hispanic workers.
Naidu and Carr review the wave of recent studies measuring employer ‘monopsony’ power and provide new empirical findings showing that quitting is not so easy. Their focus is on a measure of employer power, the quit elasticity, that measures how much more likely a worker is to quit a job in response to a (small) wage change. Studies find that quit elasticities are low, in the 2-3 range, implying that a 10% reduction in firm wages increases the probability that an average worker quits by 20-30%. This, in turn, implies that workers are paid only about 80-85% of the value they produce, showing that employer power is pervasive. Naidu and Carr also note that historically disadvantaged groups have systematically lower quit elasticities, indicating that they face even greater employer power.
Must management rights be absolute?
To what extent are management rights necessary to current economic productivity? Before assessing the potential impact of their diminution, it is important to clarify the various dimensions of management rights. To begin with, most management rights are never challenged by collective bargaining or legislated mandates on employer behavior: neither legislation nor collective bargaining constrains management’s ability to decide what to produce, where to produce, how to market, and what prices to set, nor do they impact the techniques, tools, and equipment used in production processes.
The most studied government policy intervention constraining managerial decisions has been the minimum wage. Conventional competitive labor market theory suggests that raising the minimum wage will cause unemployment and, ultimately, hurt low-wage workers. Zipperer’s review highlights voluminous research, based on outcomes in the United States, the United Kingdom, and other advanced economies, which concludes that increasing the minimum wage, sometimes significantly, has not had significant adverse economic outcomes for the intended beneficiaries—low-wage workers—nor for the economy overall. Instead, raising minimum wages has little, if any, negative impact on employment so that the sizable increase in hourly wages produces sizable gains in the average and total annual earnings (total hours worked times average hourly wage) of low-wage workers.
In 1994 the Organization for Economic Cooperation and Development (OECD) claimed that labor market flexibility—the reduction of regulations and collective bargaining constraints on employers—was essential to maximizing employment, minimizing unemployment, and obtaining growth. Consequently, it recommended efforts to reduce minimum wages, decentralize and weaken collective bargaining, weaken employment protection legislation, restrict entry to and the generosity of early pensions, and reduce unemployment benefits. Evans and Spriggs recount the ensuing research developments that led the OECD and other international organizations to reverse their position by 2018. Later research confirmed the basis for the OECD’s new stance. According to a meta-analysis conducted by Philipp Heimberger, which reviewed 75 studies across countries that examined the relationship between employment protection legislation (EPL) and unemployment, “We cannot reject the hypothesis that, on average, the genuine empirical effect of EPL is zero.” Likewise, Adams et al. studied 117 countries from 1970 to 2013 and found their laws “have become significantly more protective over time and that strengthening worker protection is associated with an increase in labour’s share of national income, rising labour force participation, rising employment, and falling unemployment, although the observed magnitudes are small.”
Finally, Jager, Noy, and Schoefer’s research on codetermination provides insights on the impact of incursions into management’s prerogatives. In the Supreme Court decision First National Maintenance Corp. v. N.L.R.B., 452 U.S. 666 (1981), the Court declined to impose on employers a duty to bargain with a union over partial closure decisions because such a duty would impinge on “an employer’s need for unencumbered decision-making.” This decision prevented what the Chamber of Commerce said would be “a sharp departure from the traditional principles of a free enterprise economy.” Yet what an employer might call an encumbrance can likely produce net economic benefits. In “shop-floor” codetermination arrangements, worker representatives enjoy decision-making authority and are involved in day-to-day firm governance. Jager, Noy and Schoefer find that codetermination does not obstruct or significantly slow down decision-making; indeed, surveys of managers, directors, and even investors report mostly positive views of codetermination. Jager, Noy, and Schoefer also review shop floor and board representation impacts on an array of economic outcomes and conclude that “the existing evidence shows it is possible to involve workers in workplace decision-making in ways that, if anything, weakly improve firm performance while also plausibly benefiting workers.”
As this issue of the JLPE makes clear, the assumption of equal power between employers and employees is deeply embedded in employment and labor law to the disadvantage of the vast majority of workers, particularly Blacks and Hispanics, women, and those lacking a college credential. Ignoring employer power over workers therefore further deepens workers’ power disadvantage, diminishing compensation, equality, freedom, and democracy.
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