If you don’t like your job, can you always quit?: Pervasive monopsony power and freedom in the labor market
Suresh Naidu, Columbia University, and Michael Carr, University of Massachusetts Boston
One common metric of monopsony power is the quit elasticity, measuring how much more likely a worker is to quit a job in response to a wage change. Experimental and quasi-experimental variation in wages across workers within a given job results in quit elasticities in the 2–3 range, implying that a 10% reduction in wages increases the probability of quitting by 20–30%. In a model with monopsonistic employers, a quit elasticity of 2–3 also implies that workers are paid about 80–85% of the value they produce. These results indicate that employer power is pervasive. We present observational evidence that historically disadvantaged groups have systematically lower quit elasticities, indicating they face even greater employer power. Because monopsony power comes from an inability of workers to voluntarily switch jobs, the quit rate and especially the quit elasticity can be a useful metric for judging the health of the labor market. Pervasive employer power alters the analysis of labor market policy in a number of important ways.
Kathryn Edwards, Rand
Worker mobility—the ability to find and take another job—is at the core of worker power, and, conversely, worker immobility is at the core of employer power. But how easy is it for a worker to leave a job and look for another?
In this paper, we present evidence of barriers to worker mobility along two dimensions: labor market considerations (can a worker find another job?) and financial considerations (can a worker afford to transition to another job?).
Understanding black-white disparities in labor market outcomes requires models that account for persistent discrimination and unequal bargaining power
Valerie Wilson, Economic Policy Institute, and William Darity Jr., Duke University
The assumption of a perfectly competitive labor market is central to some of the most widely accepted theories in the field of labor economics. But the persistent threat of unemployment means that workers often cannot change jobs or employers easily and without cost. This imbalance of power disproportionately disadvantages black workers: One of the most durable and defining features of the U.S. labor market is the 2-to-1 disparity in unemployment that exists between black and white workers. The economic theories most often invoked to explain racial differentials in labor market outcomes—human capital theory, taste-based models of discrimination, and statistical models of discrimination—fall short in their attempts to explain long-standing racial disparities in unemployment and pay while blatantly denying the persistence of discrimination. A better framework is stratification economics, which argues that, while discrimination is unjust, it serves the functional role of preserving hierarchy. Identity can be structured so that investing in, or associating with, a group identity can lead to economic returns and benefits.
Simon Jäger and Shakked Noy, Massachusetts Institute of Technology, and Benjamin Schoefer, University of California, Berkeley
How does codetermination—entitling workers to participate in firm governance, either through membership on company boards or the formation of works councils—affect worker welfare and corporate decision-making? We critically discuss the history and contemporary operation of European codetermination arrangements and review empirical evidence on their effects on firms and workers. Our review suggests that these arrangements are unlikely to significantly shift power in the workplace, but may mildly improve worker welfare and firm performance, in part by boosting information-sharing and cooperation and in part by slightly increasing worker influence.
The great reversal: The story of how an influential international organization changed its view on employment security, labor market flexibility, and collective bargaining
John Evans and William Spriggs
The claim that labor market flexibility—the lack of regulations and collective bargaining constraints on employers—is essential to maximizing employment, minimizing unemployment, and obtaining growth simply does not have empirical support. That the claim lacks evidence can be seen by tracing how the market fundamentalist assertions made in the initial OECD Jobs Strategy in 1994, conducted with limited external evidence, has been reversed by the OECD and by other international financial institutions in the years since. The OECD now notes that new evidence “shows that countries with policies and institutions that promote job quality, job quantity [maximum employment rather than minimum unemployment] and greater inclusiveness perform better than countries where the focus of policy is predominantly on enhancing market flexibility.” It has also rejected the argument that collective bargaining defends the interest of “insiders” against “outsiders” in the labor market. While OECD reports previously made almost indiscriminate calls for lowering labor standards to increase labor market flexibility for employers, they now caution that irregular work can be a danger.
The legal ‘freedom of contract’ framework is flawed because it ignores the persistent absence of full employment
Lawrence Mishel, Economic Policy Institute
The “freedom of contract” view that employment arrangements negotiated between employers and employees are necessarily optimal exchanges between equal parties willfully ignores the fact that workers rarely enjoy full employment, and without full employment employers enjoy plentiful access to willing new workers while employees face difficulties and costs in finding alternative comparable jobs. Many groups of workers, particularly Blacks and those without college credentials, have higher-than-average unemployment, and never enjoy a full employment environment even when the aggregate economy is thought to be at full employment. Excessive unemployment matters a great deal: When unemployment is high, voluntary quits and the ability to switch jobs diminish, unemployment spells are longer, finding a good job is harder, and, correspondingly, wage growth is subdued for low- and middle-wage workers. Employers, on the other hand, are able to fill vacancies with qualified workers more quickly and with less effort. Simply acknowledging the persistent absence of full employment for many workers renders the freedom-of-contract framework a flawed basis for assessing employment relationships.
Larry Mishel and Josh Bivens, Economic Policy Institute
There is now widespread acceptance across the political spectrum that the typical worker’s wages have grown very slowly or been stagnant for several decades but a consensus narrative explaining wage stagnation has not developed yet.
Peter Dorman, Evergreen State College, and Les Boden, Boston University
A small but dedicated group of economists, legal theorists, and political thinkers has promoted the argument that little if any labor market regulation is required to ensure the proper level of protection for occupational safety and health (OSH), because workers are fully compensated by higher wages for the risks they face on the job and that markets alone are sufficient to ensure this outcome.
Nancy Folbre, University of Massachusetts-Amherst
Empirical research on the causes of the surprisingly persistent earnings gap between women and men often takes the form of statistical models that control for as many variables as possible—race, ethnicity, education, labor force experience, job tenure, hours of work, occupation, industry—but ignore any measures of bargaining power other than unionization.