0:33 Intro. [Recording date: September 7, 2018.] Russ Roberts: My guest is... Noah Smith.... Our topic for today is corporate governance, and how corporations could be run differently from the way they are run now. What are people worried about right now when they look at corporate governance and boards of directors and what corporations' responsibilities and accountabilities are? Noah Smith: Well, there's a number of worries. One of the main worries has been short-termisim: the idea that when you have a public company is that everyone is worried about the next quarterly result, and no one is thinking 5 years ahead. And, or even 1 year ahead. And so this could cause companies to underinvest. We have evidence that privately-, you know, held, closely-held companies invest more. This could cause them to miss out on key market segments and just take a bunch of short-term decisions, or even, you know, asset-strip. And so that's been a big concern. Obviously, there's also a big concern about wages. Even as corporate profits have risen, wages have been relatively stagnant in America. You know--compensation has gone up very little. Especially compared to, you know, decades like the 1990s or the 1950s and 1960s, obviously. And people are worried about that. And they are thinking, you know, the economy is growing and workers are taking a smaller slice of the pie. And how do we rectify that? Well, maybe we can use the government to tax and redistribute. That's the typical solution. But maybe we can force corporations to have, you know, to change their structure and have a more equitable or at least a more even distribution of the value added from their activities. So, those are the two big concerns. Russ Roberts: We'll link to a couple of articles you've written on these topics recently. In one of them you have a chart of the trend in compensation, and the trend in corporate profits. And they diverge somewhat dramatically around 2001. Which surprised me. You know, I hear a lot about how profits are rising, lately. I'm surprised it's that length of time. Of course, profits dipped with the Recession of 2008, 2007-2008, and then bounced around a little bit. But they've been--recovered quite well since then. Noah Smith: Right. Russ Roberts: So, this is a fairly long period of time of rising corporate profits. And it might be useful to talk just a minute about the stock market and corporate profits as a measure of, say, the economy's performance. I think a lot of people mistakenly think that those two are the same thing. That, 'Well, the economy's growing. Corporations should make more profit,' or 'The economy's growing, and that's good for companies; and that's good for everybody.' And, when we talk about corporate profits, we're really talking about a particular segment of the American economy which is publicly-traded companies. It's not the whole economy. Noah Smith: Ummm. Right. It's not the whole economy. Definitely. It's just something, you know, people think that they can influence. Russ Roberts: Well, they want to play with it. But I'm thinking about the fact that a lot of people will argue that economic policy must be doing a good job because corporations are making more money or the stock market is rising. And I just don't--I don't think that's a really good measure. In particular, if changes in tax policy--we've recently cut corporate tax rates--I expect corporations to at least in the short run, maybe not for the long run because of competition, and we'll talk about that later, but: short run potentially to make more profit. That they can make more profit at the expense of customers. They can make more profit at the expense of smaller firms that might have trouble complying with certain types of regulations. I just think it's important to emphasize that the health of the corporate sector is not a one-on-one correlation with the economy as a whole. Noah Smith: Right. Exactly. And I forget who it was, but there was a great line that said, 'We don't want to tell people: Let them eat the Dow Jones Industrial Average.' Russ Roberts: Yeah. Exactly. Although, of course, a lot of Americans do own stock. Which is pleasant: If the market is going up, it's always nice. But, I think-- Noah Smith: It's very concentrated. I mean, stock ownership is so concentrated among the top 10% of Americans. Most middle class people in America have most of their wealth in their houses. Russ Roberts: Yeah. Which is unfortunately, for a lot of reasons. But to the extent that you have pensions--I don't know what proportion of Americans have pensions. But they, of course, are often benefiting from the growth in the stock market as well--although it may not be measured right now, at this point in time. Noah Smith: Right. People do have pensions. People do have 401ks; and they often are exposed to stocks that way. And so, you have a little bit of stock owned by a lot of people; but then a lot of stock owned by a little bit of people. And this is a very fat-tailed distribution. Russ Roberts: For sure. But I just--I think it's really important to keep in mind that, what I would call 'corporatism', that this somehow--the idea of coddling corporations--which will lead to higher profits and higher stock market values--it's not a good thing in particular. It's not a bad thing in and of itself. But it's not a goal. Noah Smith: Uh, right. Yeah.

6:29 Russ Roberts: So, people are worried about--in particular, they are particularly worried about compensation. The short-termism issue, I have never fully understood its source. You want to talk about that for a minute? Why do we think--I mean, why wouldn't long-term decisions or longer-term consequences be embodied in the price of the stock, so that everybody would care about the long term and the short term? They are discounted, of course. But, they still should matter. Noah Smith: Maybe, maybe not. We see--excess volatility is this really well-established fact. People have been arguing about it for a while, but really the evidence is pretty overwhelming. We see-- Russ Roberts: What is it? Noah Smith: Excess volatility means that--you see stock prices bounce around a lot. There's a lot of volatility in stock prices. Right? And then you see, you actually say, 'Okay, well let's look at the actual dividends that these companies have been paying.' Or, 'Let's look at their earnings. Forget about the dividends; let's just look at their earnings and see if the earnings end up bouncing around this much.' And you wait for 20 years and you look at it, and they never do. So, you know, today, people get really optimistic. Tomorrow they get really pessimistic. And the stock price just bounces around. And then you look and you see that earnings never did the same. So, imagine if you have a weather forecaster, and the weather forecaster switches his forecast: The weather forecaster is trying to forecast the forecast, like, two months away from now. And every day he switches his forecast. And one day he says, 'Oh, my God, the temperature is going to be 100 degrees.' And then the next day he says, 'Oh, my God, it's going to be freezing.' And he keeps switching back and forth. And then you get there and it's just, you know, a nice, even 72 degrees every day. And this guy is just, you know, talking crazy talk every day, like Alex Jefflands[?]. And, you fire that weather forecaster. And that's the analogy made by Robert Shiller, who really was the first to zero in on excess volatility and discovered it; and who won the Nobel Prize for, essentially, that. For realizing that stock prices are an excessively volatile forecast of future earning. Russ Roberts: Do we have an explanation for that? Noah Smith: We have too many-- Russ Roberts: Too many. Yeah. No doubt. Yeah-- Noah Smith: explanations for that. So. Yeah. And so, there's many explanations. The short-termism idea is basically that, you know, 'Yes, I may care about'--so, 20 years from now, someone is going to be holding this stock. But that stock is going to have changed a million times between now and then. And, in order for me to care about the long-term value of the stock, I've got to assume that every single person along the way cares equally about the long-term value of that stock, so that the--so that the price back-propagates. So, you know, by backward induction, you know, you remember that. Right? Backward induction, we can say, 'Okay, well if the last person cares about the value in 20 years, then the second-to-last person has to, too. Then the third-to-last person has to. Blah, blah, blah. All the way back down the chain to me. But if that chain is broken even one time--if there's even one idiot. Or not even an idiot. Someone who doesn't really care about the value who just has to sell, is forced to sell for liquidity reasons or because, you know, their, you know, daughter broker her leg skateboarding or something like that: Um, and then pays a price or charges a price that's not commensurate with the long-term value of the stock. If at some point the value/price link is broken, the whole chain is broken. And then: Why do I care? And there's good reason to think that that chain gets broken relatively frequently. That a lot of people actually do care about the fundamental value. But there are enough noise traders, liquidity traders, or just irrational people who don't, that, you know, this whole idea of, 'Well, I can project forward 20 years,' and then every single person who ever holds this stock is going to have to equally care about its long-term value: Well, or even 5 years. Or even 1 year, given how often stocks trade these days. You know, in other words, it's going to get washed out in the market and you are going to have that link, that chain be broken. So that's why. In other words, there are many possible reasons for short-termism. Russ Roberts: Yeah. I don't understand that. But, in particular my first-- Noah Smith: Hmm-- Russ Roberts: That's okay. My first thought is--let me take a different kind of example. We hear that the CEO [Chief Executive Officer] is focused on this quarter's earnings--at the exclusion of more important issues, perhaps down the road. So, I make a decision as the CEO to do something this quarter that leads to a horrific lawsuit in 5 years. And, the standard argument is: Well, the CEO probably won't be here in 5 years. The real question, to me, is: If you knew in advance that that was coming--and some decisions, of course, you can't know; but others you can. Why would I need that complicated backward induction argument? Isn't that just a simple arbitrage condition--that, the future value of the stock is going to be dramatically lower; that's going to affect the value today? Why do I need all these people holding the stock and all this complication? And isn't [?]--doesn't that suggest that the short-termism is performing a different purpose? It's not that investors have short time horizons or that CEOs have short time horizons. It's--perhaps it's just hard to figure out what's going on in the long term. And short term is the best we can do. The idea that somehow, that these great decisions that are being foregone because people are focused on quarterly earnings strikes me as a very bizarre picture of the stock market, corporate governance, and so on. Noah Smith: Um--I mean, I can't speak to that. I--you know, so, a lot of people--this seems extremely intuitive--the idea that people making decisions today should care chiefly about the value years from now would strike a lot of stock market participants as kind of absurd. They'd laugh at you. And, of course, there's a big tug of war here, between traders and entrepreneurs, venture capitalists, long-term people. You find almost nobody who is not vested in some way. And so if you talk to private equity people, venture capital people, they will often complain about short-termism. And if you talk to, um, you know, executives who often have big plans, they will often complain about short-termism. Look at Elon Musk fighting with Short Sellers on Twitter. So, they'll definitely complain about short-termism. But then, if you talk to, you know, traders, they'll say, 'Oh. No. Of course there's no short-termism. Obviously, you know, long term value governs the value of the stock. Blah, blah, blah. And so, it's hard to get a neutral opinion. But, when you look at research, you find a few things. You find, Number 1, you find if you take a company off the public markets and have it one the private markets, it re-invests more of its profits. And that's a pretty robust statistical correlation. Why is that happening? Why--you know, Modigliani-Miller says, and various other neutrality results in economics, saying, 'Nothing like that should ever happen. It shouldn't matter if you are owned by a consortium of 8 super-rich people or if you are owned by 9000 individual little stock investors and traders. It shouldn't make a bit of difference.' But yet it does. And why does it? We don't know. We also see that founder-run companies invest more. And also are more profitable in the long term. So, that's probably why you see a lot of these great companies being helmed by the people who originally made them. So you see, you know, Apple is headed by Steve Jobs; then they kick him out; then he leaves, goes and does some other stuff; then he comes back. Then he starts running the company again and all of a sudden it gets revitalized and you know, kicks major butt. You see Bill Gates--Microsoft was really a titan under Bill Gates, and then it just goes into--Bill Gates, you know, retires to go do his philanthropy stuff and then you see Steve Ballmer and some other outside people, non-founders, running the place; and then it sort of becomes this very staid, blue-chip company. That just does its thing and doesn't grow super-fast and ceded a lot of the market to Google and whatever. So, you see a lot of examples of this in real life, where founders invest a lot more, have these very dynamic, coherent, unified visions for their companies. So, we have pieces of information on several different fronts, about founder-owned companies and just about closely-held companies in general showing that, like, they invest a lot. So, that gives some feel to the short-termism argument. Russ Roberts: Yeah. I'm not sure the founder argument goes as cleanly as you might like. It's interesting. Relevant. Founders have different emotional issues about their own companies. They--lots of stuff going on there. They are interested in taking a risk. It's certainly the case that a publicly-traded company is going to behave differently than a founder-run company in all kinds of directions. I'm just not sure that short termism is the main thing there.

15:47 Russ Roberts: But, let's move on to the second point you made, which I think is the more interesting point. It's the one that's--I think most people would prefer that the markets not be so short-termy. But, they are much more concerned about the wage issue. Noah Smith: Right. Yeah. And so we are talking about short-termism; and it's good we got that out of the way. Because the real issue is about distribution. The real issue is about how much these companies are paying their people. Russ Roberts: And so, a lot of people--well, before we talk about a lot of people: looking abroad, America has one set of policies, legal structures, etc. But elsewhere, countries have experimented and tried different methods of corporate governance. And I want to talk about co-determination, which is what--is that the right word? Noah Smith: Yes. That is exactly the right word. Russ Roberts: Which is the thing you wrote a column about recently. And this idea is that workers would have a say on the Board either as holding seats on the Board or as having influence on who is on the Board. And, what's the argument there? What are some of the models outside the United States that we can learn from about the impact of this? Noah Smith: So, you know, Germany is the most famous model. And Germany is a relatively good model because it's a large-ish country; it's got about one quarter of the size of our population, but that's still a lot larger than some very small countries like Sweden or Denmark. And, they have a co-determination system. Now, Germany has two main pillars[?] of its co-determination system. One is, workers' councils, which, you know, basically a council of workers that has input into things and handles some of the collective bargaining. But that's not what's on the table here in America. The other part, the part that is here on the table in America, is that workers have representation on corporate boards. So basically, if you work for a company, you are considered a stake holder, and you get to vote for the Board. Now, in America, that is not true. In America you only get to vote for the Board if you are a shareholder. So, shareholders are considered the only official stake holders who own the company. In Germany, basically they have partial worker ownership for companies. Russ Roberts: And what do we know about the German experience? Noah Smith: Well, relatively little. I mean, so we know that Germany has less inequality than we do. We know that Germany has less inequality than we do. But, there could be a number of reasons for that. You know, Germany is a smaller country with less regional inequality. You know, Germany has, you know, a different education system, and blahblahblah. So it's [?]-- Russ Roberts: It's only about a million, maybe a million and a half actors, that are different in Germany than in the United States, besides that they have co-determination. So, yeah. Noah Smith: Exactly. And it's hard to, you know, sort of look at these aggregates and say, 'Okay, well Germany is doing better. We better just copy everything they do.' That's cargo-cult thinking. Right? You know cargo cults, right? Russ Roberts: I do. But why don't you explain it--so, Feynman, right? Noah Smith: So, cargo cults were this relatively short-lived phenomenon. In World War II, you know, American military would land on all these islands and bring awesome stuff with them. And then, eventually after the war they just left and stopped doing that. And, some of the people there thought, 'Well, how do we get this stuff back?' and 'How do we make these planes land again and bring us awesome stuff?' And so they sort of made facsimiles of air traffic control equipment and made a religious cult and made a plane--fake planes out of straw. It wasn't that common of a thing; it happened on a couple-- Russ Roberts: It maybe never happened. But it's such a good example-- Noah Smith: It did happen somewhere. But yeah, so I don't want to, you know, stereotype the poor-- Russ Roberts: It's probably apocryphal-- Noah Smith: the poor people of the South Pacific. Russ Roberts: But it's a Richard Feynman story, if I remember correctly. Right? The physicist. Noah Smith: Yes, it's a Richard Feynman story. Russ Roberts: He used it as an example--of ideological--it's actually a fantastic example of misconstruing correlation for causation. Right? Noah Smith: Exactly. Russ Roberts: When you had a lot of planes on your airport, you got a lot of goodies. So, let's put a lot of fake planes and make it look like an airport. Or, better: Let's build an airport. If we build it they will come. But of course, it doesn't work that way. Noah Smith: Right. And, yeah. So that's--so we can't--it's hard to look at aggregates in Germany. And so there has been research on co-determination, and looking at companies that are, you know, subject to co-determination. And that research has been somewhat mixed, actually. So, you can do a cross-country regression, see that countries with co-determination in general, not just Germany, do tend to have lower inequality. But, again, that's a pretty blunt piece of research. You can look at the--you can just compare at the company level--companies that have labor representation on their Board. And again, that's looking at correlation, not causation. So that's important to realize. But, um, you--some papers find that companies with labor representation on their Boards do have lower stock market value. And that implies that workers are successfully extracting some of the value from shareholders and redirecting it to themselves. Which is exactly what the proponents of co-determination in America would want. It's saying: Well, if you give workers seats on the board, they are going to use it to press for higher wages and lower profits while keeping productivity similar. And some people do actually find evidence of that, but then some other papers don't find that, and they say well actually there's no relationship at all, no correlation. So it's a wash. So, it's not clear. You don't seem to find anyone who thinks that co-determination results in worse wages for workers. That's not a thing that anyone has found. Russ Roberts: But you could. You could--that would be a possibility. Because it could be that workers are very worried about the long-term stability of the company. They value their job security. And so they're willing to take lower wages and make higher profits to make sure the company survives about all else. It's possible. Noah Smith: That's right. It's theoretically possible. So that's one of the things that makes this very hard to study, because you can use profit as just a way of distributing the value added to the shareholders and saying, 'Here, rich people: take your stuff, go buy a yacht.' Or, you could use high profits as essentially a cushion, and you could say, 'You know, we have this very volatile manufacturing-based business,' as you do in Germany, 'and this year we might sell a lot of cars; and then next year we might not sell any cars; and so we are going to make sure that when we do sell cars, we make a bunch of profit so that we have this cushion so that we don't go out of business in the years that we don't sell many cars.' And so, that could be a thing that's going on, too; and it could be that high profit margins could act as a sort of cushion for hard times for a volatile business, to make sure that you maintain a high labor employment. That you maintain high employment levels. Which, Germany has also been focusing on in the last couple of decades is raising employment levels. And you're absolutely right about that. So, another thing that co-determination can do, actually, which isn't being talked about in America very much, is that you can get better worker input. So, workers kind of know how things work on the ground. There's another Feynman story here. So, Feynman is legendarily reputed to have solved the Challenger disaster and to have figured out that it was the O-ring in the Challenger that blew. And if you read his memoirs, what he mainly just did was go talk to a bunch of engineers and say, 'Hey, engineers: What do you think is the weak link here?' And they said, 'The O-ring.' So he grabbed a piece of O-ring and he put it in a cup of cold punch and then he crumbled it in his hand, and it was this very dramatic moment. And people thought, 'Oh, Feynman. What a genius!' Really, he just went and talked to the guys on the ground. And, there's a chance that if you give workers more input into the running of the company, they will know what needs to be done to raise productivity, because they're the people on the ground, the people close to where the sausage gets made. And so actually, there have been a couple of papers showing that companies with more workers on their board do have higher productivity over the long term. But, again, that's correlation, not causation. So, basically, that could be because more productive companies tend to put more workers on the board, to the degree that they have voluntary control over it. Because there is some variation--Germany says, 'Well, you have to do this.' But then some companies do it more. And then some companies in other countries do it more just on their own, voluntarily. And so some people argue that voluntary putting of workers on the board is just a good thing; and this is a thing American companies are doing but are legally already allowed to do on their own, and we shouldn't actually force them to. Instead we should just sort of disseminate information about how that could be a good thing to do.

25:20 Russ Roberts: And, you suggested that--and this summary is very nice, and one of the things I like about--I follow Noah on Twitter, and he's one of the--even though we don't agree on a lot of things, he's extremely honest--as far as I can tell; of course; it's hard to tell--but as far as I can tell, you are often saying things that don't necessarily go along with your priors. You are summarizing research like you--you don't try to whitewash it and sell it and [?] the direction. You point out that it's mixed. Which is really good. You also point out that, since we don't know everything here, we might play around with some tax incentives to encourage firms to try this. Noah Smith: Right. Yeah. So we can just nudge--I know that you're not the biggest fan of the Nudge concept. But maybe if we are talking about an organization rather than an individual you might be more amenable. Russ Roberts: Yeah. But not really. Go ahead and give it your shot. Noah Smith: We could nudge companies and say, 'Hey, companies: we're going to try out this thing where, try putting some workers on your board and we'll throw you a little money if you do. And try seeing how that works.' And then some companies will say, 'Bah, we don't want workers on our board. [?]' And some companies will say, 'Well, you know, we'll try that. Maybe our workers do have something important input.' And they'll put the workers on the board and they'll say, 'Actually, we learned a lot from these workers, and that was pretty good,' and it's not just turning into a big labor versus management shouting battle like a lot of union battles did in the mid-20th century. Instead it's actually just workers who care about the company now feel more vested and feel more of a stake in the operations and have useful insight to offer to management. So I think it should probably start there. And then, if that works, if the companies who do it succeed, then we can start thinking about scaling up that program in some way. Or maybe it would just spread on its own and we wouldn't have to. Russ Roberts: Yeah. I think it would be an interesting cost-benefit analysis of whether you'd be better off spending that money in giving it to the workers--the subsidies--and just giving it to them and saying, 'Here: have more money.' Noah Smith: Right. Russ Roberts: Depends on how much money it would take to encourage this trend. It's hard to know.

27:47 Russ Roberts: Let's turn to a different issue, which a lot of people have lately picked up, to my fascination and somewhat surprise--and somewhat horror--which is this idea that monopoly power is spreading in the U.S. economy; that that's the explanation for these higher profits, and that this also might explain the wage stagnation. Of course, long time listeners know that I'm skeptical about the existence of wage stagnation. I think it's false. I think it's a misreading of the data. Noah Smith: Really? Russ Roberts: Yeah. If you want to talk about that, we can talk about it for a minute, but-- Noah Smith: Yeah; I think we should talk about that. Russ Roberts: All right. Sure. Noah Smith: Because if that's not happening, then this discussion is a little silly. Russ Roberts: Yeah. But everyone assumes, besides me and about 7 other people, thinks that it is happening; and so they are trying to solve it, fix it, improve it. Noah Smith: Yeah. Well, let's talk about it. Russ Roberts: Okay, we'll talk about that first. And then if we have time we'll talk about--so, what would you say is the evidence that wages are stagnating? Noah Smith: Um--you look at the government data. The government has a bunch of surveys about this. Russ Roberts: Yeah; sure. Noah Smith: And the surveys are collected in different ways. Which I think is important because that minimizes the chance that you are looking at a methodological error. And you look at decades, you don't look at months. Again, I--sometimes against my better judgment show the most recent data point and then that's [?] interpreted[?]. Because obviously that can easily get out of context[?]. But if you look at decades, you can look at, you know, real compensation; you can look at employee compensation measures. You can look at average hourly earnings--that's another measure. Russ Roberts: Not a good one. Go ahead. Noah Smith: Well, I mean, the point is that none of these are perfect. Russ Roberts: Right. Let me just comment on this-- Noah Smith: None of these are perfect. And so you look at a bunch; and so the average hourly earnings does contain important information. It's not a full picture of what's going on. You can also look at median real weekly earnings for full-time employees, is another popular one. Russ Roberts: That's a good one. Noah Smith: And so those are three measures that I always look at. You have the Atlanta Fed's Wage Tracker. That's another one. That's a smoothed moving average. So that's yet another measure. And then you have some more measures besides that. And then they all show the same thing, which is that, you know, since the turn of the century we haven't seen a lot of action in wages. And, ironically, we have seen a little bit of growth in 2014, 2015, and then a little bit again in 2017, although that then it looked like it kind of reversed. We've seen a little bit of growth since then, but mostly since the turn of the century we've seen very little action at all. Now, we're in the 18th year since the turn of the century, or I guess we have 17 years of data. And that's a decently long time. I mean, I'm not willing to call 17 years a blip. And we do see a lower rate of growth than we saw in the 1990s. The 1970s were tough. That was a tough time. We saw some growth in the 1980s, and then robust growth in the 1990s. And of course we saw robust growth in the 1940s, 1950s, 1960s, etc., etc. We haven't seen a heck of a lot of growth this century in any of these measures. There's really nothing that--and, you know, that doesn't change, whether you look at, you know, inflation, or, you know, if you use a different inflation measure. You can use PCE [Personal Consumption Expenditure] inflation, and CPI [Consumer Price Index] inflation, and then-- Russ Roberts: It makes a difference-- Noah Smith: and then you get a little better growth. Yeah, it makes a little bit of difference, but it doesn't change the fact of the slowdown. Russ Roberts: But that's two different questions. So--here-- Noah Smith: And when you say stagnation-- Russ Roberts: Bad word-- Noah Smith: it doesn't mean that wages haven't gone up at all, because they've gone up a little. Russ Roberts: Yeah. A lot of people think they haven't gone up at all. Noah Smith: Right. And I think that people who say that wages have actually fallen since the 1970s, that's a piece of, like, popular conventional wisdom that I disagree with. They have gone up, pretty robustly, since the 1970s, when you look at total compensation and you deflate it right. Russ Roberts: Correct. Noah Smith: And that's not a talking point of Noah Smith's. Russ Roberts: Hey, hey. Excellent. It's other people's talking points. Noah Smith: It's other people's talking point, and I don't buy it. I don't believe it; and I've written about how it's not true. Russ Roberts: Good for you. Noah Smith: But, I do believe that there's been a slowdown in wage growth since the turn of the century, and that slowdown is marked and observable. I do believe that's true. Russ Roberts: I'm open to that, and I think it would be a productive--the next time I'm back in the Bay Area we should sit down and we should film video--I'm not kidding, actually. I'm serious. I think this is a really good idea-- Noah Smith: I'm into it. I like it-- Russ Roberts: We should film you and I looking at the data and talking about it and saying, 'Yeah, but what about this?' or 'What about that?' Because I think a lot of the time what people do is they just pick their favorite series--I joked about average hourly earnings being bad data because if you look at average hourly earnings since--real average hourly earnings since, I think, mid-1970s, it's flat. And part of that's because it's deflated with a particularly inaccurate--and it's often presented--a particularly inaccurate price deflator. It also isn't the whole economy. There's a lot of reasons to worry about one particular data set. You're absolutely right that you want to look at a few. When I've looked at a few--and the video idea I think is really interesting because--it's like being in the kitchen. It's like saying, 'Oh, yeah, I ran these numbers, and look what I found,' and I don't show you the 50 I ran that I didn't like or that didn't make my story look good. And if we could video our conversation where we pulled out the different charts and actually had to be accountable for what we pulled out, I think we'd both learn something. Which would be really good. And the point I would make about the different series is that you're absolutely right. You don't want to look at one. There's a lot of reasons--average hourly earnings, for example, doesn't include non-monetary compensation. The ECI [Effectively Connected Income] series looks at all forms of compensation, but you could argue that some of those forms maybe you can't spend; so it's not so helpful. It's not the only thing people care about-- Noah Smith: Right, so here the limitation of ECI is that if health care simply gets more expensive but yet doesn't improve in quality terms, and if the reason that health care gets more expensive is because we have an inefficient employer-based health care system that shovels extra money-- Russ Roberts: It's a disaster-- Noah Smith: into this health care system; and if both those things are true, then people don't really care that they're getting-- Russ Roberts: They're not being made better off-- Noah Smith: that they're getting the exact same health services and someone's getting more dollars, and they don't see the input or the output. People see their take-home wages, and they see their take-home benefits; and they see 'I'm getting the same amount of doctor visits, and I'm getting the same amount of surgeries, and I'm getting the same amount of surgeries as before. And yet it costs more. So, my wages have gone up?' No. Russ Roberts: So, the problem with that--but the problem with that point--I agree with that point, which is what I was alluding to. But the problem with that is that: that's not what we're using the data for. You're making the point that: People aren't going to be better off. And you're right. Because we have a lousy health care system, the way it's structured and organized, then we wouldn't want to use the flatness of, say, take-home pay, or monetary compensation to then say, 'Well, we have to use that because people can't spend their health care insurance. They're just being stuck with the fact that their health care benefits are chewing up a larger and larger portion of their compensation.' That's true, but that wouldn't be an indictment of, say, the American corporate [?]-- Noah Smith: You're right. Absolutely-- Russ Roberts: it would be an indictment of the health care system. So, I think you do want to look at ECI-- Noah Smith: Oh, yay. You do-- Russ Roberts: not by itself, but other things-- Noah Smith: No question. No question. You do want to look at ECI.

36:22 Russ Roberts: Now, the point you're making, which I also want to concede, is that I tend to focus on the 1970s to the present. I'm going 4 decades. Because you're, as you point out, you don't want to look at a blip, or a year. I also--but I agree with you that, since 2000, that's important. It's not zero; it's not a short time. And I'm willing to accept the possibility--this is where I want to sit down and we'll go over the data--that there's actually been a slowdown. But's it's not stagnant. And so, this relentless argument that I hear, that I'm just frustrated with, that all the gains have gone to the rich for the last 40 years--I think is "not true." And so, that's the only point I want to make there. I'm willing to concede the possibility--I've not looked at it lately--that the last 17 years have been different. For whatever reason. Noah Smith: Right. And the last 17 years, we've seen--you looked at this explosion of profit. So, that's been an interesting juxtaposition-- Russ Roberts: Yup-- Noah Smith: over the last 17 years, is that we've seen corporation making a lot more profit-- Russ Roberts: [?] attention-- Noah Smith: a lot of it from overseas operations. And then workers--you know, we've seen this wage slowdown at the same time as companies are making a lot of profits. If you look at simply Domestic Value Created, you actually see the same trend, but less marked. So, if you look at just the profits that are being made, you know, domestically--and of course there's a lot of accounting issues in that, because companies do a lot of profit-shifting-- Russ Roberts: yup-- Noah Smith: you know, for tax reasons. So it's not super-reliable. But if you do look at that, you still see this rise in the ratio of corporate profits to wages, since 2000, and there looks to be a very clear inflection point. Russ Roberts: So, as long as we're clear that it's not stagnation--that's just drama-- Noah Smith: Wait--now hold on. When I say 'stagnation,' what I mean is a-- Russ Roberts: a slowdown in the rate of growth-- Noah Smith: slowdown in the trend rate-- Russ Roberts: Yeah. Noah Smith: A slowdown in the rate of growth. I do not mean zero growth. Russ Roberts: That's what stagnation means, just FYI [For Your Information]. It's like, when people say that 'Budgets have been slashed,' and they mean, 'Oh, the rate of growth.' I think those are-- Noah Smith: Oh, no, no. You're right. 'Slashed' is something else. So, if your wages grow 7% over, you know, two decades, right? And then previously are 5% over two decades, something like that. And then previously your wages have grown in many previous decades by, you know, 15, 20%; and now you look at this extremely slow rate of growth, I feel justified in calling that stagnation. Russ Roberts: Okay. We'll leave this at that. This is not-- Noah Smith: Okay. Yeah-- Russ Roberts: this is not-- Noah Smith: I just want people to know what I mean. Russ Roberts: Good. That's good. This is not EnglishTalk. It's EconTalk. Noah Smith: So, when I look at Wikipedia, it says, 'Economic stagnation is a prolonged period of slow economic growth.' Russ Roberts: Well, that's--you've got-- Noah Smith: So, you know, extending that to wages-- Russ Roberts: you've got me. Noah Smith: I don't know. It's, it's a point that people shouldn't argue about, because it's easier to just look at a graph and see what's going on. Russ Roberts: Yeah. I think it's important to keep our terms straight. To be clear. And so we now are clear-- Noah Smith: We now are clear. Russ Roberts: that you mean a slowdown in the rate of growth. Noah Smith: A dramatic slowdown. Russ Roberts: Fair enough. A potential slowdown. Noah Smith: A substantial slowdown. Russ Roberts: Potentially. Again, there could be other factors. It could be, just to take one, it could be that the incredible innovation of the last 17 years in the tech sector has made the price indices we use be less accurate; and that's part of the problem. Right? Could be.

39:53 Russ Roberts: But, let's put that to the side, for now. I think we've made it clear what we think the state of the data are, more or less. And let's turn to this question that a lot of people are suggesting: is that this slowdown in the rate of growth comes from increased market power on the part of corporations. We had Matt Stoller on the program recently making that case. What's your view of that claim? Noah Smith: It's uncertain as to whether or not that is the culprit. And, it's a big question that is completely unresolved. So, you've got people at the Economic Policy Institute that is basically saying, 'No, this can only be a tiny part of what's going on.' You've got Jason Furman, Obama former-economic adviser and current professor, I believe at Harvard--I always forget where Furman is at. Anyway, he says: It's only a small piece of the wage puzzle [?]. And then other people say, 'Well, oh, it's actually a big piece of what's going on.' You look at--and sometimes they are not talking about wage stagnation so much as the reduced labor share of income. So you've got David Autor's paper, and you've got a couple of other papers talking about that. You've got Simcha Barkai's paper. And so, they say, 'Oh, well, actually decreasing labor's share comes a lot from concentration.' Or at least from increasing rent extraction from the [?] economy. Russ Roberts: So, that's a strange argument. So, let me try to make the argument--let me find to make what I find troubling about the argument. The claim is--and it's often combined with a focus on the tech sector. The tech sector has certain non-competitiveness aspects to it. So, for example: Some people on the Right complain that, say, Google doesn't give a fair shake to conservative sources, when you do a Google search. And, of course, one answer to that is, 'Well, start your own Google. You don't like Google? Start your own competitor.' And it's hard to start a competitor. We understand that. It's hard to start a competitor to Facebook. Having said that, they may disappear. There is a competitor to Google: It's called DuckDuckGo. There's others, I'm sure. Bing. Noah Smith: I didn't even know that existed. Russ Roberts: I know. But Bing is out there, DuckDuckGo. And, I always like to point out: DuckDuckGo promises they won't share your information. And everybody thinks, 'That's great.' Of course, you have no idea if it's true. Just don't know--why, the fact that they claim they don't share it makes you-- Noah Smith: Well, Google is probably sharing your information. Russ Roberts: Google is. At least they're honest about it. So, if you are worried about these things--if you are worried about the concentration in the tech sector, say, of social media, or search opportunities and the ability of those to be manipulated, that's a legitimate--I think that's a real, interesting issue. It's a worry. It's not clear it has the same impact--I mean, I don't see it would have any reason that it would have an impact on wages. And, in particular, what we're talking about is monopoly in product markets, not monopoly in the competition for the services of the people who work at these companies. And, in fact, I'm going to just pull--I never do this. Noah, I'm doing this for you. Noah Smith: Okay. Russ Roberts: Just earlier today, in the last hour and a half, you retweeted a graph--I follow Noah on Twitter--you retweeted a graph that shows that the share of national income captured by the San Francisco Bay Area is 'way up', while its proportion of employment is basically flat, or a little bit down. And I'm not going to really claim that high tech companies have been treating their workers very well. But I think they do treat their workers well. And I think it would be hard to argue that workers in these companies that have alleged monopoly power are somehow being exploited as employees. I just don't--what's the evidence for that? Either theoretical or actual? Noah Smith: Um, I mean. The evidence that--wait--so, what's your question, again? Can you restate the question? Russ Roberts: Yeah. So, I understand that people are worried about dominance by a small number of firms, in, say, the market for information. That the social media is very concentrated, right now. Twitter, Facebook, and Instagram have a very large share of the market. I understand that Google has a very large share of the search market. That has cultural and social implications that I don't think we've fully dealt with, understand. And we're going to have to see how it works out, but I understand-- Noah Smith: All right. Well, looking-- Russ Roberts: I understand the argument. I'm worried about it. But I understand the argument that says, 'These are like public utilities. We should regulate them. We should demand that Google, say, or Facebook, say, give equal representation to all political viewpoints.' I don't really like the government doing that. I don't think that's a great thing. But, we'll see--we'll see how this turns out. But, having said that, I don't understand the argument, then, that this dominance in consumer markets--like search or social media--means that they are going to exploit their employees, and that growth of monopoly power is keeping down wages in the United States--it just doesn't--I don't get it. Help me out. Noah Smith: All right. So, there's a number of issues to unpack here. One is that you talk about the tech industry. But the tech industry, despite having a spectacular market capitalization, is a relatively small slice of employment and revenue in the American economy-- Russ Roberts: Excellent point. Noah Smith: and value added. You know, tech is--everybody has put all their money into Google and Facebook and Amazon, and whoever; but it's actually like most of the American economy is still stuff like, you know, agriculture or, you know, like food processing, or construction, or [?] services like education and health care--I mean health care--real estate, business services, insulting--consulting, sorry--insurance. 'Insurance' plus 'consulting' equals 'in-sulting'. Russ Roberts: Retail--you could just make things. Noah Smith: Retail. Like you could just list[?] off all the sectors-- Russ Roberts: Even manufacturing. Noah Smith: Yeah-- Russ Roberts: for output, anyway-- Noah Smith: Air travel. I don't know. And so, when you look at all these sectors, like tech is this high-profile small sector of it. So I don't like to focus too much on it. If you look at the [?]. If you wanted to look at the tech sector, and you wanted to look at who wasn't getting paid very much, you wouldn't look at Facebook engineers, because they get paid great. They get paid big bucks. But there's only very few of them. You'd want to look at Amazon warehouse workers. That's who you'd want to look at. Russ Roberts: Yep. Noah Smith: There's a ton of them. And Michael Mandel has said: This is the future of retail employment. So, instead of working in a store--jockeying a cash register, whatever--you are, you know, you the working class person of America is going to be working at an Amazon fulfillment center instead. If we want to talk about tech employment and low wages and large companies, that's what we would talk about. But, I don't. I don't want to focus on that-- Russ Roberts: Good choice-- Noah Smith: because so much of the American economy is not that-- Russ Roberts: Correct. Noah Smith: is not tech at all. And it's just--we, again, we focus on the stock market so much, and we focus on these tech companies because we pump a lot of money into their stocks. So, anyway.

47:23 Russ Roberts: So, outside the tech sector, and in the rest of the economy-- Noah Smith: Outside the tech sector-- Russ Roberts: where's the evidence that monopoly power is growing in, say, retailing, or retail employment, or consulting services, or haircutting, or whatever? Noah Smith: All right. I will go over the evidence. So, there is actually quite a lot of evidence in terms of correlation; relatively thin evidence in terms of causation. That doesn't mean that the evidence is wrong or that the phenomenon isn't happening, or that we won't be able to prove the phenomenon is happening. But it just means that it's hard to know in this area. So, what we've seen are this: So, number one, we've seen that in--so that across the board, in all sectors, markets are becoming more concentrated. You are seeing a few large players where before you saw a lot of small players. And this is happening, you know, in sectors, like, you know, in food processing. You know, Tyson processes like all the chicken. Monsanto provides all the seeds. And you see a few of these very dominant companies in these sectors that we don't think much about. Weirdly, construction is not super-concentrated--but that's an exception. But then you see a lot are really concentrated. Russ Roberts: But that's on the product side. Right? So-- Noah Smith: That's on the product side. And, so what you see--well, hold on, hold on, hold on. And what you see is that in those industries where the product side is more concentrated, you've seen labor's share of income also fall more than in industries where it's less concentrated. So, in less concentrated--in industries that have become less concentrated, that have not become more concentrated, you see that labor's share of income tends to be higher than in industries that have become more concentrated. So, there is a correlation for you. That's piece of evidence Number One. Piece of evidence Number Two: We see markups increasing [?]-- Russ Roberts: You think--should I be impressed with that first piece of evidence, Noah? Noah Smith: Should you be impressed with it? Russ Roberts: Yeah. Should it like, rock me? Should it rock my priors? Noah Smith: It should, you know, concern you a little bit. I mean, I don't know. I don't know what your priors were. I don't know how easily impressed you are. Russ Roberts: Wouldn't you--I'll let you keep going. Go ahead. Noah Smith: I'm almost never impressed by anything, so it's hard for me to say. You know, I like to think of evidence as sort of more like building a case, more like, you know; less like 'Thunderclap paper definitively proves x' and more like, 'Ah, we have a hundred papers that all sort of point in the same direction.' Russ Roberts: Good for you. You're a good man. Noah Smith: You know, 'It's starting to look like this is going on.' That's my approach. Russ Roberts: Yup. You're a good man. Keep going. Noah Smith: Thank you. So, well, anyway--so, we also see markups increasing. So we see that companies are, no matter how you measure cost--and there's lots of different ways to measure how much cost companies are actually paying. No matter how much we measure cost, it looks like companies are, across the board in a large variety of industries in the American economy, are starting to charge higher markups above whatever their costs are. And, that could be for several reasons. That could be because companies are just getting much more productive and selling stuff for the same price but able to produce it for much cheaper because they are inventing better production technologies. But that's kind of against the evidence that there's this economy-wide productivity slowdown that we see. Productivity slowdown means: if all these companies, if all these big companies are super-efficient and we see, you know, and then there's a correlation of concentration markups: In industries where you have more concentration, we're seeing more markups; and why is that happening? If it's because all of these super-big companies are becoming much more efficient through mergers, then why do we see an economy-wide slowdown? Doesn't make sense. Another possibility is that these products are just higher quality, so that people are selling stuff that's better and so people are willing to pay more for it. And so these unobserved quality improvements that aren't captured in official rates of inflation, whatever, are actually driving these higher markups because actually you are just selling awesomer products. And that's actually a possibility that we can't rule out. But, then, another possibility with these higher markups is just that companies are squeezing their workers more: big dominant companies are able to squeeze their workers more, and able to charge consumers higher prices. Or squeeze suppliers. So, you can squeeze your suppliers; you can squeeze your workers; you can squeeze your customers. But that basically squeezing is getting done, and many of the explanations for higher markups revolve around this sort of squeezing. And that would explain the sort of correlation between concentration and markups. So, that's piece of evidence Number Two. Piece of evidence Number Three is that people are starting to look locally, because we have all this better data now: we are able to look at localities. We have the Internet now; we can look at how many people are posting job postings within, like, this town, or within 10 miles of this point. Or within 2 miles of this point. Or within 100 feet of this point--whatever, I don't know. So, we're able to look locally. And local stuff matters a lot, because nobody wants to have a 2-hour commute each way across town to work. So, it matters how many employers there are within, you know, a mile or two of your house. And so, there have been several-- Russ Roberts: Ten. Noah Smith: papers that showed lower wages and higher prices in locally concentrated markets. So, for example, suppose you are like a welder and there's only a few companies in industries that employ welders within a few miles of your house: We see that your wages tend to be lower than welders--you know, all else equal, controlling blahblahblah--your wages tend to be lower than welders in places where there's many people who employ welders within a few miles of your house. And, again, it's correlation, not causation. But it's-- Russ Roberts: Wouldn't you think-- Noah Smith: a scary correlation. Russ Roberts: But wouldn't you think that as people move more into urban areas--which is a very long-term trend in the United States, somewhat maybe being reversed a little bit lately as housing prices get out of control--but, there's still a lot of people moving into urban areas, where there's lots more choices for people to find work. You'd think that would go the other way: there'd be a lot more opportunities to--I mean, just, for example-- Noah Smith: Well, if you look at some evidence by Jed Kolko--the urban, private-sector-like urbanesque economist who has spent a lot of time looking at these trends, the move back into the city was a pretty small move, and concentrated in one decade--the 2000s. Overall, the move to the suburbs has continued; and suburbs have a much more natural rate of population growth, because people in cities don't have any kids. Russ Roberts: But even the suburbs, there's often ways to get--I live in suburban Maryland; it's easy to go work in downtown D.C. Most of my friends do. It's 20 miles away, and I'm here in the comfort of my own home. Although I have to concede, I've turned off the air conditioning to reduce the background hum; so it's not that comfortable on a 90 degree day. But, the sacrifices I make for EconTalk are often not fully known. Noah Smith: But, that's why you should move to San Francisco where the fog naturally cools everything in the summer. Russ Roberts: It's true. It's true. But my point is that, I think if you think about the general job market that people are in, and in particular if you think about the fact that Walmart, which for example is not a small employer--a very large employer, employs I think around a million people, somewhere around a million people. They moved out of smaller towns, or stayed in those smaller towns but increasingly entered into metropolitan markets. And those metropolitan markets, they are in competition with lots and lots of other firms for those workers.

55:07 Russ Roberts: So, what I want to focus on is this squeezing thing. Because employers-- Noah Smith: No, hold on. Let me explain why that's not-- Russ Roberts: Okay. Noah Smith: So, if you have overall concentration increasing in every industry, then you have industry-specific concentrations probably increasing in most localities as well. Russ Roberts: Yup. Noah Smith: In other words, if you have only, you know, 3 chicken processing companies, or 2 chicken processing companies, or mostly just Tyson, really, where you used to have a thousand, then it stands to reason that in a lot of areas where you used to have a couple chicken processing companies, or 3 chicken processing companies, that someone who works in the chicken processing industry could go work at, now it's just one. Unless you are going to switch industries and spend all the time and effort to retrain yourself or whatever-- Russ Roberts: Naaahh. That's the problem with that type of argument-- Noah Smith: It's Tyson that's the only game in town-- Russ Roberts: I don't agree with that argument. Noah Smith: The only game in town is Tyson, and then they'll be able to pay you a lower wage because it's just so hard for you to switch. Russ Roberts: Nah, that doesn't work for me. And here's why-- Noah Smith: Why not? Russ Roberts: Well, because--let's go back, oh, maybe 30 years ago, when there were maybe in any one city there were 5 or 6 or maybe even more equivalents of Walmart. I'm moving away from chicken processing-- Noah Smith: That's local retail-- Russ Roberts: I'll come back to it, though--I'm not cheating on you, Noah. I'm going to come back to Tyson's for you. But I think it's easier to see. So, it used to be there was Target, Walmart, K-Mart; and usually a lot of small, local stores that competed for general retail--department store type customers. Those local ones died. They all died. They couldn't match the inventory control--probably other reasons, but the main reason that I see is that they couldn't match the inventory control that the larger chains had. And that suddenly was a crushing, crushing cost advantage for the larger firms. Within the larger firms it got harder. Noah Smith: No question. You're right. Russ Roberts: So, K-Mart might be--is K-Mart gone? I don't see them any more-- Noah Smith: Kind of gone-- Russ Roberts: Target's around. Sears is struggling. Macy's--all these firms, slightly different market than Walmart, K-Mart, etc., Target. But, those markets have gotten more concentrated. I actually would think that the prices have gotten lower, not higher. They don't--Walmart hasn't been able to exploit the fact that it's driven out the smaller, local-based discount firms. When you tell people that, they sometimes say, 'But they will. When they are the last ones standing.' Well, we'll see. I don't think that's what they actually do-- Noah Smith: They make a lot of profit. Russ Roberts: They do. Because they are really good at driving down costs. Now-- Noah Smith: Yeah, and what--what are costs?-- Russ Roberts: and they are delivering-- Noah Smith: What percent of costs-- Russ Roberts: and they are delivering-- Noah Smith: All right. What are costs? So, you have inventory management costs, you have warehousing costs. You have all those kind of costs-- Russ Roberts: And you have labor costs-- Noah Smith: land[?] costs. But what is your biggest cost, by far-- Russ Roberts: Labor. Noah Smith: more than 50% of your cost?-- Russ Roberts: Labor. Noah Smith: Labor. And when people say, 'These companies are gaining, you know, market share because they've become more efficient; they've become more efficient because they've driven down costs'--that is almost always saying, 'You are paying your workers less.' Which is not contradicting the evidence that I was just telling you. Russ Roberts: I don't think they are almost always--I don't think that follows. And I'll make-- Noah Smith: Because labor cost is like 60% of costs. Russ Roberts: Only 60%. That means you've shrunk the other 40. And I'm going to make the case-- Noah Smith: And you can. You can shrink the other costs without shrinking labor costs. Russ Roberts: Yup-- Noah Smith: But it almost never happens-- Russ Roberts: I disagree-- Noah Smith: When you have one cost factor that's 60% of costs, it is rare-- Russ Roberts: Nope. Disagree. I disagree-- Noah Smith: it is possible but it is rare to see costs--well, on what evidence? Do you have any evidence, any evidence at all? Because I have evidence showing that labor costs go down. Russ Roberts: Just intuition. Noah Smith: I have evidence-- Russ Roberts: I'll come back to that in a sec-- Noah Smith: Just intuition? Russ Roberts: I'm not done with that. No, I've got some good intuition. Trust me. So, here's why-- Noah Smith: Why labor costs are not shrinking but all the other costs--they are managing to shrink all the costs-- Russ Roberts: Correct. Noah Smith: except labor? Russ Roberts: Yep. Noah Smith: No, because then--No. I have evidence, direct evidence against that. And-- Russ Roberts: Naahhh, you'd be surprised. Let me finish my argument-- Noah Smith: I've already given you, I've already told you the evidence against it in this podcast. So the idea that labor's share has decreased-- Russ Roberts: Ehhh-- Noah Smith: and industries have become more concentrated indicates that it's the labor costs that are being driven down. It's the Autor evidence. Russ Roberts: Uhhh--okay. That could be. I don't remember that paper. So, I'll have to look at that-- Noah Smith: [?] concentrating on the fall of labor share? Like the David Autor paper about the concentration versus labor's share? Russ Roberts: I'm going to look at it. Hang on. Noah Smith: Okay. Sorry. Okay. I just wanted to not go on before you made that point. That point is-- Russ Roberts: Well, I want to finish-- Noah Smith: That point is that I've already presented evidence that they are holding down wages. Russ Roberts: Well, let me--I don't know. But let me finish my argument. Which is the following. Noah Smith: Okay. Russ Roberts: I'm an employee of Target, K-Mart, local firm; and my firm goes out of business. Okay? Noah Smith: Okay. Russ Roberts: Now, I'm stuck working at--I have a smaller set of retailers who can employ me. Noah Smith: Right. Russ Roberts: My argument, by the way, would be that it's easy to apply technology to lower all the costs. And let's think about that slowly. I can employ technology to reduce my inventory costs. It's obvious that all these firms have done that. Noah Smith: Mmmhmm? Russ Roberts: I can also employ technology to lower my labor cost. And the way I do that, is I pick a different mix of workers. Noah Smith: Mmmhmm? Russ Roberts: I find a technology--to take an obvious example--if I'm McDonald's, and I can have my cashier push a button rather than actually work a cash register, I don't have to have as skilled an employee. I'm going to have lower wages as a result. But I'm not squeezing anybody. I'm taking a different kind of worker than I had before. But the point I was trying to make before you jumped down my throat with that empirical evidence-- Noah Smith: Sorry. Russ Roberts: That's okay. Noah Smith: Sorry. Russ Roberts: The point I was trying to make is that--and this is my Tyson's point, also: Just because I can't work at K-Mart any more--K-Mart actually is out of business--doesn't mean that I'm stuck working at Walmart. Just because my Tyson opportunities have gotten smaller, my chicken-plucking opportunities are getting smaller, is that most of the people who are working in these industries we are talking about don't have very specialized skills in these areas. They have lots of employers they can work for. Their wages are low because their skills are low. Not because they are being squeezed. That's my point. Noah Smith: Well, here is--Okay. Fair enough. So, basically, the case where this, where local concentration really, really lowers wages a lot is where you can't move locations and you can't move industries. You are basically completely immobile. You are forced to keep doing the same job in the same place forever. Russ Roberts: What do I have[?], cement? Noah Smith: And that's the ideal, that's not real. Russ Roberts: cement feet? Noah Smith: In reality-- Russ Roberts: honest[?]-- Noah Smith: you do have some ability to do something else. You can say, 'Well, I can't work as a clerk in this retail store. I'll go work,' you know, '[?] construction'-- Russ Roberts: I'll go work in a different store-- Noah Smith: or 'I'll go work as a waiter,' or whatever. And so, will a clerk in a different store: No, that's not what we're talking about. What we're talking about is switching between locations and switching between industries. Not switching between employers. Because, remember, we are talking about the case where there's fewer employers to switch to in the same industry in the same location. Russ Roberts: Yeahhh. Noah Smith: So, if you, if you can switch locations--if you can say, 'Well, you know, there's not many stores here, so I'll just move to LA [Los Angeles] where there's a lot of stores, okay. Fine. Then you can avoid that. But it's hard to move to LA--it's expensive, blahblahblah. We could talk all day about the reasons why people don't all just uproot and move to LA. Russ Roberts: We talk about it all the time on this program. Noah Smith: Right. And so, so that's one thing. And so in terms of retraining for different industries, moving to different industries, like, you know, jockeying a cash register at a retailer is a fundamentally different thing than, you know, stacking bricks for construction-- Russ Roberts: Oh, 100% agreed. But that's-- Noah Smith: It's not 100% different. Yeah, you can do it-- Russ Roberts: Yeah; I'm agreeing with you. Take, say--Yes. Noah Smith: So, retraining industry is not impossible. But there's barriers-- Russ Roberts: But-- Noah Smith: so it's just a question--there's frictions, you know. Russ Roberts: I agree with that. But it's not retraining industries. It's retraining--I'm asking about the possibility of: You can change industries and still be a cashier. Right? It's the job that you have, that the skills of that job--which I think again are sometimes relatively straightforward and not very specialized. You can do that in lots of different industries. Do it at lots of different firms within an industry; but more than that, you can go outside the industry. You don't have to stay in the same industry. And in metropolitan areas there's lots of choices like that. Noah Smith: Ummm. Yeah. I mean--but the point is there are less choices maybe than before. Russ Roberts: Yeah. I don't think--I agree that there can be fewer, but it doesn't mean there aren't enough to compete. I don't think--it's not this dramatic 4, down to 2, down to 1: Now there's-- Noah Smith: Well, think on the margin, though. Russ Roberts: instead of 2-- Noah Smith: I mean, just think on the margin. Russ Roberts: It doesn't work on the margin. If there's 2000 that are much bigger instead of 8000 small ones, there's still going to be the same demand for labor. And I'm not sure why that's therefore going to be a less competitive labor market. Noah Smith: No, but I'm talking about--you know, I don't know about 2000. There's not 2000 employers--I live in San Francisco; I live-- Russ Roberts: There's more than 2000. Noah Smith: in the middle of a big city. And there's not 2000 people that I could walk out and work for. Russ Roberts: Uhhh, no. There's quite a few, though, actually, even with your limited-- Noah Smith: with my skills-- Russ Roberts: with your limited skills-- Noah Smith: even with my amazing, high versatile skills and my natural genius that allows me to learn anything in a week, I still don't think there's 2000 employers for me. Russ Roberts: Okay. I'm calling Bloomberg-- Noah Smith: But the point is-- Russ Roberts: I'm calling Bloomberg, and I'm telling you them that you are overpaid. Obviously. Because you have limited choices--- Noah Smith: Shhhh. Don't tell them, Russ. Russ Roberts: Okay.

1:05:15 Russ Roberts: I want to read a quote from your paper, from your essay, that I think is a nice thing to close on. You quote Alan Krueger; you say that "the decline in union representation and the erosion of the real value of the minimum wage have contributed to the significant rise in inequality and polarization of incomes in the U.S. since the early 1980s." And then you write, Noah, which I thought was very interesting, Krueger also notes that structural changes in the U.S. economy--the rise of noncompete agreements, temp-staffing agencies and outsourcing--have aggravated the situation. Now, there's too many things in there to talk about. Noah Smith: Okay. Russ Roberts: I don't think that the decline in representation since the 1980s has anything to do with the change in income and wages. Or, very little to do. Since-- Noah Smith: Maybe not. Maybe, though. Russ Roberts: But the point--I want to focus on a very small thing, an aside that you wrote on, here. Which is: Temp-staffing agencies. Noah Smith: Oh, yeah. Russ Roberts: When people think about temp-staffing agencies--and I just think this is an incredible opportunity for a journalist or an economist to explore. And I think it's an incredibly important aspect of our time that--I was going to say almost no one's noticed. Krueger's noticed it. But that's the level of notice, 'Oh, by the way, there's also this temp-staffing thing.' So, when people think about temp staffing, I think they often think about a secretary has an illness, and is going to be out for a trip. And is out for 3 days. So, we're going to call a temp agency to get a secretary and answer the phone for 3 days. That's not what's driving the temp-staffing phenomenon that I think Krueger is talking about, or should be talking about. Which is the fact that there are numerous--thousands, hundreds of thousands, millions--I don't know the numbers; I've never seen a study of it--of people who work for employers. They show up for work. They work at this job--it's not temp. They work there for a year. For 6 months. Or for two years. Meaning--if it's temp, it's not what we usually think of as temp. And, instead of being directly paid by the employer, they are paid by an agency. That agency takes an enormous share of the compensation. A shockingly large share of the compensation. Which suggests that there is something inherently unhealthy right now about our labor market. About either the legal environment or the regulatory climate or the provision of HR [Human Resource] services that has made it profitable for companies to pay agencies an enormous premium so that they don't have to have those workers directly on their payroll. And I just think this is an incredibly important issue. I don't know what's driving it. And I wish people would pay attention to it. Noah Smith: Yeah. It is weird. I agree with you that I do not know what's going on there. Russ Roberts: Okay. Well, that's-- Noah Smith: I have no idea. It's worth looking into. I will look into it and see who has done research on this. I put that in there because it's sort of this casually-known fact that temp agencies pay low. But, why that's actually happening structurally is something I would say we don't really know. Russ Roberts: Again, the interesting thing isn't the--how much they pay the workers. It's how much their firms pay them for those workers. The gap between the cost to the employer and the-- Noah Smith: the payment[?] to the temps themselves-- Russ Roberts: [?] and that's just--it's a shocking premium. Noah Smith: It is. Russ Roberts: And it's not because they are nice. There's--the temp agencies. The temp agencies are providing a service of value that is--there are just, there are middlemen that are not--I haven't seen anybody try to understand that it's really important. Noah Smith: Yep. And--yep. There's all kinds of things in our economy that, um, that we, that you know, have these industrial organization effects that we don't understand. And that's why this very traditional way of thinking of employers as these, this huge number of essentially atomistic employers which are essentially wage takers and forced to pay the going market wage and have no wage-setting ability--I think we must be very skeptical of that mental model. And the idea that there's 2000 employers like who walk out and work for-- Russ Roberts: ach[?]-- Noah Smith: very, very skeptical of that model. Especially when you see things like the temp agency effect that you just talked about. There's so many strange industrial organizations in our country. There's so many strange industry organizations that end up with, you know, huge premiums, huge wedges, huge markups, weird anti-competitive stuff. The fact that real estate commissions--I'm just randomly rambling at this point--real estate commissions have been, you know, this fixed percent commission and finally starting to come down after so many decades. How did competition never, uh, cut that in this country? Um, there's so many things like that, that you'll find in our economy. So many mysteries. Russ Roberts: Well, you know I have an answer to that, of course. But, we're not going to argue about real estate-- Noah Smith: To the real estate thing? Russ Roberts: Yeah. But we'll talk about that another time. Noah Smith: Oh, actually, I would be interesting to know what you think, because I don't know about that. Russ Roberts: I'm not going to tell you. We'll talk about it another time.