Scott Alexander on Labor Economics: Point-by-Point Reply By Bryan Caplan

To recap my last post, Scott Alexander’s critique of libertarian labor economics amounts to a critique of mainstream labor economics itself. If Scott were in my labor economics course, I could spend hours of classtime responding to his thought-provoking critique. Since he’s not, I’ll do it here. Scott’s in blockquotes, I’m not.

It is frequently proposed that workers and bosses are equal negotiating

partners bargaining on equal terms, and only the excessive government

intervention on the side of labor that makes the negotiating table

unfair. After all, both need something from one another: the worker

needs money, the boss labor. Both can end the deal if they don’t like

the terms: the boss can fire the worker, or the worker can quit the

boss. Both have other choices: the boss can choose a different employee,

the worker can work for a different company.

The first sentence is needlessly philosophical. If I pay you $100 an hour to hop on one foot, is that “equal”? Is it “fair”? But the rest of the paragraph is correct. The key intuition of labor economics is that employers pay workers to do things that employers value more than workers disvalue. “Value,” as usual in economics, is equivalent to “willingness to pay.” The deals they strike may violate norms of equality or fairness, but remain mutually beneficial.

And yet, strange to

behold, having proven the fundamental equality of workers and bosses, we

find that everyone keeps acting as if bosses have the better end of the

deal.

Everyone talks as if bosses have the better end. But talk is very different from action. If everyone were trying to start their own businesses and hire workers, that would count as “acting as if bosses have the better end of the deal.” Most workers, however, make no effort to become entrepreneurs. You could object that most workers don’t have the money to open their own businesses, but most rich workers make no effort to become entrepreneurs either.

During interviews, the prospective employee is often nervous; the boss

rarely is.

True. The boss has different negative emotions, especially fear of hiring a bad worker.

The boss can ask all sorts of things like that the

prospective pay for her own background check, or pee in a cup so the

boss can test the urine for drugs; the prospective employee would think

twice before daring make even so reasonable a request as a cup of

coffee.

True. But prospective employees routinely ask for things much more expensive than a cup of coffee. They bargain over salary. They ask about health insurance and other benefits. At the same time, bosses fail to demand many other valuable concessions. For example, they could charge applicants for the time they spend interviewing them.

I’ll admit that the details of the hiring process are complex. If I were a job candidate, I wouldn’t ask for coffee either. But if the reason is deep fear of unemployment, why do I have the courage to inquire about salary and benefits? This sounds more etiquette than “bargaining power.”

Once the employee is hired, the boss may ask on a moment’s

notice that she work a half hour longer or else she’s fired, and she may

not dare to even complain.

This is true on some jobs. But workers frequently respond to such requests with complaining or excuses. Like, “I have to pick up my son.” Employers’ threats to fire workers are much rarer than workers’ complaining and excuse-making.

On the other hand, if she were to so much as

ask to be allowed to start work thirty minutes later to get more sleep

or else she’ll quit, she might well be laughed out of the company.

Again, true on some jobs, especially when team production is important. But requests to arrive late and leave early are common in most workplaces.

A

boss may, and very often does, yell at an employee who has made a minor

mistake, telling her how stupid and worthless she is,

True on some jobs. But as competent workers know, there are also plenty of bosses who turn a blind eye to incompetence out of pity.

but rarely could

an employee get away with even politely mentioning the mistake of a

boss, even if it is many times as unforgivable.

Simple explanation: If a worker messes up, the employer doesn’t get what he paid for. If a boss messes up, the employee still gets paid.

The naive economist who truly believes in the equal bargaining position

of labor and capital would find all of these things very puzzling.

“Very puzzling”? No, only mildly puzzling. Remember: If employers value a conventionally “unequal” or “unfair” outcome more than workers disvalue it, we should expect employers to ask for it and workers to accede in exchange for money. The central question for all of Scott’s stylized facts, then, is: “Do employers plausibly value this outcome more than workers disvalue it?” This framing doesn’t clearly predict Scott’s observations (or at least suitably toned-down versions thereof), but it doesn’t predict the opposite either.

Let’s focus on the last issue; a boss berating an employee, versus an

employee berating a boss. Maybe the boss has one hundred employees. Each

of these employees only has one job. If the boss decides she dislikes

an employee, she can drive her to quit and still be 99% as productive

while she looks for a replacement; once the replacement is found, the

company will go on exactly as smoothly as before.

This argument proves too much. It also implies that store owners will feel free to berate their customers. After all, if the store loses one customer, it still has plenty left. Indeed, Scott’s 99% argument implies that waiters will feel free to berate restaurant patrons. After all, if one offended customer fails to tip you, you still get tips from your next 99 tables.

A far better story: Whenever people trade money for complex goods, the people who pay money feel free to berate and the people who receive money hold their tongues. Why? Because the people who pay cash for complex goods have plenty of good reasons to feel like they haven’t gotten their money’s worth. The recipients of the money, in contrast, have little reason to complain as long as they get the pay they bargained for.

We previously proposed a symmetry between a boss firing a worker and a

worker quitting a boss, but actually they could not be more different.

For a boss to fire a worker is at most a minor inconvenience; for a

worker to lose a job is a disaster. The Holmes-Rahe Stress Scale, a

measure of the comparative stress level of different life events, puts

being fired at 47 units, worse than the death of a close friend and

nearly as bad as a jail term. Tellingly, “firing one of your employees”

failed to make the scale.

Being fired is definitely very stressful. Rather than keep their workers on edge, however, most firms informally provide some insurance against this bad outcome. It’s called “job security” and most workers feel like they have some (see e.g. GSS variable identifier JOBSECOK). Why do employers go out of their way to reassure their workers? The standard labor economics story: Workers value job security more than it costs employers, so employers provide job security in tacit exchange for lower wages.

It’s worth adding, moreover, that firing workers is no walk in the park. Almost every workplace employs some visibly bad workers. Why haven’t they been fired? Employers’ squeamishness, or firing aversion, is the simplest explanation.

This fundamental asymmetry gives capital the power to create more

asymmetries in its favor. For example, bosses retain a level of control

on workers even after they quit, because a worker may very well need a

letter of reference from a previous boss to get a good job at a new

company.

This “level of control” is trivial. How often do employers hit their past workers up for time or money?

On the other hand, a prospective employee who asked her

prospective boss to produce letters of recommendation from her previous

workers would be politely shown the door; we find even the image funny.

Yes, it’s funny. But it doesn’t mean much. Informally talking to the prospective employer’s current and past employees is much more informative. Again, this looks more like etiquette than “bargaining power.”

The proper level negotiating partner to a boss is not one worker, but all workers. If the boss lost all workers at once, then she would be at 0% productivity, the same as the worker who loses her job. Likewise, if all

the workers approached the boss and said “We want to start a half hour

later in the morning or we all quit”, they might receive the same

attention as the boss who said “Work a half hour longer each day or

you’re all fired”.

This is definitely much more favorable for workers. But why is this the “proper” negotiating level? Would “proper” customer-CostCo relations require that all customers negotiate as a bloc with CostCo?

[…] The ability of workers to coordinate action without being threatened or

fired for attempting to do so is the only thing that gives them any

negotiating power at all, and is necessary for a healthy labor market.

“Any negotiating power at all”? Absurd. Most workers in the U.S. aren’t in unions. Most aren’t even close to being in unions. Yet most U.S. workers earn well above the minimum wage. A simple supply-and-demand story can explain this. Scott’s story doesn’t. Furthermore, Scott’s story ignores all the collateral damage of this “worker coordination,” especially unemployment.

About three hundred Americans commit suicide for work-related reasons

every year – this number doesn’t count those who attempt suicide but

fail. The reasons cited by suicide notes, survivors and researchers

investigating the phenomenon include on-the-job bullying, poor working

conditions, unbearable hours, and fear of being fired. I don’t claim to understand the thought processes that would drive

someone to do this, but given the rarity and extremity of suicide, we

can assume for every worker who goes ahead with suicide for work-related

reasons, there are a hundred or a thousand who feel miserable but not

quite suicidal. If people are literally killing themselves because of bad working

conditions, it’s safe to say that life is more complicated than the

ideal world in which everyone who didn’t like their working conditions

quits and get a better job elsewhere (see the next section,

Irrationality).

Sensible points. But the same holds in romantic relationships, too.

In both cases, people are free to leave and find something better.

When they’re miserable, most workers and lovers exit. Some don’t.

Why don’t they leave? Most obviously, because their alternatives are worse than the status quo. This isn’t a problem with the

labor market or the dating market. It’s a problem with having little

to offer.

I note in the same vein stories from the days before labor regulations

when employers would ban workers from using the restroom on jobs with

nine hour shifts, often ending in the workers wetting themselves. This

seems like the sort of thing that provides so much humiliation to the

workers, and so little benefit to the bosses, that a free market would

eliminate it in a split second. But we know that it was a common policy

in the 1910s and 1920s, and that factories with such policies never

wanted for employees.

“Common”? Very hard to believe. But if Scott’s history checked out, the question would remain: Why didn’t the firms give their workers bathroom breaks in exchange for lower pay? Scott’s appeal to unequal bargaining power explains nothing unless the workers in question are earning the legal minimum wage.

The fundamental problem with Scott’s bargaining power story is that it predicts that workers will receive similarly crummy treatment regardless of their skill. If labor markets work poorly because employers don’t need any single worker very much, why do major employers of corporate lawyers treat them so much better than they treat their janitors? If you say, “Because corporate lawyers have better outside options,” you’re almost a mainstream labor economist. Invoke supply-and-demand and you’re there.

Scott’s counter, perhaps, is that unemployment is much worse for janitors than corporate lawyers. Objectively, that’s right. But subjectively, the difference is muted. An unemployed corporate lawyer, like an unemployed janitor, feels like his whole world is collapsing. If he doesn’t find another job quickly, he risks his home and his family.

More importantly, the “unemployment is worse for janitors than corporate lawyers” story implies that employers prefer to hire desperate workers. In the real world, the opposite is true. Employers favor currently employed applicants over unemployed applicants, and short-term unemployed applicants over long-term unemployed applicants. That’s why workers who are desperate for a new job doctor their resumes to look less desperate, not more.

Scott’s challenge to labor economics made me think. And in one sense, we agree. The longer I study labor economics, the more convinced I am that the supply-and-demand model is too simple. Yet the complications that count are almost the opposite of the ones that Scott discusses. The chief failure in labor markets is that wages tend to be too high, leading to durably high unemployment.

Why? Mostly because so many workers view employers with resentment and suspicion. To contain this resentment and suspicion, employers compress wages and avoid wage cuts even when there’s high unemployment. The unintended effect is to make unemployment far higher – and hence more traumatic – than it needs to be, especially for the least-skilled. It’s the Tinkerbell Principle at work. Involuntary unemployment, free labor markets’ chief shortcoming, exists largely because workers believe that free labor markets are bad for workers.