[I suggest reading the whole article]
By Suresh Naidu, Eric Posner, and Glen Weyl Apr 6, 2018, 9:50am EDT
Our current [before Covid pandemic] economic expansion has lasted almost nine years, yet wages have hardly budged, especially for less skilled workers. Inflation-adjusted wages for the average worker have risen only by 3 percent since the 1970s — and have actually declined for the bottom fifth.
For a long time, the conventional wisdom was that wage growth had slowed because of rising competition from low-paid workers in foreign countries (globalization), as well as the replacement of workers with machinery, including robots (automation). But in recent years, economists have discovered another source: the growth of the labor market power of employers — namely, their power to dictate, and hence suppress, wages.
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It turns out, however, that labor markets are often uncompetitive: Employers have the power to hold down wages by a host of methods and for numerous reasons. And new academic studies suggest the markets have been growing ever more uncompetitive over time.
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Few company towns exist today. Still, a variation of the company town effect exists in some regions, at least for certain occupations. A nurse or doctor who lives in a small town or rural area can choose only among a handful of medical institutions within driving distance of his or her home, for example.
And in many areas of rural America, the best jobs are in chicken processing plants, private prisons, agribusinesses, and other large-scale employers that dominate their local economies. Workers can either choose to take the jobs on offer or incur the turmoil of moving elsewhere. Companies can and do take advantage of this leverage.
[It also costs a lot to move.]
Yet another source of labor market power are so-called noncompete agreements, which are far more prevalent than many Americans realize. These agreements prohibit workers who leave a job from working for a competitor of their former employer.
Almost a quarter of all workers report that their current employer or a former employer forced them to sign a noncompete clause. (Jimmy John’s, the sandwich franchise, famously asked its “sandwich artists” to sign covenants forbidding them from taking jobs with Jimmy John’s competitors.) Relatedly, Apple and several other high-tech firms were caught entering into collusive “no poach” agreements so they didn’t have to worry about losing engineers to each other, and settled with the Justice Department.
But the practice continues in many sectors of the economy — including fast-food franchises. No-poaching agreements, like noncompete clauses, enhance employers’ labor market power by depriving workers of the threat to quit if wages fall or stagnate.
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While employers have taken advantage of labor market power throughout modern economic history, a worldwide social movement at the end of the 19th century moderated the worst excesses. Workers organized labor unions, which enabled them to oppose employers’ market power with the threat to shut down plants. A powerful legal regime was put in place that supported unions and protected workers with health, safety, minimum wage, and maximum-hour regulations.
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But the good times ended in the 1970s. Globalization, changes in workplace technology, and the rise of a more heterogeneous workforce put strains on unions. A conservative reaction to technocratic liberalism, led by Ronald Reagan and Margaret Thatcher, eroded support for labor and employment law. A wave of mergers produced larger corporations with even greater labor market power.
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Similarly, to raise its profits, a monopsonist lowers wages below the value of the workers to the employer. Because not all workers are willing to work at these depressed wages, monopsony leads some workers to quit.
Firms bear the loss in workers (and resulting lowered sales) in exchange for the higher profits made off the workers who do not quit. The resulting group of workers looking for jobs are what Marx called the “reserve army of the unemployed.”
Employer labor market power thus reduces employment, raises prices, and depresses the economy. Those sound a lot like the harms that conservative economists have long attributed to excessive taxation. And that’s no coincidence. Wage suppression is just like a tax: a tax on the labor of workers.
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