Pushing Wages Down

An op-ed at the New York Times from Alan Krueger and Eric Posner lists some of the ways in which companies keep wages low:

Even after eight years of economic recovery and steady private-sector job growth, wages for most Americans have hardly budged. It is tempting to think that wage stagnation is intractable, a result of long-term trends, like automation and globalization, that government is powerless to do anything about.

In fact, a growing body of evidence pins much of the blame on a specific culprit, one for which proven legal weapons already exist. But they are not being used.

The culprit is “monopsony power.” This term is used by economists to refer to the ability of an employer to suppress wages below the efficient or perfectly competitive level of compensation. In the more familiar case of monopoly, a large seller — like a cable company — is able to demand high prices for poor service because consumers have no other choice. It turns out that many corporations possess bargaining power over their workers, not just over their consumers. Their workers accept low wages and substandard working conditions because few alternative job opportunities exist for them or because switching jobs is costly. In other words, in the labor market, effectively a small number of employers are competing for their labor.

The other culprit at which they point the finger is outsourcing. I wish they had been a bit more precise about what they meant by that. Every company outsources. I don’t know of any company that operates its own phone system, generates it own electricity, builds its own office buildings, manufactures its own vehicles, and develops its own software. Even Microsoft uses non-Microsoft software. Companies outsource those functions because it’s more efficient to do so. That’s basic Adam Smith.

Outsourcing and particularly offshore outsourcing core business functions is a different issue. To those I would add importing workers from overseas to replace domestic workers, something that’s expressly prohibited but is done all of the time. There’s also employing illegal immigrants.

The authors’ implied solutions are bans on “no-poaching” employment contracts and increasing union power:

Unions used to offset employer monopsony power, but unions now represent only 7 percent of private sector workers, down from a peak of 35 percent in the 1950s.

which is self-refuting. Unions function most effectively when there’s a tight labor market.

My own view is that size itself is the enemy. Big companies exert monopsony power. It’s unlikely that your local bookstore wields the power that Amazon does.

The first step is having the guts to enforce laws already on the books. When monopolies use their power to push their way into other businesses, that’s an illegal violation of monopoly power. Such companies should be broken up.