The aftermath of wage collusion in Silicon Valley

The settlement is in—some of Silicon Valley’s biggest and most influential technology companies late last week agreed to pay $324.5 million to settle a class-action law suit brought by their employees alleging collusion to suppress their wages.  After an anti-trust investigation, the U.S. Department of Justice filed a complaint in September of 2010.  The companies eventually settled with the department and stopped the practice. The targeted workers and the companies involved agreed to settle last month, with the amount announced last week.

But will there be any repercussions from this long legal tangle between employers and employees in one of the leading industries in the country? A great series of stories on Pando Daily lay bare the alleged efforts of big tech companies (including Apple Inc., Intel Corp., and Google Inc.) for a secret “do not hire” cartel deterring these companies from hiring each other’s workers, which artificially suppressed their workers’ wages. In the mid-2000s there was a high demand for programmers and engineers, which pushed up their wages. To combat higher pay, Apple’s Steve Jobs and Google’s Eric Schmidt allegedly agreed to stop trying to hire each other’s workers, using their size to pressure other firms to join them.

Yet some conservative economists, among them George Mason University economics professor Tyler Cowen on his popular Marginal Revolution blog, argue this kind of cartel is not terribly important because some firms will cheat, causing the system to fall apart, while new workers will figure out that there is a cartel and go work somewhere else for more money. But this particular case of wage collusion lasted from 2005 to 2009 and took the Justice Department to solve this problem, not the market.

In fact, this series of cases fit in with the narrative of French economist Thomas Piketty and his book “Capital in the 21st Century.” Piketty describes some of the fundamental economic problems facing the developed world, emphasizing those related to earnings from work versus investment. Piketty’s conservative critics make much of the fact that the author targets the “supermanagers” of companies as culprits in the rise in income inequality in the developed economies, in particular the United States. On the editorial pages of The Wall Street Journal, for example, columnist Holman Jenkins argues that Piketty wants to pitchfork the idle rich but “somewhat disconsolately for his story, the U.S. has exhibited the wrong kind of income inequality, caused not by rising inheritances but soaring “labor earnings” of the managerial class, which he attributes to self-dealing by executives and boards. “

Piketty does discuss at length such self-dealing, mostly in order to note that labor earnings in the C-suite do not seem at all connected to any corresponding productively gains compared to these supermanagers’ steely-eyed focus on wages and productivity among their companies’ workforces. And now comes along a legal settlement in Silicon Valley that proves Piketty’s point in spades.

There are at least three concrete steps that can be taken to help combat future abuses. The first is to improve access to salary information. The Bureau of Labor Statistics provides some information about salary norms by occupation and location. More important are websites such as Glass Door that encourage people to share salary information. As participation increases, there will be less room for wage discrimination not just from executive to employees but also by sex, race, and ethnicity. Earlier this year, President Obama signed an executive order preventing federal contractors from discouraging workers from talking about pay. Legislation could expand this to protect all workers.

The second is to bring new analytic tools to investigating business collusion charges. Law enforcement and intelligence agencies have brought a wide array of new analytic tools to bear on problems of terrorism. White-collar crimes need the same rigor. The financial crisis was extraordinarily costly for not just the United States but the whole world, yet we spend only a miniscule fraction of the resources fighting business crimes as we do on national defense.

And third, policymakers could change the penalties to target the actual offenders, in this case, the colluding executives. Lawmakers could ensure that these rogue executives get stiff fines and even jail time. Firms can also act by using clawback provisions to recoup losses from fines. These actions would help deter future collusion.

In the aftermath of wage collusion in Silicon Valley, these suits and settlements highlight the need to modernize our systems to detect and deter such labor abuses, which are a problem for white collar workers, too.

Carter Price is a Senior Mathematician focusing on quantitative analysis of U.S. economic policy at the Washington Center for Equitable Growth.

May 27, 2014


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