Paid family and medical leave in the United States: A data agenda for practitioners

Posted on by Maria Monroe

Overview

The United States is an outlier among developed nations for its lack of a national paid family and medical leave program. New parents across our nation struggle to balance the demands of their jobs with the responsibilities for their families. What’s more, the need for paid leave is growing as the U.S. population ages and more working adults are responsible for aging parents or in need of support to recover from their own illnesses or injuries. Existing paid leave programs do not reach everyone, with low-income working families most in need of support the least likely to have access to benefits.

In the absence of federal policy, a growing number of states have adopted their own paid leave programs. California, New Jersey, and Rhode Island have had programs providing paid leave for new parents, caregivers, and medical leave in place for years. Since 2017, three new states (New York, Washington, and Massachusetts) and the District of Columbia have all passed paid family and medical leave laws. Data from these programs allow researchers to generate a clearer understanding of how paid leave affects workers, families, and employers in these states.

More work remains to be done to understand the nuances of these programs’ effects. Doing so will require additional groundwork to create better data to inform policy. This issue brief presents a brief guide to the available data, drawing upon our newly released paper, “Paid family and medical leave in the United States: A data agenda.”

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Paid family and medical leave in the United States: A data agenda for practitioners

Background

A report issued by the Washington Center for Equitable Growth in 2018 organized the existing evidence on paid leave in the United States into a framework for understanding the channels through which each type of paid leave (parental, caregiving, and medical leave) affects economic outcomes via individual-level employment and health outcomes, firm-level outcomes, and the broader macroeconomic effects. That report elevated what we know about paid leave’s economic impacts and makes the case that the sum of the research to date suggests compelling economic evidence through multiple channels demonstrating the effectiveness of paid family and medical leave for families, businesses, and the broader economy.

That paper also acknowledged the gaps in the knowledge base that remain, among them multiple dimensions of the economic effects of paid caregiving leave on both caregivers and care recipients, as well as broader program interactions between paid leave and other social insurance and social safety net programs. The paper then outlined a research agenda designed to inform future policy efforts aimed at supporting the millions of Americans managing both work and caregiving across the life-cycle.

Making progress on that research agenda, and therefore on evidence-backed policy, requires the use of high-quality data. Our follow-up report released today assesses the state of the data available for answering many of the remaining questions about paid leave in the United States and offers a blueprint for building the necessary data architecture to advance evidence-backed policy. Existing survey data and new sources of administrative data from both state and federal sources—see our comprehensive spreadsheet below and our glossary of data sources—advance the knowledge base on how paid family leave impacts families, firms, and the economy as a whole.

Survey data

Existing data on paid family and medical leave comes in two main forms. Surveys rely on a sample of respondents’ answers to questions. The Department of Labor Family and Medical Leave Act Worksite and Employee Survey (known as the DOL FMLA survey), conducted in 1995, 2000, and 2012, is perhaps the most widely known relevant example of existing survey data. But other important surveys also include relevant information, including multiple datasets from the U.S. Census Bureau and the U.S. Bureau of Labor Statistics, and university-based datasets such as the Panel Study of Income Dynamics, the National Health and Aging Trends Study, and the Health and Retirement Survey.

Survey data can be rich in detail on key factors such as demographics, as well as on the nuances of the variety of care needs, among them medical conditions and employment limitations. Yet because survey data relies on individuals’ recall of key details regarding employment, earnings, and health status, this data is sometimes viewed as unreliable. Moreover, most survey data do not include repeat observations of the same people (so-called longitudinal data), and many surveys are collected only once or at irregular intervals. This means utilizing surveys to ascertain the effectiveness of paid family and medical leave programs presents methodological challenges that require creative approaches from researchers seeking to establish valid results.

Administrative data

Administrative data, which are collected by state governments and the federal government in the process of operating programs and providing benefits, is a rich and currently underutilized resource. States with existing paid leave programs collect information on program applicants and participants as part of program administration in order to determine eligibility, benefit levels, and benefit durations, and to monitor participation and progress toward desired outcomes. Even in the absence of a federal paid leave policy, federal administrative data sources can play a key role in providing evidence as well.

Just one case in point: Data from the Internal Revenue Service and the Social Security Administration include important information about earnings and labor force participation that can be compared across states with and without paid leave policies. While administrative data may not have the rich details included in some survey datasets, it is generally seen as the gold standard for understanding program uptake and impacts over time due to the large number of repeated observations and highly inclusive universe of individuals included.

The new data agenda

To date, paid leave researchers have relied on a patchwork of survey and administrative data sources to make headway on key research questions pertaining to paid parental, caregiving, and medical leave. A detailed summary of the data landscape for each of these pieces of the paid leave policy puzzle is available in our longer report, available here. Yet substantial work remains to be done in creating the evidence base necessary for understanding how best to design paid family and medical leave policies that not only support families in their efforts to juggle work and caregiving responsibilities, but also boost overall economic performance.

In each case, but especially for caregiving and medical leave, substantial additional work remains to be done to create the necessary data landscape for headway on open research questions. Examples of key questions in need of better data include how variations in policy design impact labor market outcomes across all three types of leave, how access to medical leave impacts labor market and health outcomes, and a wide variety of basic questions about the demand for and impact of caregiving leave.

Practitioners, including state and federal policymakers, advocates, data administrators, and philanthropists, have a key role to play in helping to strengthen the data infrastructure in service of generating sound empirical evidence on the economic impacts of paid family and medical leave policy. In particular, policymakers can:

  • Ensure state and federal agencies have the necessary infrastructure in place to protect privacy while allowing data sharing for research purposes, including appropriate technological and human resources
  • Remove legislative barriers to creating data-sharing agreements
  • Support and fund additional waves of important existing surveys that collect data on paid family and medical leave
  • Advocate for the inclusion of questions on paid family and medical leave in existing surveys that do not currently collect data on the topic
  • Partner with the growing community of paid family and medical leave scholars to evaluate the effects of new and existing state-level programs (and changes to those programs), providing access to administrative data sources early on in the process

Philanthropists also have a key role to play. They can:

  • Commit to long-term funding for researchers pursuing data-sharing agreements and data linkages across state and/or federal agencies. Negotiating such agreements and linkages takes much longer than a year and thus requires sustained financial backing from investors.
  • Consider funding new questions and/or new modules for existing large representative surveys, such as the Panel Study of Income Dynamics.
  • Invest in coalitions that actively cultivate relationships with state and federal legislatures and agencies in order to advocate for proactive planning around data sharing for new programs.
  • Invest in expanded versions of data toolkits, such as the recent report issued by Equitable Growth, in order to provide a more extensive guide for researchers interested in accessing administrative data, covering topics including:
    • A step-by-step process for requesting data from the states (including contact information for the office and/or person responsible for executing data-sharing agreements in each state).
    • A sample of Memorandum of Understanding or Data Use Agreement.
    • Resources for state data administrators who are interested in cleaning and coding their data for sharing.
    • Model legislative or regulatory language that states could use to ensure accurate and secure sharing of data from newly implemented programs.

Conclusion

The momentum around paid family and medical leave in the United States is genuine and much-needed. A growing number of state and federal policymakers are recognizing that the longstanding gap between family caregiving responsibilities and labor market responsibilities are a drag on family economic security, national economic performance, and global competitiveness. This momentum creates a window of opportunity for policy action that meets the nation’s economic needs while also advancing a data-backed approach to policy.

The strong foundational research on paid family and medical leave provides the first step, allowing a growing number of states to develop programs with confidence that they’re headed in the right direction. The time has come to take that next step—to fill out the data landscape so that existing programs are continually improved and future policies are on even firmer empirical footing. The results will ultimately improve the socioeconomic well-being of countless families and the U.S. economy as a whole.

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Brad DeLong: Worthy reads on equitable growth, March 1–7, 2019

Posted on by Maria Monroe

Worthy reads from Equitable Growth:

  1. Time is almost up for dissertation/postdoc support proposals! Proposals for doctoral/postdoctoral grants and applications to the Dissertation Scholars Program are due by 11:59 p.m. EDT on Sunday, March 10, 2019. See Equitable Growth’s Request for proposals: “We consider proposals that investigate: the consequences of economic inequality on individuals’ economic outcomes and labor market dynamics, as well as group dimensions of inequality, including race, ethnicity, and gender; the causes of inequality to the extent that understanding these causal pathways will help us identify and understand key channels through which economic inequality may affect growth and stability; and the ways in which public policies affect the relationship between inequality and growth.”
  2. Nobody ever showed me credible numbers stating that New York’s proposed subsidies to Amazon.com Inc. were a good deal for the people of New York, let alone for the country as a whole. That makes me strongly suspect that credible numbers cannot be calculated. Unless a recession hits at the right (or, rather, wrong) moment, the people who would have worked in New York at Amazon HQ2 will work elsewhere, and the state economy as a whole is likely to be healthier. Read Nathan Jensen, “Economic Development Public Policy Lessons Abound in New York’s Amazon HQ2 Debacle,” in which he writes: “Most of these incentives are bad public policy. Virginia’s HQ2 bid was more public focused. It includes future payments based on a formula involving new, high-paying jobs, as well as other public subsidies, but it also includes a promise of infrastructure and education investments that would serve not only Amazon but also the entire community. The subsidies continue to face opposition. New York’s bid, in contrast, was designed primarily to put more money into the pockets of Amazon.”
  3. How did I miss this last week? Kate Bahn wrote about how it really is the case that holders of H-1 and H-2 visas are close to indentured servants—and suffer for it. Read “The Search for and Hiring of Guest Workers in the United States Displays the Complexity of Market Concentration and Monopsony Power,” in which she writes: “Eric M. Gibbons … Allie Greenman … Peter Norlander … and Todd Sorensen … [examine the] monopsonistic effects for workers who are employed under guest worker visas such as H-1 and H-2 … review lawsuits against employers of guest workers and confirm widely held beliefs about wage theft and abusive employment … The four researchers exploit the application process to the U.S. Department of Labor for guest worker visas to estimate employer concentration for guest workers and how this affects wages. … Guest workers are in a more concentrated set of occupations than the overall U.S. labor market, with more than a third of them working in computer and mathematical occupations on H-1B visas and nearly half working in building, grounds cleaning, and maintenance on H-2B visas … Herfindahl-Hirschman Index … is sufficiently high to warrant U.S. Department of Justice scrutiny of mergers in these sectors of the U.S. economy.”
  4. The brilliant Bhash Mazumder is in conversation this past week with Liz Hipple. He is right in his stress on siblings as an excellent test strip for measuring and understanding inequality in one easy-to-calculate number: Read “In Conversation with Bhash Mazumder,” in which he discusses: “The sibling approach … [which] boils everything down into one number by saying, what are all of the things that two siblings shared growing up? How much does that determine their overall outcomes? … That’s an important measure that we haven’t studied a lot. In the United States, there has been some research on sibling correlations, which I’ve contributed to a little bit, that suggests there’s much less intergenerational mobility in U.S. society than in other countries. … There is something about the nature of our society causing family background characteristics to strongly influence children’s long-run outcomes, thereby reinforcing inequalities.”
  5. Go watch Michael Kades testify on Capitol Hill on Thursday, March 7. But first, read his column, “To Combat Rising U.S. Prescription Drug Prices, Let’s Try Competition,” in which he writes: “Look at the variety of problems with anti-competitive practices engaged in by U.S. pharmaceutical companies. Take ViroPharma Inc. When faced with the possibility that the U.S. Food and Drug Administration would approve generic versions of its Vancocin product (a drug to treat a potentially life-threatening gastrointestinal infection), the company filed 43 petitions to delay or prevent generic approval. Although none were successful on the merits, it took years before the FDA approved any generic competitors. The Federal Trade Commission alleged the strategy increased costs by hundreds of millions of dollars.”

Worthy reads not from Equitable Growth:

  1. In England, at least, there was no “middle class” in the 20th century—if “middle class” is defined as the not-rich who can nevertheless expect some support from their parents and pass a nest egg down to their grandchildren. Read Neil Cummins, “The Missing English Middle Class: Evidence From 60 Million Death And Probate Records,” in which he writes: “Using a combination of old-fashioned archival research, mass scripted downloading, optical character recognition, text parsing, and sets of algorithmic programming tools, I have digitised every individual entry, 18 million records with estate values, from the Principal Probate Calendar from 1892 to 1992. To this I have added all 60 million adult English deaths … This simple finding is quite stark: despite the great equalisation of wealth over the 20th century, most English have no significant wealth at death.”
  2. Brilliant from a brilliant economist. Read David H. Autor, “Work of the Past, Work of the Future,” in which he writes: “Urban noncollege workers currently perform substantially less skilled work than in prior decades … Automation and international trade … have eliminated the bulk of noncollege production, administrative support, and clerical jobs, yielding a disproportionate polarization of urban labor markets … by: (1) shunting noncollege workers out of specialized middle-skill occupations into low-wage occupations that require only generic skills; (2) diminishing the set of noncollege workers that hold middle-skill jobs in high-wage cities; and (3) attenuating, to a startling degree, the steep urban wage premium for noncollege workers that prevailed in earlier decades. Changes in the nature of work—many of which are technological in origin—have been more disruptive and less beneficial for noncollege than college workers.”
  3. Pharmaceutical price reform is one of the very few equitable growth issues where there are actually Republican legislators willing to talk. Read the Coalition to Protect Patient Choice’s “Senate Finance Committee Grills Drug Executives on Rising Prices, Criticize Them for Terrible Practices,” which notes that “Sen. Chuck Grassley (R-IA) opened by saying that America has a problem with high prescription drug prices, that a balance can be struck between innovation and affordability, and that the Committee was here to discuss solutions. He and Sen. Wyden have launched a bipartisan investigation into the high price of insulin.”
  4. The 2017 tax cut increased inequality. Evidence mounts that it had no good ancillary effects at all. Read Chye-Ching Huang, “Fundamentally Flawed 2017 Tax Law Largely Leaves Low- and Moderate-Income Americans Behind,” in which he writes: “The fundamental flaws of the 2017 tax law: 1) it ignores the stagnation of working-class wages and exacerbates inequality; 2) it weakens revenues when the nation needs to raise more; and 3) it encourages rampant tax avoidance and gaming that will undermine the integrity of tax code …The 2017 tax law largely left behind low- and moderate-income Americans—and in many ways hurts them … A restructuring of the law can fix these flaws.”
  5. Building up the database we need to understand inequality on a global scale are Facundo Alvaredo, Lucas Chancel, Thomas Piketty, Emmanuel Saez, and Gabriel Zucman. Read their “World Inequality Report 2018,” in which they write: “The World Inequality Report 2018 relies on a cutting-edge methodology to measure income and wealth inequality in a systematic and transparent manner. By developing this report, the World Inequality Lab seeks to fill a democratic gap and to equip various actors of society with the necessary facts to engage in informed public debates on inequality.”
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U.S. Congress asks Bureau of Economic Analysis to disaggregate GDP growth data

Posted on by Maria Monroe

The U.S. Congress recently took an important step toward having the federal government measure economic inequality in the United States by reporting on how households at all income levels are experiencing changes in the U.S. economy.

The conference report accompanying the fiscal year 2019 omnibus appropriations bill—the legislation that ended the government shutdown in February—encourages the U.S. Department of Commerce’s Bureau of Economic Analysis “to develop and begin reporting on income growth indicators” that show “how incomes grow in each decile of the income distribution.” The report encourages BEA, by 2020, to include estimates of these measures with each report and update on U.S. Gross Domestic Product. BEA is the agency that issues the official government reports on GDP quarterly and annually, along with monthly updates.

Language in a conference report encouraging an agency to take a particular action does not have the force of law. But it makes clear the desire of Congress, and agencies tend to take the hint. In other words, there is a good chance that for the first time, the federal government will routinely disaggregate growth data, reporting not only whether and how the overall economy is growing but also whether and how households up and down the income ladder are experiencing that growth.

What does this mean and why is it important?

Research by Paris School of Economics’ Thomas Piketty, Equitable Growth Steering Committee Member and University of California, Berkeley economist Emmanuel Saez, and Equitable Growth grantee and UC Berkeley economist Gabriel Zucman shows that “growth was once distributed relatively evenly across all individuals in the United States … by contrast, the majority of individuals in the United States have seen income and wage growth significantly below what is suggested by national measures of output and income.”

More specifically, from the 1950s through the 1970s—when the U.S. economy, as represented by GDP, grew over time—that growth was evenly shared by most Americans. When the economy was growing, so too were most incomes. But since the 1980s, there has been a significant change. Growth in GDP continued, but its benefits were not widely shared. So, while those at or near the top of the income ladder were getting a lot wealthier, the incomes of most Americans were relatively flat, or worse.

The result: GDP growth figures that national leaders and the media continue to look to as the most important indicator of economic health are no longer relevant to the way most Americans experience the economy.

Equitable Growth was pleased when Sens. Charles Schumer (D-NY) and Martin Heinrich (D-NM) and Rep. Carolyn Maloney (D-NY) introduced the “Measuring Real Income Growth Act,” which would require the BEA to provide estimates of income growth for Americans in each decile of income, as well as for the top 1 percent. Now, Congress has asked BEA to carry out a significant part of this legislation.

This measure will tell us how Americans—wealthy, middle-income, and poor alike—are faring in the current economy, relative to other groups and to the average. That not only will be a better measure of economic growth and stability, but also may provide a roadmap for policy changes we need to reduce economic inequality.

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To combat rising U.S. prescription drug prices, let’s try competition

Posted on by Maria Monroe

Michael Kades, Equitable Growth’s Director of Markets and Competition Policy, will testify on March 7 at a hearing of the U.S. House Committee on the Judiciary’s Subcommittee on Antitrust, Commercial, and Administrative Law. At the hearing, entitled “Diagnosing the Problem: Exploring the Effects of Consolidation and Anticompetitive Conduct in Health Care Markets,” Kades will discuss the competition issues in the prescription drug marketplace raised in this article.

The rising cost of prescription drugs in the United States is now a “weather” issue—everybody talks about it. The difference is you can’t change today’s weather, but we can do something about drug prices. And competition is an important part of the answer.

Since 1960, overall national health expenditures have risen as a percentage of Gross Domestic Product from 5 percent to around 18 percent, and drug prices have generally risen right along with them. And the future does not look good. The American Academy of Actuaries notes that cost projections by the Centers for Medicare and Medicaid Services cite spending for retail prescription drugs as the consistently fastest growth health category over the next decade.

High prices mean that millions of Americans struggle to pay for their medications. Too many either don’t take a needed drug or don’t take the recommended amount, simply because they can’t afford it. A 2018 survey by GoodRx—a firm that tracks drug prices and offers drug coupons—found that fully one-third of Americans had in the previous 12 months skipped filling a prescription at least once due to cost. Obviously, this can affect health outcomes. And it is not acceptable. It’s time to inject some serious competition into the U.S. prescription drug industry.

But first, let’s look at the variety of problems with anti-competitive practices engaged in by U.S. pharmaceutical companies. Take ViroPharma Inc. When faced with the possibility that the U.S. Food and Drug Administration would approve generic versions of its Vancocin product (a drug to treat a potentially life-threatening gastrointestinal infection), the company filed 43 petitions to delay or prevent generic approval. Although none were successful on the merits, it took years before the FDA approved any generic competitors. The Federal Trade Commission alleged the strategy increased costs by hundreds of millions of dollars.

Or consider, Cephalon Inc. When it faced four potential generic competitors for its wakefulness drug, Provigil, it paid them to stay off the market until 2012 as part of a patent settlement. Afterwards, its CEO boasted, “We were able to get six more years of patent protection. That’s $4 billion in sales that no one expected,” which meant six years of less competition for consumers.

Another example is Revlimid, a chemotherapy drug manufactured by Celgene Corporation. It can sell for more than $750 per capsule (costing cancer patients some $20,000 a month). Mylan N.V. sought to manufacture a generic version, but Celgene has prevented Mylan from obtaining the samples of Celgene’s product, citing the dangerous side effects of the drug. Without those samples, Mylan cannot conduct the testing that the Food and Drug Administration requires to approve a generic product.

The relatively new and very promising category of drugs known as biologics are magnifying this cost issue. According to the FDA, these products include “vaccines, blood and blood components, allergenics, somatic cells, gene therapy, tissues, and recombinant therapeutic proteins.” Biologics “can be composed of sugars, proteins, or nucleic acids or complex combinations of these substances, or may be living entities such as cells and tissues,” according to the FDA. “Biologics are isolated from a variety of natural sources—human, animal, or microorganism—and may be produced by biotechnology methods and other cutting-edge technologies.”

Biologics have already had a major impact on the treatment of some diseases. But they are very expensive to develop. And their increasing role in healthcare will probably accelerate overall cost increases. Indeed, those who try to justify high U.S. drug prices frequently rely on the cost of research and development of biologics and other prescription drugs to make their case. It requires a lot of money to discover and develop drugs, the theory goes, and when they succeed, the large profits guaranteed from patenting these new drugs are ostensibly plowed back into research and innovation to produce new and better drugs.

At first glance, this seems like a very strong argument, except that the theory does not always explain the reality. Robin C. Feldman of California Hastings College of the Law examined drug development over a 10-year period and found that “rather than creating new medicines, pharmaceutical companies are recycling and repurposing old ones.” Her report found that “on average, 78 percent of the drugs associated with new patents [between 2005 and 2015] were not new drugs coming on the market, but existing drugs.”

Not surprisingly, pharmaceutical companies were especially likely to engage in such practices to extend patents on their current blockbuster drugs. Feldman found that companies effectively extended the patents on about 80 percent of the 100 best-selling medications during this period. In other words, a lot of those profits are being plowed into ways of maintaining those profits, not making true medical advances.

The pharmaceutical industry is a unique market with unique rules. The legal structure has been designed with the intent of encouraging an adequate supply of medicines and continuing innovation in the search for treatments and cures while also ensuring a degree of competition to produce market efficiency to keep prices in check. Yet there are serious problems in the system. The biggest is the prices that help keep insurance premiums high and, for too many people, block access to drugs they need to ameliorate suffering or even save their lives.

There is already a well-tested tool for moderating prescription drug expenditures: Competition. The Government Accountability Office in 2018 cited comprehensive studies by IMS Health, a healthcare information services company, of the generics industry that found total savings to the health system from the use of generics in the years 1999-2010 to be more that $1 trillion. As most of us have experienced, generics have become ubiquitous at the pharmacist’s counter (as well as on grocery and drugstore shelves) since the Drug Price Competition and Patent Term Restoration Act of 1984, more commonly known as the Hatch-Waxman Act, established a streamlined process for their approval. It is well understood how this law promoted price competition, but the threat of competition also spurred innovation.

The law provided drug manufacturers unique protections from competition. Drug companies get their patents extended based on the time it takes the U.S. Food and Drug Administration to approve the product, and they receive certain other exclusivities that prevent competition. On the other side of the ledger, the Hatch-Waxman Act creates an abbreviated approval process for generic versions of the drug—products that are identical to the original but usually have a much lower price tag.

In fact, according to research by the IMS Institute for Healthcare Informatics (conducted with support from the Pharmaceutical Research and Manufacturers of America), the price of medicines declined on average by 51 percent in the first year and 57 percent in the second year following the introduction of generics between 2002 and 2014.

But the talents of pharmaceutical companies are not limited to developing drugs to treat disease. These firms also excel at creating schemes to fatten their profits by keeping the revenues flowing from their most valuable drugs even after their patents expire. They create and patent “new” drugs that are slight variants on the original drugs, or they use several other means to effectively extend the original patent in ways that are entirely, or at least arguably, legal.

A similar dynamic is occurring in the realm of biologics. Drugs that are interchangeable with biologics, known as biosimilars, are being developed and, like generics, offer the possibility of effective drugs at lower prices. But there is real concern that barriers to competition may snuff out these alternatives. It is worth noting that the European Union approved its first biosimilar in 2006, but the FDA did not approve a biosimilar until 2015. Today, according to NPR, Europeans have access to some 50 biosimilars, while only six have been approved in the United States.

While sometimes ingenious, the tactics used by manufacturers of brand-name drugs, as well as biologics, can be costly to these firms. But the enormous profits the companies are protecting make those expenditures worthwhile. All these practices can be clearly restricted or outlawed by legislation—if Congress and the Trump administration choose to address them, or, in some instances, if federal courts reconsider their current framework for considering antitrust issues.

What are the most common tactics employed by the U.S. pharmaceutical industry to block competition? And what can be done to address them? Here are five major problems and suggested remedies.

Drugs firms make testing impossible, so guarantee access to the original drugs

To gain approval for a generic, manufacturers must test their product against the original, so they need to purchase the branded drug in bulk from wholesalers. However, if the Food and Drug Administration brands a medication as “dangerous,” then it cannot be sold through wholesalers. Consequently, one tactic for blocking a generic is to convince the FDA to declare the original drug dangerous and then refuse to sell the would-be generic manufacturer enough of the medication to test it. Some companies are taking the position that, even absent the FDA’s declaring a drug is dangerous, they can unilaterally prevent the sale of the product to potential competitors.

The FDA is making efforts to adjust its processes to make it more difficult for pharmaceutical companies to gain a “dangerous” label for their products. But legislation could simply guarantee the ability of a generics company to purchase the quantity of a branded product it needs to test its own generic version by making it a condition of drug approval or giving generics manufacturers petition rights.

“Pay-for-delay” patent settlements block cost-saving competition, so prevent the practice

Another tactic used by brand-name companies is to sue a generic manufacturer seeking to sell a generic version of its product for alleged patent infringement and then settle the case by paying the manufacturer to delay bringing the generic to market.

Patent settlements are sometimes challenged successfully by the FTC. Yet these types of cases can take years to settle—one recent case took more than a decade—and there are too many instances where the tactic succeeds. Legislation establishing that patent settlements are presumptively anticompetitive could effectively neuter this tactic for undermining competition.

“Product hopping” improperly extends patent protection, so the courts and enforcers should be more skeptical of the practice

When the patent on a lucrative drug approaches termination, companies sometimes seek a new patent by making relatively insignificant changes in the original product. When these minor reformulations are successful, companies discontinue the original, doctors switch patients’ prescriptions to the newly patent-protected version, and the market for generics for a popular medication disappears.

This tactic can be challenged, but the courts often do not recognize it. Addressing product hopping requires a change in the framework the courts use to focus on whether a replacement drug is primarily an effort to effectively extend the patent on the original product.

Exclusionary rebates hide the true cost of drugs and can exclude competitors, so courts and enforcers should be more skeptical of the practice

Prescription benefit managers are supposed to, and often do, push down prescription drug prices for the insurers (and therefore for patients). Yet the system of rebates by which discounts are effected and by which prescription benefit management companies make a profit, as well as the opacity of transactions between these firms and pharmaceutical companies, sometimes encourage prescription benefit managers to prefer more expensive drugs because they provide the highest rebates. This is of particular concern when it is used as a tactic to exclude biosimilar drugs. This practice when it prevents competition should violate the antitrust laws, but courts have been too lenient and should be tougher on the practice. The solution is more transparency in drug pricing.

Anti-competitive practices are lucrative, so enact stronger deterrence

The profits from delaying competition, for even a few months, can run into the billions of dollars. Absent strong deterrence, we can expect that some companies will see antitrust enforcement simply as the cost of doing business. But just last week, a federal court significantly limited the ability of the FTC to seek disgorgement (a remedy that deprives a defendant of its illegal profits) for past behavior. This ruling could affect any case in which the FTC challenges the conduct after its completion.

Congress can easily remedy this by clarifying that disgorgement and other monetary remedies are available for violations of the FTC Act. It could go even farther and give the FTC the ability to assess penalties for particularly blatant antitrust violations.

Bringing competition back to the fore in the U.S. pharmaceutical industry

None of these problems are insurmountable, and none of these solutions are a silver bullet. But each of the remedies together could unleash true competition by encouraging not only lower prices but also greater innovation. And these remedies, of course, are not the only steps that can be taken to control drug prices.

Senators Chuck Grassley (R-IA) and Amy Klobuchar (D-MN) and others have introduced legislation to permit individuals to purchase prescription drugs directly from Canada. This would provide another source of competition for U.S. drug makers. And Senator Sherrod Brown (D-OH) and Rep. Lloyd Doggett (D-TX) have proposed legislation to authorize the U.S. Secretary of Health and Human Services to negotiate drug prices paid by Medicare.

But the proposals outlined in this article specifically recognize the role that legal enforcement and regulation by the FTC can play in ensuring competition for brand-name pharmaceuticals from generics, including biosimilars. Such competition benefits consumers, encourages innovation, and keeps the pharmaceutical companies honest. It’s how the system is supposed to work, and still can.

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The case for more internships and apprenticeships in the United States

Posted on by Maria Monroe

For many Americans, an internship is a key entry point into the U.S. labor market. Interns are typically paid very little but learn valuable skills from their more seasoned colleagues. It was the case for me, and it is the case for millions of other entry-level workers. A new working paper, “Production and Learning in Teams,” by me and my co-authors—economists Jeremy Lise at the University of Minnesota, Guido Menzio at New York University, and Gordon Phillips at Dartmouth College’s Tuck School of Business—measures the rate at which low-skill workers learn from their high-skill peers. Our findings demonstrate that the United States would benefit significantly in terms of overall welfare and Gross Domestic Product by subsidizing jobs that pair high- and low-skill workers. These pairings of workers could be promoted through internships but also vocational training, mentorships, or apprenticeships.

To conduct our research, we obtained administrative U.S. Census bureau data which links 95 percent of private-sector employees to their coworkers between 1998 and 2008. We use this data in conjunction with the so-called frontier theory of the labor market, which integrates peer effects and realistic wage-setting into a model with heterogeneous co-workers, in order to measure the costs and benefits of pairing high- and low-skill workers. The cost of pairing these contrasting sets of workers is the forgone output that would have been generated by pairing high-skill workers together. The benefit is the human capital generated from the learning accumulated by low-skill workers from their high-skill co-workers.

To measure these costs and benefits, we use the wage patterns (including wage growth and job mobility) of workers and how those wage patterns vary with the characteristics of their co-workers. We find that learning is single-sided, as one would expect, meaning that workers catch up to more knowledgeable co-workers, but more knowledgeable co-workers are largely unaffected by less knowledgeable ones. In other words, interns and apprentices will learn from senior colleagues, but these low-skill workers will not affect the skills of senior colleagues.

We estimate that learning from co-workers accounts for 24 percent of the aggregate U.S. human capital stock. Roughly 40 percent of a typical worker’s human capital is accumulated on the job, and of that human capital accumulation, 60 percent comes from learning the skills of co-workers. These benefits of learning from co-workers could be increased markedly, however, if U.S. policymakers encouraged more firms to offer internships, apprenticeships, and other types of mentoring such as vocational training.

But this is easier said than done. In the U.S. labor market, workers are free to leave their jobs at any point in time, and firms are generally free to replace those workers at any point in time. As a result, not enough mentorship relationships are formed between high- and low-skill workers. If low-skill workers are able to leave immediately after learning new skills, then their employers have little incentive to train and educate those workers. But, from society’s standpoint, we want those low-skill workers to be taught so that they produce more and eventually go on to train the next generation of workers.

Our findings show that there could be significant social welfare and U.S. economic output gains to be had in the United States if policymakers subsidized the pairing of high- and low-skill workers. While our paper allows for very complicated policies, we compute that a simple 3.6 percent tax break on the wages of interns, or a 3 percent tax break on the wages of mentors (defined to be those whose primary capacity is to work with interns), would generate welfare gains of roughly 2 percent per annum in the long-run. We find that implementing a more complex policy—such as the tax system considered in the paper—would increase U.S. GDP per capita by roughly the same amount of 2 percentage points and increase the aggregate human capital stock in the United States by 2 percentage points in the long run.

—Kyle Herkenhoff is an assistant professor of economics at the University of Minnesota and a 2015 and 2016 Equitable Growth grantee.

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Economic development public policy lessons abound in New York’s Amazon HQ2 debacle

Posted on by Maria Monroe

New York’s recent Amazon.com Inc. debacle—winning and then losing the company’s partial second headquarters, or HQ2—has led to some soul searching by politicians (and new efforts, thus far unsuccessful, to win Amazon back). What went wrong? And how should other states and cities faced with tantalizing employment and economic development opportunities presented by giant companies in the future learn from the debacle?

There is a natural tendency to play the blame game in the wake of a political mess of this magnitude. Who killed the goose that was going to lay the golden egg? Was it the governor? The mayor? The city council? A state senator? Or was Amazon CEO Jeff Bezos at fault? Rather than engage in finger-pointing, I think it is more productive to study how this process broke down and produced an outcome that wasn’t in the best interest of either the company or, arguably, the majority of New Yorkers.

Amazon began the year-long process for establishing a second headquarters with a public call for proposals from states and localities across the country. The prospect of landing an employer promising tens of thousands of high-paying jobs set off a media frenzy and a then a frenzy of bids, which unsurprisingly included publicity stunts such as Arizona’s mailing of a 21-foot-tall cactus to Amazon HQ1. One town offered to rename itself “Amazon.” If Amazon’s goal was to generate excitement and free media attention, this first phase was a smashing success.

In January 2018 Amazon culled from the 238 different sites that made bids a list of 20 cities. In stark contrast to the first-round “beauty contest,” The company required the finalists to sign non-disclosure agreements, and public records requests reveal that Amazon asked cities to avoid additional publicity.

Amazon’s final announcement that it would split its HQ2 into two locations, New York City and Arlington, Virginia, was coupled with a description of the incentives provided by each location. New York’s offer was a firm-specific, incentive-heavy offer—the governor and mayor offered Amazon billions of dollars through existing economic development programs.

Virginia’s offer was also made in secret, but the deal was considerably smaller, more creative, and largely focused on workforce development and investment in infrastructure. New York’s offer, based just on the cost and type of incentives, was more open to criticism.

But the cause of much of the flurry of criticism in New York, and in many other cities that put in bids, was the proposals’ lack of transparency. Many cities either routed their bids through agencies that weren’t subject to public records requests, such as Chambers of Commerce, or used exceptions for economic development and legal challenges to keep their bids secret. New York and Virginia both kept their bids under wraps until Amazon announced the content of the offers.

Many New York politicians and civic leaders cried foul. The Amazon deal was pre-negotiated without input from local officials and civil society. Sadly, this was a common practice across most HQ2 bids. For instance, in my own analysis of two dozen bids, I found letters of support from labor unions in only three cities (Pittsburgh, Philadelphia, and St. Louis) and not a single letter from an environmental group. And these letters reflect a minimal level of involvement. It’s unclear, for example, whether these organizations had any opportunity to provide real feedback in the process. Most affected interests in New York—labor, environmental groups, affordable housing advocates, and even the state legislature or the city council—weren’t consulted in the bidding process.

Virginia had a similarly secretive process. The difference was that its accompanying letters of support did include a wider range of organizations, including school districts, as well as letters of support from the Democratic and Republican candidates for governor. This would suggest that, within the confines of Amazon’s imposed silence, local and state leaders found a way of consulting with the affected communities and organizations.

Still, there is some opposition to Amazon in Virginia, and part of that opposition is based on the secrecy of the process and the public subsidies to which the parties agreed. At this time, the full package has not been approved.

But for both cases, this bidding process contributed to events consistent with what political scientists have long known: Processes that depend on non-transparency agreements are inherently less credible. And in the case of New York, a reaction that took down the project.

It is easy to say that this was simply a miscalculation by New York’s governor and mayor, but the problem is bigger than two individuals. Across the country many HQ2 bids shared a similar process, raising two fundamental issues for economic development processes in hundreds of communities.

First, too many deals, large and small, have become opaque. As Amazon HQ2 has shed some light on this trend, we could see similar backlashes in communities across the country against these kinds of agreements. The one way to manage this is for political leaders to run inclusive processes, including a broader range of groups in the bid-making process and then being fully public about what was offered, when they seek to attract employers to their jurisdictions.

The second main point is that most of these incentives are bad public policy. Virginia’s HQ2 bid was more public focused. It includes future payments based on a formula involving new, high-paying jobs as well as and other public subsidies, but it also includes a promise of infrastructure and education investments that would serve not only Amazon but also the entire community. The subsidies continue to face opposition. New York’s bid, in contrast, was designed primarily to put more money into the pockets of Amazon. Again, most cities across the United States made bids more similar to New York’s offer, and often at staggering costs, in one case exceeding $20 billion in tax incentives over 99 years.

To be clear, my point is not that New York should not have sought to become a home for Amazon. But the academic literature tells us what many New Yorkers already knew. Companies such as Amazon often pick a location first, and then try to exact as many incentives as possible. Research suggests that these incentive programs swing very few investments, and there is even evidence that executives in some cases don’t know that their companies received these benefits.

Even when such incentives are effective, they are often so excessive that the costs aren’t justified. Taiwanese semiconductor manufacturer Foxconn Technology Group’s investment in Wisconsin is the poster child for such exorbitance, but this isn’t an isolated incident. Film incentive programs are routinely criticized by state audits, including Virginia’s finding that each dollar in film tax credits returns only a dime to the state. And even when California’s more traditional flagship incentive program, California Competes, was reviewed by the state Legislative Audit Office, the main recommendation was to end the program. New York’s audit of the Excelsior Jobs Program, the same program used to provide the state incentives to Amazon, found damning evidence of mismanagement.

Promises of jobs, which are especially salient for public perceptions of incentive deals, are problematic at best. This should serve as a warning to Virginia, regardless of how the jobs provisions of its bid are structured. My co-author Calvin Thrall and I studied location incentive deals in Texas and found that many of the jobs promised as part of the agreements are quietly renegotiated downward by firms to avoid rules that would lead to clawbacks—taking back a portion of incentive payments, for example—for noncompliance. Studying economic development programs in Maryland and Virginia, I found that incentives had virtually no impact on job creation. The companies receiving the incentives did not add appreciably more jobs than control groups of similar firms that had received no such incentives.

These two points provide a very simple lesson for communities that want to avoid the same folly as New York. Good public policy should involve the public. Secrecy is undemocratic and limits the credibility of deals. A secret offer that is shielded from the public and is put together without appropriate consultation tells you that leaders are worried the public won’t support that deal.

And for good reason. Many of these deals don’t pass a simple cost-benefit test and impose serious costs on the rest of society. Making these deals more transparent from the onset forces officials to gain buy-in from the rest of the community. This can correct the most egregious uses of incentive programs.

New York’s governor and mayor made the mistake of following the same script that has been used in thousands of incentive deals across the country. My hope is that the lessons provided by Virginia and New York are not that localities should have rejected Amazon, or economic development deals in general, but that they should reject broken processes in favor of those that work for both firms and the public.

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Weekend reading: “Fair markets, happy kids” edition

Posted on by Maria Monroe

This is a weekly post we publish on Fridays with links to articles that touch on economic inequality and growth. The first section is a round-up of what Equitable Growth published this week and the second is the work we’re highlighting from elsewhere. We won’t be the first to share these articles, but we hope by taking a look back at the whole week, we can put them in context.

Equitable Growth round-up

Equitable Growth released the next episode of our In Conversation series, in which our Executive Director and Chief Economist Heather Boushey discusses the research of prominent economists and how their work relates to contemporary policy debates on inequality and growth. In this edition, Heather talks to University of California, Berkeley economist Emmanuel Saez on the theory of optimal taxation, the necessity of raising taxes on the wealthy to reduce inequality and fund public investments, and the meager evidence of positive growth impacts of severe tax cuts, such as those implemented in Kansas.

Equitable Growth Research Assistant Raksha Kopparam discusses the findings of a new addition to Equitable Growth’s working paper series by economists Elena Prager at the Kellogg School of Management at Northwestern University and Matt Schmitt at the Anderson School of Management at the University of California, Los Angeles on “Employer Consolidation and Wages: Evidence from Hospitals.” Using data on a decade of hospital mergers, Prager and Schmitt show that mergers reduce wage growth for workers in situations where they result in a substantial increase in market concentration and where workers’ skills are industry-specific. Emphasizing the important role of collective organizing as a counter-balance to monopsony power, Prager and Schmitt find that this effect is weaker in markets with stronger labor unions.

In his weekly “Worthy Reads” column, UC-Berkeley economist and Equitable Growth columnist Brad Delong highlights recent research and writing in economics from Equitable Growth and other economists. This week, Brad highlights Prager and Schmitt’s working paper and University of Chicago economist Damon Jones’ seminar at Equitable Growth on his research with University of Pennsylvania economist Ioana Marinescu studying “The Labor Market Impacts of Universal and Permanent Cash Transfers: Evidence from the Alaska Permanent Fund.” Additionally, Brad points to a column by Economic Policy Institute Communications Director Pedro Nicolai da Costa on the negative health effects of rising inequality as well as recent work by economists Dani Rodrik and Richard Baldwin on the role of technological changes in the good jobs of the future.

Equitable Growth economist Kate Bahn analyzes the findings of another new working paper in Equitable Growth’s series, titled “Monopsony power and guest worker programs,” by economists Eric M. Gibbons at The Ohio State University at Marion, Allie Greenman at the University of Nevada, Reno, Peter Norlander at Loyola University Chicago, and Todd Sorensen at UNR. Using administrative immigration data, the authors calculate that many guest workers experience heightened employer concentration, which noticeably drives down their wages. Kate notes that search frictions facing disadvantaged populations such as guest workers likely play an important role in increasing firms’ monopsony power to set artificially low wages—similar to the effect of market concentration itself. The working paper authors argue that enforcing wage regulations and increasing job mobility for guest workers would help improve their bargaining position and wages.

Links from around the web

Clare Lombardo delves into recent research on the drastic negative effects of persistent school segregation on racially based funding disparities. Specifically, she highlights the findings of a report by the nonprofit EdBuild, which calculated that predominantly white school districts receive $23 billion in additional funding compared to predominantly black school districts in the United States. Advocating for a renewed commitment to school desegregation and equalized school funding, the report points out that creating larger school districts (often along county lines), especially in the South, facilitates reductions in these funding disparities by increasing the income and racial diversity of the tax base funding schools in these larger districts. [npr]

Dylan Matthews discusses the release of a comprehensive report commissioned by Congress on the most effective policy interventions to halve child poverty in the United States. The authors of the report include several economists from Equitable Growth’s network: Janet Currie, of Princeton University, Hilary Hoynes of UC-Berkeley, and Tim Smeeding of the University of Wisconsin. The authors estimate that child poverty costs society between $800 billion and $1.1 trillion yearly due to its negative effects on health, earnings, and crime. Relying on evidence from the United States and other countries, the report offers a variety of potential policy solutions and argues that direct federal support in the forms of monetary allowances per child along with housing and food benefits have a much larger effect on reducing poverty than “work-based” benefits. [vox]

Kathleen Geier provides a constructive critique of the sweeping new child care proposal from Senator Elizabeth Warren (D-MA). As Geier points out, Sen. Warren’s plan is a welcome step to increasing the federal government’s role in ensuring access to universal childcare, given the substantial economic evidence on market failures in exclusively private provision of this essential service for U.S. families. Geier argues, however, that a greater public role is needed not only in financing but also in building the infrastructure for a veritable universal child care system in the United States. [in these times]

Friday Figure

Figure is from Equitable Growth’s, “Falling behind the rest of the world: Childcare in the United States.”

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Brad DeLong: Worthy reads on equitable growth, February 22–28, 2019

Posted on by Maria Monroe

Worthy reads from Equitable Growth:

  1. Great conversation between Heather Boushey and Emmanuel Saez from their “In conversation with Emmanuel Saez.” My favorite highlight: “Kansas … illustrates beautifully from a research perspective even though it’s a disaster in terms of public policy [that] … tax avoidance … pass-through businesses … huge incentives for high-income earners to reclassify … a big erosion of the wage income tax base in the state … [resulted in] a much bigger negative impact on tax revenue than would have been predicted mechanically … When governments have actually to balance their budgets, they realize that taxes are useful, and that brings the two pieces of the debate together … Certainly Kansas didn’t experience an economic boom.”
  2. Damon Jones came to Equitable Growth and presented a paper about Alaska’s Oil Dividend Fund that made me significantly more optimistic about Universal Basic Income. His “Labor Market Impacts of Universal and Permanent Cash Transfers,” includes these points about the UBI concept: “UBI-like cash transfer in Alaska: unconditional, universal, long-run, captures macro effects. The macro effects of Alaska PDF on labor supply less negative than the macro effects of an unconditional cash transfer … a very small *(0.001) and insignificant effect on employment to population.” [Equitable Growth will be posting a video of his presentation in early March.]
  3. Excellent working paper from the very sharp Elena Prager and Matt Schmitt on how hospital mergers appear to be as much about gaining market power with respect to health-care workers as about gaining market power with respect to patients and their insurers. There continues to be very little evidence that they are about efficiencies of any kind. Read their “Employer Consolidation and Wages: Evidence from Hospitals,” in which they write: “We find evidence of reduced wage growth in cases where both (i) the increase in concentration induced by the merger is large and (ii) workers’ skills are at least somewhat industry-specific. Following such mergers, annual wage growth is 1.1 percentage points slower for skilled non-health professionals and 1.7 percentage points slower for nursing and pharmacy workers than in markets without mergers … Observed patterns are unlikely to be explained by merger-related changes aside from labor market power. Wage growth slowdowns appear to be attenuated in markets with strong labor unions, and we do not observe reduced wage growth after out-of-market mergers that leave employer concentration unchanged.” [Also read Raksha Kopparam’s summary of the working paper.]
  4. Equitable Growth has money to spend to support research. It is very easy and straightforward to apply. Request for Proposals: “Equitable Growth supports inquiry utilizing many different kinds of evidence, relying on a variety of methodological approaches and cutting across academic disciplines. We are especially interested in projects using data linking individuals, households, and/or firms, and those that utilize geocoded data or rigorous comparative case studies—including across places in the United States, as well as comparing the experience of different countries—that allow for insight into the role of place in shaping economic opportunities and outcomes.”

Worthy reads not from Equitable Growth:

  1. I am still recovering from my joint appearance at San Francisco’s Commonwealth Club with Steve Moore, and my having to listen to an extraordinary number of things from his mouth that simply were not true. It is draining to find oneself thinking over and over again: “But this is different than you said last year” and “but that prediction will be so obviously wrong in six months.” Menzie Chinn has a similar reaction in “Why Isn’t Stephen Moore Still Bragging about Coal As #1?,” in which he writes: “Recall from July 2017, when Stephen Moore wrote an article entitled ‘When It Comes To Electric Power, Coal Is No. 1’? No more. Now, lying has never been an impediment to Mr. Moore claiming something that was untrue (see [1] [2] [3] [4] [5] [6] [7])—but in this case perhaps it’s just so clearly untrue, he was chastened. So much for ‘winning’ (coal edition). Not that I’m complaining [See this graphic].”
  2. Pedro Nicolaci da Costa, newly-installed over at EPI, is doing a bang-up job. Read his “These 5 Charts Show Inequality Is Bad for Your Health—Even If You Are Rich,” in which he writes: “Pickett and Wilkinson kept coming back to a single uniting factor—inequality: ‘What the research shows—not just ours but that of hundreds of researchers around the world—is that inequality brings out features of our evolved psychology, to do with dominance and subordination, superiority and inferiority, and that affects how we treat one another and ourselves, it increases status competition and anxiety, anxieties about our self worth, worries about how we are seen and judged’ … Here are five charts from their presentation.”
  3. Simon Wren-Lewis says a “Green New Deal” needs to be not just technocratically efficient but politically popular. Read his “How to Pay for the Green New Deal,” in which he writes: “Tackling climate change is resisted by powerful political forces that have in the past prevented the appropriate taxes, subsidies and regulations being applied. Which is a major reason why the world has failed to do enough to mitigate climate change … Just as proponents of a Green New Deal are savvy about the need to overcome the resistance of, for example, the oil and gas industry, they also realize that the Green New Deal needs to be politically popular. So the New Deal package has to include current benefits for the many, perhaps at the expense of the few … If you cannot make the polluter pay, it is still better to take action to stop climate change even if future generations have to pay the cost of that action.”
  4. Dani Rodrik has, I think, a better way to frame the problems that he and Richard Baldwin are both thinking about this winter. Read “The Good Jobs Challenge,” in which Rodrik writes: “[For] developing countries … existing technologies allow insufficient room for factor substitution: using less-skilled labor instead of skilled professionals or physical capital. The demanding quality standards needed to supply global value chains cannot be easily met by replacing machines with manual labor. This is why globally integrated production in even the most labor-abundant countries, such as India or Ethiopia, relies on relatively capital-intensive methods … The standard remedy of improving educational institutions does not yield near-term benefits, while the economy’s most advanced sectors are unable to absorb the excess supply of low-skilled workers. Solving this problem may require … boosting an intermediate range of labor-intensive, low-skilled economic activities. Tourism and non-traditional agriculture … public employment … non-tradable services carried out by small and medium-size enterprises, will not be among the most productive, which is why they are rarely the focus of industrial or innovation policies. But they may still provide significantly better jobs than the alternatives in the informal sector.”
  5. Richard Baldwin has a new book and has coined the ugliest word I have ever seen to promote it. It is very interesting, and I think it is largely right. But I think it does have a big problem with the word “globotics.” “Globalization” and “robots,” even robot-enabled globalization and globalization-enabled robots, are two very different processes with very different implications. Squashing them into one makes his argument less coherent than it might have been. Read Baldwin’s “The Globotics Upheaval: Globalization, Robotics, and the Future of Work,” in which he writes: “A new form of globalization will combine with software robots to disrupt service-sector and professional jobs in the same way automation and trade disrupted manufacturing jobs … Software robots … pervasive translation that open[s] new opportunities for outsourcing to tele-migrants … Future jobs will be more human and involve more face-to-face contact since software robots and tele-migrants will do everything else.”
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The search for and hiring of guest workers in the United States displays the complexity of market concentration and monopsony power

Posted on by Maria Monroe

The increase in academic research on monopsony—the labor market situation in which individual employers have the market power to set wages below competitive levels due to market concentration or significant job search frictions facing workers—captures how far-reaching this problem is for workers in the U.S. labor market. Specific groups of workers such as women, and occupations and industries affected such as hospital workers, demonstrate the growing evidence of monopsony power in the U.S. labor market . And when the overall labor market has rampant monopsony, income inequality is exacerbated.

The theory of monopsony also predicts that suppressed wages lead to lower employment levels as well. This expected result is because more workers would work for a firm at a higher, competitive wage and thereby eliminate the “deadweight loss” (due to an inefficient allocation of labor) created by the anti-competitive, artificially low wages associated with monopsony. But the exact cause of low labor supply elasticity for firms—economic parlance for conditions where wages offered by firms are not much affected by the supply of workers—can come from a variety of causes, including institutional and “natural” frictions (such as caregiving responsibilities), which make job searching more difficult for workers. In addition, there is the economic profession’s canonical example of employer market concentration—where there is only one employer in a location, so workers are captive to accept any wage offered since they cannot find work elsewhere.

The common denominator is that all these frictions in the U.S. labor market give more power to employers to arbitrarily set wages, regardless of the supply of workers looking for jobs—which, along with labor demand, would be the key driver of wages in a truly competitive labor market. A new working paper by economists Eric M. Gibbons at The Ohio State University at Marion, Allie Greenman at the University of Nevada, Reno, Peter Norlander at Loyola University Chicago, and Todd Sorensen at UNR examines these varied causes of monopsonistic effects for workers who are employed under guest worker visas such as H-1 and H-2 visas.

Their working paper demonstrates how monopsony is a complicated market force and how the policy solutions need to vary by circumstances as well. Increasing labor market dynamism so that workers can match into the jobs for which they’re best suited requires a suite of policies to increase competition, job mobility, and bargaining power.

The restrictive conditions facing guest workers has led to serious concerns about the quality of their employment. Gibbons, Greenman, Norlander, and Sorensen review lawsuits against employers of guest workers and confirm widely held beliefs about wage theft and abusive employment circumstances. Yet despite workers’ limited job mobility, there are only two cases related to antitrust enforcement—the policy arena where concentration-based monopsony is perhaps best addressed. As further attention is paid to the role of market concentration in wage setting, the authors contend that there is cause to examine the extent of monopsony in these labor markets.

The four researchers exploit the application process to the U.S. Department of Labor for guest worker visas to estimate employer concentration for guest workers and how this affects wages. Employers submit a Labor Condition Application, or LCA, which allows the authors to calculate program-specific concentration ratios based on the ability to hire guest workers (which may or may not translate into actual hires). Guest workers are in a more concentrated set of occupations than the overall U.S. labor market, with more than a third of them working in computer and mathematical occupations on H-1B visas and nearly half working in building, grounds cleaning, and maintenance on H-2B visas. They find that the average market level of concentration of employers who can hire guest workers—identified by Herfindahl-Hirschman Index, or HHI, calculations, a common measure of market concentration—is sufficiently high to warrant U.S. Department of Justice scrutiny of mergers in these sectors of the U.S. economy.

Because visas impose a variety of mobility restrictions on workers, it’s important to understand how monopsony is caused by both frictions, as well as concentration in the labor market. In order to examine this further, Gibbons, Greenman, Norlander, and Sorensen replicate the model developed by economist Suresh Naidu at Columbia University and law professor Eric Posner at the University of Chicago Law School, which measures the elasticity of labor supply as a function of concentration, as well as frictions. This simulation model finds that wage suppression is actually less than expected, given their calculated HHIs and the structure of guest worker visas, which they say is probably due to prevailing wage standards offsetting employer power. But prevailing wages could be manipulated if an employer has general monopsony power in a local area, which should be taken into consideration by U.S. Department of Labor authorities when granting visa sponsorship approval and setting prevailing wages.

This paper is the first to measure the role of employer concentration in determining the wages of guest workers, but it places its findings within a broader context of understanding how multiple factors exacerbate monopsony. Understanding the myriad of causes of monopsony is crucial to implementing policies to address employer wage-setting power. In particular, Gibbons, Greenman, Norlander, and Sorensen discuss the need for better and more frequent merger scrutiny by the U.S. Department of Justice and the Federal Trade Commission—the two U.S. antitrust enforcement agencies—when concentration results in setting prevailing wages and immigration reform. No silver-bullet policy solution can solve monopsony when it is the result of multiple factors, so research that looks at the several causes of wage exploitation is a crucial step in increasing worker well-being.

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