McDonald’s, monopsony, and the need for joint employer standards

McDonald’s Corp. is involved in a case with the National Labor Relations Board regarding the firing of workers at their franchises for labor organizing under the “Fight for Fifteen” campaign to raise the minimum wage.

McDonald’s Corp. is involved in a case with the National Labor Relations Board regarding the company’s responsibility under the so-called joint employer standard for the firing of workers at their franchises for labor organizing under the “Fight for Fifteen” campaign to raise the minimum wage. The corporation reached a resolution with the NLRB, and there will be a settlement hearing on April 5. The settlement, however, is a result of the Trump administration’s vacating Obama administration standards for joint employment—standards that held a corporation responsible for the labor decisions and outcomes at its agency franchises. How the resolution is worded when it’s unveiled tomorrow may well determine whether rising income inequality in the United States can be addressed through collective bargaining in one of the most important industries for low-wage workers.

The joint employer standard is significant for labor organizing because it is easier to unionize across establishments within the same company than at individual establishments one by one. More specifically, recognizing this standard could help address wage stagnation resulting from the dual effects of increasing market concentration and so-called job search frictions in the fast-food industry, which can lead to depressed wages across the industry alongside the fissuring of the workplace—similar to the franchising model that divides workers within a single corporate business model. These twin forces contribute to stagnating wages, including a federal minimum wage that has not kept up with inflation, and decreasing worker power.

Economists have a term for this kind of situation in the marketplace and in the labor market. It’s called monopsony—originally conceptualized by Joan Robinson in The Economics of Imperfect Competition in 1933 as a labor market with only one employer who holds complete sway over the wages it offers to its workers rather than the competitive market determining the going wage rate. More recently, job search theory demonstrates that search frictions result in monopsonistic conditions, where a small group of employers exert wage-setting power in an uncompetitive labor market. Recent research supports the idea that low-wage labor markets show signs of lack of competition, resulting in persistent low pay, which in turn indicates that the U.S. labor market can bear an increase in the federal minimum wage and also more clout for workers to collectively bargain for their wages.

Monopsony theory predicts the situation facing workers at McDonald’s franchises today. But to understand more fully why joint employer standards are important for industries such as fast food, we need to understand the most recent data-driven evidence of monopsony and what the theory of monopsony tells us about collective bargaining. Let’s turn first to a recent working paper by economists Arin Dube at the University of Massachusetts, Amherst, Alan Manning at the London School of Economics, and Suresh Naidu at Columbia University. They find that the lack of competition in labor markets help explain why wages are often “bunched” around round numbers similar to how they are today around the current minimum wage in the fast-food restaurant industry. Prior research by Dube, along with his colleague Doruk Cengiz at the University of Massachusetts, Atilla Lindner at the Institute of Labor Economics, and Ben Zipperer (now at the Economic Policy Institute) also found that this kind of bunching around the minimum wage, common in the fast-food industry, was prevalent.

Dube, Manning, and Naidu in their recent paper provide evidence that many markets have a combination of imperfect competition, as in monopsony, and imperfect firm optimization, which is when firms aren’t earning the maximum possible profits. Competitive markets economic theory explains bunching as “left-digit bias,” where workers (or consumers) believe a wage (or a consumer good price) of $10 is much higher than a wage (price) of $9.90. Dube, Manning, and Naidu use administrative unemployment insurance data from Washington and Minnesota, two states that collect detailed hourly information in their payroll taxes, to estimate the extent to which bunching is explained by this left-digit bias. They also examine labor market competition—measured by labor supply elasticity, which estimates the degree of monopsony—and employer mis-optimization, which is how much profit employers are willing to give up in order to pay their employees a round number. Their study explicitly examines wage bunching at $10, which is within the universe of pay among restaurant workers.

With limited evidence of worker left-digit bias, the three economists find a trade-off between employer market power and optimization frictions—when employers exert market power and thus are able to maintain subcompetitive wages at a “bunched” level. When there are optimization frictions, firms give up profits in order to maintain wages at a bunched level. This kind of monopsony in low-wage work is further supported by a 2010 study by Dube, T. William Lester at the University of North Carolina at Chapel Hill and Michael Reich at the University of California, Berkeley. They found that minimum-wage increases did not decrease employment levels in restaurant employment, as would be predicted under the assumption of competitive markets. That 2010 study estimated the effect of an increase in the minimum wage across contiguous counties using the Quarterly Census of Employment and Wages. The three researchers found that restaurant workers in those counties that had a minimum-wage increase experienced increases in their incomes with no discernible disemployment effects.

Further work by Dube, Lester, and Reich from a 2014 study using Quarterly Workforce Indicators examined the underlying dynamics behind this earlier finding. That study noted that if there were search frictions in a labor market, as described by Alan Manning, then increases in the minimum wage would reduce job-to-job transitions. Using information on the duration of nonemployment in the industry for restaurant workers and teen workers—two common minimum wage groups—they find this to be the case. The authors note these findings are “rough,” but they are able to roughly estimate that job-to-job transitions account for more than half of separations (economics-speak for leaving a job) for restaurant workers. The authors find that an increase in the minimum wage of 10 percent reduces the turnover of restaurant workers by 2.1 percent, which means workers’ tenure increased, and did not result in less employment.

Indeed, one of the important implications of these findings as they relate to the theory of monopsony is that employers can bear higher wages such as those induced by government increases in the minimum wage. The same monopsonistic findings hold for collective bargaining, too. When individual employers face an upward sloping supply-of-labor curve that falls below their marginal-cost curve, they pay less and employ fewer workers than would be predicted by a competitive model. If wages were collectively bargained to go higher along the labor supply curve, then employers could bear wage increases up to the point where supply and demand meet. Unionization, then, among fast-food workers can lead to the wage and employment levels that would be predicted by such a supply-demand equilibrium in a competitive model.

Because of the structure of fast-food employment generally, and the business model of McDonald’s in particular, workers may face low wages due to monopsonistic forces, yet they are constrained in their ability to bargain collectively for wages that would correspond to their productivity. Joint employer responsibility is a key tool for workers to organize across establishments so they can garner the power through collective action needed to balance the wage-setting power at individual establishments, both corporate-owned and franchised.

Should-Read: Jesse K. Anttila-Hughes et al.: Mortality from Nestlé’s Marketing of Infant Formula in Low and Middle-Income Countries

Should-Read: Jesse K. Anttila-Hughes et al.: Mortality from Nestlé’s Marketing of Infant Formula in Low and Middle-Income Countries: “Intensive and controversial marketing of infant formula is believed to be responsible for millions of infant deaths in low and middle-income countries (LMICs)…

…yet to date there have been no rigorous analyses that quantify these effects. To estimate the impact of infant formula on infant mortality, we pair country-specific data from the annual corporate reports of Nestlé, the largest producer of infant formula, with a sample of 2.48 million births in 46 LMICs from 1970-2011. Our key finding is that the availability of formula increased infant mortality by 9.4 per 1000 births, 95%CI 1 among mothers without access to clean water, suggesting that unclean water acted as a vector for the transmission of water-borne pathogens to infants. We estimate that the availability of formula in LIMCs resulted in approximately 66,000 infant deaths in 1981 at the peak of the infant formula controversy…

Should-Read: Ben Thompson: The End of Windows

Should-Read: Ben Thompson: The End of Windows: “The story of Windows’ decline is relatively straightforward…

…a classic case of disruption:

  • The Internet dramatically reduced application lock-in
  • PCs became “good enough”, elongating the upgrade cycle
  • Smartphones first addressed needs the PC couldn’t, then over time started taking over >* PC functionality directly

What is more interesting, though, is the story of Windows’ decline in Redmond…. A mere five years ago, when, in the context of another reorganization, former-CEO Steve Ballmer wrote a memo insisting that Windows was the future:

In the critical choice today of digital ecosystems, Microsoft has an unmatched advantage in work and productivity experiences, and has a unique ability to drive unified services for everything from tasks and documents to entertainment, games and communications. I am convinced that by deploying our smart-cloud assets across a range of devices, we can make Windows devices once again the devices to own. Other companies provide strong experiences, but in their own way they are each fragmented and limited. Microsoft is best positioned to take advantage of the power of one, and bring it to our over 1 billion users….

That memo prompted me to write a post entitled Services, Not Devices that argued that Ballmer’s strategic priorities were exactly backwards: Microsoft’s services should be businesses in their own right, not Windows’ differentiators. Ballmer, though, followed-through on…. buying Nokia… dysfunction… allowed to spend billions on a deal that allegedly played a large role in his ouster. That dysfunction was The Curse of Culture:

Culture is not something that begets success, rather, it is a product of it…. The espoused beliefs and values of their founder(s)… lead to real sustained success… slip from the conscious to the unconscious…. The founder no longer needs to espouse his or her beliefs and values to the 10,000th employee; every single person already in the company will do just that, in every decision they make, big or small. As with most such things, culture is one of a company’s most powerful assets right until it isn’t: the same underlying assumptions that permit an organization to scale massively constrain the ability of that same organization to change direction. More distressingly, culture prevents organizations from even knowing they need to do so….

The story of how Microsoft came to accept the reality of Windows’ decline is more interesting than the fact of Windows’ decline; this is how CEO Satya Nadella convinced the company to accept the obvious….

Should-Read: Federal Reserve Bank of San Francisco: Leadership and Membership Announcements

Should-Read: The people who are going to pick the next President of the Federal Reserve Bank of San Francisco: Tamara Lundgren, Rosemary Turner, Alex Mehran**, Barry M. Meyer, Steven E. Bochner, Sanford L. Michelman: Federal Reserve Bank of San Francisco: Leadership and Membership Announcements: “Tamara Lundgren, president and CEO, Schnitzer Steel Industries, Inc., Portland, OR, has been elected as a class B director…

…and Rosemary Turner, president, UPS Northern California District, Oakland, CA, has been reappointed as a Class C director…. Alex Mehran, chairman and CEO of Sunset Development Company, San Ramon, CA; and Barry Meyer chairman and CEO, retired, Warner Bros. Entertainment, and founder and chairman of North Ten Mile Associates. Mr. Mehran has been redesignated chairman of the board while Mr. Meyer has been redesignated as deputy chairman for 2018.

Tamara Lundgren: Ms. Lundgren is president, CEO and director of Schnitzer Steel Industries, Inc., Portland, OR, positions she’s held since 2008. Prior to joining the company in 2005, Ms. Lundgren was a managing director in investment banking at JPMorgan Chase and Deutsche Bank in New York and London, respectively. She serves as an independent director on the boards of Ryder System, Inc. and Parsons Corporation. She holds a bachelor’s degree from Wellesley College, and a J.D. from the Northwestern University School of Law. Ms. Lundgren previously served as chair of the Portland branch’s board of directors.

Rosemary Turner: Ms. Turner serves as president of UPS Northern California. In her current role she ensures that UPS provides the logistical capabilities to support new business in Northern and Central California, as well as Northern Nevada. Her territory spans from Ventura, California, to Nevada. Ms. Turner holds a bachelor’s degree in accounting from Loyola Marymount University in Los Angeles.

Alex Mehran: Mr. Mehran is chairman and CEO of Sunset Development Company, located in San Ramon, CA. He is the former chairman of the board of directors of The Bay Area Council, and a current member of its executive committee. He is also the chairman of the Contra Costa Economic Partnership and a Trustee of the California Institute of Technology. Mr. Mehran graduated with honors from Harvard College, and holds an LLB with honors from Cambridge University. Mr. Mehran served as deputy chairman of the board for the Federal Reserve Bank of San Francisco in 2015-2016.

Barry M. Meyer: Mr. Meyer is the chairman and CEO, retired, Warner Bros. Entertainment, and founder and chairman of North Ten Mile Associates, a strategic consultancy firm specializing in entertainment industry clients and issues. He retired from Warner Bros. in 2013, following a 43-year career at the studio that included 14 years as its chairman and CEO. An active leader in the entertainment industry, he often serves as an advisor on industry-wide production, labor, and regulatory issues. Mr. Meyer holds a bachelor’s degree from the University of Rochester, and a J.D. from Case Western Reserve University School of Law.

The balance of the Federal Reserve Bank of San Francisco Board includes:

Steven E. Bochner, partner, Wilson Sonsini, Goodrich & Rosati, P.C., Palo Alto, CA. Mr. Bochner is a Class B director…. Mr. Bochner served as CEO of Wilson Sonsini Goodrich & Rosati from 2009 to 2012, and is currently a member of its board of directors. He is the chairman of the advisory board of the Berkeley Center for Law, Business and the Economy, UC Berkeley School of Law. He is also the executive committee vice chairman, 39th Annual Securities Regulation Institute, Northwestern Law School. Mr. Bochner holds a BS in political science from San Jose State University, and a JD from UC Berkeley School of Law….

Sanford L. Michelman, chairman, Michelman & Robinson, LLP, Los Angeles, CA. Mr. Michelman is a Class B director…. Mr. Michelman is the chairman of Michelman & Robinson, LLP. He focuses his practice primarily on the insurance, financial services, advertising and digital media industries. He sits on the Board of Directors of other institutions, including the Zimmer Children’s Museum. In addition, he has been honored by the California State Bar for his pro bono work at Bet Tzedek, and was recently appointed to the Insurance Industry Charitable Foundation’s (IICF) Western Division Board. Mr. Michelman holds a bachelor’s degree from the University of California, Los Angeles, and a J.D. from Southwestern University School of Law…

Should-Read: Paul Krugman: Trade Wars, Stranded Assets, and the Stock Market

Should-Read: Paul Krugman: Trade Wars, Stranded Assets, and the Stock Market: “Even a trade war that drastically rolled back globalization wouldn’t impose costs on the economy comparable to the kinds of movement we’ve seen in stock prices…

…But the costs to the economy as a whole might not be a good indicator of the costs to existing corporate assets. Since about 1990 corporate America has bet heavily on hyperglobalization…. Apple could produce… entirely in North America, and probably would in the face of 30 percent tariffs. But the factories it would take to do that don’t (yet) exist. Meanwhile, the factories that do exist were built to serve globalized production–and many of them would be marginalized, maybe even made worthless, by tariffs that broke up those global value chains. That is, they would become stranded assets. Call it the anti-China shock…. My original question was why stocks are dropping so much more than the likely costs of trade war to the economy. And one answer, I’d suggest, is disruption–which business leaders love to celebrate in their rhetoric, but hate when it happens to them.

Who Should Be the Next President of the Federal Reserve Bank of San Francisco?

Memo to Self: Now that John Williams is heading to become President of the Federal Reserve Bank of New York and Vice Chair of the Federal Open Market Committee, who should take his place as President of the Federal Reserve bank of San Francisco?

  • Mary Daly?
  • Christie Romer?
  • Glenn Rudebusch?
  • Thinking outside the box, Takeo Hoshi?
  • Thinking way outside the box, Enrico Moretti?
  • Thinking way way outside the box, Raj Chetty?

Ideal candidates should I think, be in their early 50s, and should be prepared to lead an analytical and operations orientation of the San Francisco Federal Reserve Bank toward one or more of:

  • Financial system safety-and-soundness regulation
  • Financial system consumer finance regulation
  • Asia and its place in the global financial system
  • Tech and its place in the global financial system
  • Regional economic development issues.

Should-Read: William Beveridge (1942): Beveridge Report: Social Insurance and Allied Services

Should-Read: William Beveridge (1942): Beveridge Report: Social Insurance and Allied Services: “Three guiding principles may be laid down at the outset…

  • The first principle is that any proposals for the future, while they should use to the full the experience gathered in the past, should not be restricted by consideration of sectional interests established in the obtaining of that experience. Now, when the war is abolishing landmarks of every kind, is the opportunity for using experience in a clear field. A revolutionary moment in the world’s history is a time for revolutions, not for patching.

  • The second principle is that organisation of social insurance should be treated as one part only of a comprehensive policy of social progress. Social insurance fully developed may provide income security; it is an attack upon Want. But Want is one only of five giants on the road of reconstruction and in some ways the easiest to attack. The others are Disease, Ignorance, Squalor and Idleness.

  • The third principle is that social security must be achieved by co-operation between the State and the individual. The State should offer security for service and contribution. The State in organising security should not stifle incentive, opportunity, responsibility ; in establishing a national minimum, it should leave room and encouragement for voluntary action by each individual to provide more than that minimum for himself and his family.

The Plan for Social Security set out in this Report is built upon these principles. It uses experience but is not tied by experience. It is put forward as a limited contribution to a wider social policy, though as something that could be achieved now without waiting for the whole of that policy. It is, first and foremost, a plan of insurance–of giving in return for contributions benefits up to subsistence level, as of right and without means test, so that individuals may build freely upon it….

Abolition of want requires, first, improvement of State insurance that is to say provision against interruption and loss of earning power…. Abolition of want requires, second, adjustment of incomes, in periods of earning as well as in interruption of earning, to family needs, that is to say, in one form or another it requires allowances for children. Without such allowances as part of benefit – or added to it, to make provision for large families, no social insurance against interruption of earnings can be adequate…

Should-Read: Martin Wolf: The Chinese economy is rebalancing, at last

Should-Read: Martin Wolf: The Chinese economy is rebalancing, at last: “Consumption is at last becoming the most important driver of demand in the Chinese economy…

…This is a long-awaited and desirable adjustment…. But it still has a long way to go…. In 2007, premier Wen Jiabao argued rightly that “the biggest problem with China’s economy is that the growth is unstable, unbalanced, uncoordinated and unsustainable”. In that year, gross national savings were 50 per cent of gross domestic product, up from 37 per cent in 2000. These huge savings financed domestic investment of 41 per cent of GDP and a current account surplus of 9 per cent. Then came the global financial crisis. The Chinese authorities promptly realised that the current account surplus had become unsustainable. In the short run, the only way to avoid a slump was to expand investment further. In 2011, gross investment reached 48 per cent of GDP and the current account surplus fell to 2 per cent. But national savings remained at 50 per cent of GDP.

This solution brought new problems. The first was a declining return on investment…. The second problem is that the increased investment was driven by a huge rise in debt…. Up to 2014… nothing had happened to make the Chinese economy seem any less unstable, unbalanced, uncoordinated and unsustainable….

The past three years have witnessed change at last: investment has fallen by 3 per cent of GDP, while public and private consumption have risen by much the same proportion. As a result, consumption has become a more important source of additional demand than investment. Thus, in 2017, notes a background paper to this year’s China Development Forum, final consumption contributed 59 per cent of GDP growth…. The rise in indebtedness has also (apparently) stopped. Behind this has been a willingness to substitute quality for quantity of growth…. While the shifts are slow and the full adjustment to more reasonable levels could take until the middle of the next decade, we are seeing early signs of the necessary change in the structure of the Chinese economy towards one that is less unbalanced and, above all, one that is more reliant on the consumer demand of China’s vast population. That would, in turn, be good for China and for the rest of the world….

The story told by former premier Wen is far from over. But we can now at least envisage a happy ending.

Should-Read: Michael J. Boskin, Charles W. Calomiris, John F. Cogan, Niall Ferguson, Kevin A. Hassett, Douglas Holtz-Eakin, David Malpass, John B. Taylor, and others not worth mentioning: (November 15, 2010): Open Letter to Ben Bernanke

Should-Read: Remember this negative singularity of idiocy? I am still unaware of any “I’m sorrys” or any “I have had to rethink my vision of the Cosmic All” from any of the signers, and it has been more than seven years: Michael J. Boskin, Charles W. Calomiris, John F. Cogan, Niall Ferguson, Kevin A. Hassett, Douglas Holtz-Eakin, David Malpass, John B. Taylor, and others not worth mentioning: (November 15, 2010): Open Letter to Ben Bernanke: “We believe the Federal Reserve’s large-scale asset purchase plan (so-called ‘quantitative easing’) should be reconsidered and discontinued…

…We do not believe such a plan is necessary or advisable under current circumstances. The planned asset purchases risk currency debasement and inflation, and we do not think they will achieve the Fed’s objective of promoting employment.

We disagree with the view that inflation needs to be pushed higher and worry that another round of asset purchases, with interest rates still near zero over a year into the recovery, will distort financial markets and greatly complicate future Fed efforts to normalize monetary policy.

The Fed’s purchase program has also met broad opposition from other central banks and we share their concerns that quantitative easing by the Fed is neither warranted nor helpful in addressing either U.S. or global economic problems

Cliff Asness, Michael J. Boskin, Richard X. Bove, Charles W. Calomiris, Jim Chanos, John F. Cogan, Niall Ferguson, Nicole Gelinas, James Grant, Kevin A. Hassett, Roger Hertog, Gregory Hess, Douglas Holtz-Eakin, Seth Klarman, William Kristol, David Malpass, Ronald I. McKinnon, Dan Senor, Amity Shlaes, Paul E. Singer, John B. Taylor, Peter J. Wallison, Geoffrey Wood

Should-Read: Janet Yellen: Statement on the Appointment of John Williams as President of the Federal Reserve Bank of New York

Should-Read: Janet Yellen: Statement on the Appointment of John Williams as President of the Federal Reserve Bank of New York: “I strongly support the appointment of John Williams as President of the Federal Reserve Bank of New York… Continue reading “Should-Read: Janet Yellen: Statement on the Appointment of John Williams as President of the Federal Reserve Bank of New York”