Competitive Edge: Why noncompete clauses in employment contracts are by and large harmful to U.S. workers and the U.S. economy

Posted on by Maria Monroe

Antitrust and competition issues are receiving renewed interest, and for good reason. So far, the discussion has occurred at a high level of generality. To address important specific antitrust enforcement and competition issues, the Washington Center for Equitable Growth has launched this blog, which we call “Competitive Edge.” This series features leading experts in antitrust enforcement on a broad range of topics: potential areas for antitrust enforcement, concerns about existing doctrine, practical realities enforcers face, proposals for reform, and broader policies to promote competition. David J. Balan has authored this contribution.

The octopus image, above, updates an iconic editorial cartoon first published in 1904 in the magazine Puck to portray the Standard Oil monopoly. Please note the harpoon. Our goal for Competitive Edge is to promote the development of sharp and effective tools to increase competition in the United States economy.

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David J. Balan

Researchers in recent years have compiled a substantial and impressive body of empirical evidence on the economic effects of noncompete clauses, which are often included in labor contracts between U.S. workers and firms. While somewhat mixed, this evidence mostly indicates that noncompetes are harmful to workers and to the U.S. economy overall.

This recent empirical evidence stands in tension with older theoretical arguments claiming that noncompetes are beneficial to both workers and firms. How that tension should be resolved depends on the strength of the arguments. If the arguments were extremely strong, then it might make sense to believe them, even in the face of substantial (but imperfect) empirical evidence to the contrary. But if the arguments in favor of noncompetes are weak, or if there are valid arguments against them, then the tension disappears and the natural conclusion is simply that noncompetes are harmful.

In this column, I argue for the latter position. Specifically, I describe and critique each of the three main theoretical arguments that are commonly made in favor of noncompetes, namely that:

  • The worker and the firm both voluntarily agree to the noncompete, which justifies a strong inference that it is mutually beneficial and economically efficient
  • Noncompetes facilitate efficient knowledge transfer from firms to workers
  • Noncompetes facilitate efficient firm-sponsored investment in worker training

Let us examine each of these arguments in turn.

Noncompetes only exist because they benefit both workers and firms

The first argument goes as follows. The fact that the noncompete was agreed to by both the worker and the firm strongly indicates that it is mutually beneficial. To be sure, all else being equal, the worker would prefer not to have a noncompete because it restricts their ability to leave the job or to use the threat of leaving to improve their bargaining position. But all else is not equal. A noncompete can only exist if the worker agrees to it, and the worker does not have to agree; they always have the option to refuse and take their next-best alternative option instead.

In other words, the firm cannot impose a noncompete on the worker. Therefore, the firm can only induce the worker to accept a noncompete by offering some other contract terms that are sufficiently attractive to cause the worker to agree. That is, a noncompete will only exist if the worker has been sufficiently compensated by the firm.

The next step in this argument is that the firm will only be willing to pay that compensation to the worker if it derives an efficiency benefit from the noncompete that is at least as large as the payment. So, if a noncompete exists, the compensation must have been big enough that the worker was willing to accept it and small enough that the firm was willing to pay it—thus, it must be mutually beneficial. And if the noncompete benefits both parties, then it must also be economically efficient in the sense of increasing total economic surplus (as long as it does not harm any third parties).

This argument depends crucially on the premise that imposing a noncompete on the worker without compensation is impossible. That is, the argument requires that the worker’s formal agreement to the noncompete provision can never be obtained unless the provision truly makes the worker better-off. This premise is rather obviously incorrect. There are, in fact, a number of ways that firms can impose noncompetes on workers without compensation. These include:

  • The firm can mislead the worker about the existence or the meaning of the noncompete.
  • The firm can wait until the worker starts the job before informing the worker of the existence of the noncompete, exploiting the worker’s reluctance to quit and restart the job search.
  • The firm can impose on the worker an interpretation of the noncompete that is more restrictive than what was originally agreed to by exploiting the power asymmetry between the worker and the firm in the ability to bear the costs of fighting in court.
  • The firm can simply refuse to deliver the promised compensation, knowing that the worker’s most powerful weapon to compel the firm to keep its promises—threatening to quit—is precisely what is deterred by the noncompete itself.

In response to the above points, it might be argued that even if it were possible for noncompetes to be imposed on workers without compensation, they would be dislodged by competition in the labor market because firms that do not require an (uncompensated) noncompete would attract workers away from ones that do. But this competitive pressure is likely to be weak, especially if noncompetes are already ubiquitous in an industry.

For a firm to succeed in attracting workers by not requiring a noncompete, it would likely have to make the absence of a noncompete a central element of its recruiting message to the exclusion of other, likely more effective messages. Moreover, if only one or a few firms did not require a noncompete, then they would tend to attract the workers who care the most about avoiding a noncompete. Those workers may be less desirable as they may be the workers most likely to quit. For these reasons, the ability of labor market competition to dislodge uncompensated noncompetes is likely to be limited.

For the above reasons, noncompetes likely can be imposed on workers without compensation. And if that is true, then the presumption that noncompetes must be mutually beneficial disappears—and with it the presumption that they are economically efficient. Rather, it becomes possible, even likely, that noncompetes are instead largely a means by which firms extract value from workers.

Commonly claimed positive effects of noncompetes

It is worth noting that the above argument does not depend on any specific claim regarding possible positive effects of noncompetes. Rather, according to that argument, the mere existence of a noncompete, and its voluntary nature, are taken to be sufficient to demonstrate that it must have large positive effects, otherwise the firm would not have been willing to pay the compensation necessary for the worker to agree to it. But, as discussed above, this argument is badly flawed, and noncompetes likely can, in fact, be imposed without compensation. This does not necessarily mean that noncompetes do not have positive effects (more on this below), but it does mean that those positive effects must be demonstrated and not merely inferred from the fact that the noncompete exists.

We now turn to the specific claims of positive effects that are commonly made in favor of noncompetes. There are two such claims. The first is that they facilitate efficient transfer of knowledge from firms to workers, and the second is that they facilitate efficient worker-funded employee training. We consider each claim in turn.

Noncompetes facilitate efficient knowledge transfer from firms to workers

The first claim is that noncompetes facilitate efficient information sharing, which, in turn, provides stronger incentives to produce valuable information. The claim is that a firm will have greater incentive to share knowledge with a worker, and even to generate new knowledge in the first place, if the knowledge is protected by a noncompete to prevent the worker from taking that information to a new firm. But there are a number of reasons to doubt this benefit is large, including:

  • Much information sharing will occur with or without a noncompete simply because it is impossible to operate the business any other way. The efficiency benefit is only the increment of information sharing that is induced by the noncompete (that would not have occurred otherwise), and that increment may not be large.
  • Noncompetes impede the efficient flow of information across firms. The experience of California, which does not enforce noncompetes but is a world-leading center of innovation, suggests that the benefits of this cross-fertilization of knowledge may be so large that impeding it with noncompetes is harmful to innovation, on balance. At a minimum, it strongly suggests that any innovation benefits from noncompetes are not very large.
  • By the same logic that the noncompete increases the firm’s incentive to generate new knowledge, it decreases the worker’s incentive to do so. The fact that a worker who creates new knowledge cannot use that knowledge to make themselves more attractive to outside employers reduces the incentive to create the knowledge in the first place.
  • Noncompetes also impede the efficient flow of people across firms. Some job matches are inefficient, and noncompetes impede them from being dissolved in favor of more efficient ones.
  • To the extent that noncompetes do facilitate efficient information sharing, those benefits can often be achieved through other, less restrictive means, including nondisclosure and nonsolicitation agreements.

Noncompetes encourage efficient firm-sponsored investment in worker training

The second claim of positive effects of noncompetes is that they facilitate efficient firm-funded worker training. The idea is that a firm will have a greater incentive to train the worker if a noncompete prevents the worker from taking that training to a new firm. But there are a number of reasons to doubt that this benefit is large, namely:

  • Some training will occur with or without the noncompete simply because it is impossible to operate the business any other way. Once again, it is only the increment of training that is induced by the noncompete that matters (that would not have occurred otherwise), and that increment may not be very large.
  • A noncompete does remove a barrier to firm-funded training because the firm no longer has to worry that the worker will use that training to get a better job offer. That is, with a noncompete, the firm can capture the benefit of the training and so is more willing to pay the cost of it. But standard economic theory indicates that, in a competitive labor market, training with benefits that exceed the costs will occur regardless. With a noncompete, the firm will pay the cost and receive the benefit, but without a noncompete, the worker will pay the cost (through formal schooling and/or lower wages early in a career) and receive the benefit. The training will occur regardless.

Appropriate policy response

If noncompetes are, in fact, largely a means for firms to extract value from workers, the question becomes what the appropriate policy response might be. In a companion article, I argue that noncompetes can reasonably be viewed as a problem appropriately dealt with in the context of the antitrust laws. In another article, FTC Commissioner Rohit Chopra and researcher Lina Khan argue that this problem can be addressed using the FTC’s rulemaking authority.

Conclusion

The empirical evidence, combined with the weakness of the arguments in favor of noncompete contracts and the existence of strong arguments against them, suggests that noncompetes are harmful, on balance. This harm may extend beyond the measures that economists normally consider, such as effects on job mobility, entrepreneurship, worker training, innovation, and wages. Rather, it is likely that noncompetes have other, even worse, effects. By making it more difficult to leave a job, noncompetes increase worker vulnerability to nonmonetary harms such as abuse and degradation. A predatory employer or manager who knows that the worker cannot leave will be more unrestrained in their predation.

Aside from all measurable harms, the ability of human beings to take their body and their labor where they choose is a fundamental human right. Perhaps some extremely strong economic efficiency benefits would be sufficient to outweigh this, but both the evidence and the theoretical arguments indicate that such benefits do not exist.

—David J. Balan is an employee of the Federal Trade Commission. The views expressed in this column are solely those of the author.

Expert Focus: Understanding the economic impacts of climate change

Posted on by Maria Monroe
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Equitable Growth is committed to building a community of scholars working to understand how inequality affects broadly shared growth and stability. To that end, we have created the monthly series, “Expert Focus.” This series highlights scholars in the Equitable Growth network and beyond who are at the frontier of social science research. We encourage you to learn more about both the researchers featured below and our broader network of experts. If you are looking for support to investigate the intersection of climate change and economic inequality and growth, please see our current Request for Proposals.

Climate change is a crisis that reinforces and exacerbates existing U.S. economic inequalities, placing a disproportionate burden on those people who have minimal safety net protections and are already more vulnerable to health-related risks, financial shocks, and climate-related hazards. Understanding the full economic, social, and environmental benefits and costs of addressing the consequences and risks of climate change is critical to understanding what makes the economy grow sustainably and equitably. This installment of “Expert Focus” highlights the research of scholars who are taking into full account the effects of climate change and related policies across communities, income and wealth distributions, firms and workers, and the macroeconomy.

Stephie Fried 

Arizona State University 

Stephie Fried is an assistant professor at Arizona State University’s W.P. Casey School of Business and a senior economist at the Federal Reserve Bank of San Francisco. Her research focuses on the macroeconomic implications of environmental economics. Recent work, including this working paper published in the American Economic Journal, studies the effect of a carbon tax on the macroeconomy, its relationship to innovation, and its impact on current and future generations. Her forthcoming research, with Gregory Casey and Matthew Gibson of Williams College, will examine the effects of climate change on different sectors of the economy and the consequences for economic growth.

Quote from Stephie Fried and co-authors on carbon tax policies

Solomon Hsiang 

University of California, Berkeley

Solomon Hsiang is the Chancellor’s professor of public policy at the University of California, Berkeley, where he directs the Climate Impact Lab, which analyzes historical socioeconomic and climate data to estimate the relationship between a changing climate and human well-being. Hsiang’s recent research includes understanding the distributional effects of environmental damages for welfare analysis and policy design, published in the Review of Environmental Economics and Policy with Paulina Oliva at the University of Southern California and Reed Walker at UC Berkeley. He has testified before the U.S. Congress on the economic costs of climate change and has written about the importance of economics to climate change science.

Quote from Solomon Hsiang on climate as a national asset

Leah Stokes 

University of California, Santa Barbara

Leah Stokes is an assistant professor of political science and affiliated with the Bren School of Environmental Science & Management and the Environmental Studies Department at the University of California, Santa Barbara. Her research interests include both energy and environmental politics, with particular focus on climate change, renewable energy, water, and chemicals policy. Stokes co-authored “A plan for equitable climate policy in the United States,” with Matto Mildenberger, assistant professor of political science at the University of California, Santa Barbara, as part of Equitable Growth’s Vision 2020 policy essay series. Her recent book, Short Circuiting Policy, examines the role that utilities have played in promoting climate denial and rolling back clean energy laws.

Quote from Leah Stokes and Matto Mildenberger on climate change and vulnerable communities

R. Jisung Park

University of California, Los Angeles

R. Jisung Park is an assistant professor in the Department of Public Policy at the University of California, Los Angeles Luskin School of Public Affairs. An environmental and labor economist, Park’s research interests include the consequences of climate change for economic inequality and mobility for vulnerable populations. He was recently awarded an Equitable Growth grant to explore the disparate impacts of extreme temperatures due to climate change on workers, and the implications for workplace safety and labor policy.

Quote from R. Jisung Park and co-authors on heat and learning

Randall Walsh

University of Pittsburgh

Randall Walsh is a professor and director of the Master of Science in quantitative economics program at the University of Pittsburgh. Walsh is also a research associate affiliated with the Environment and Energy Economics program and the Determinants of the American Economy group within the National Bureau of Economic Research. His research focuses on economic history and urban and environmental economics. Along with Spencer Banzhaf of Georgia State University, Walsh was recently awarded an Equitable Growth grant to utilize never-before-used historical data to investigate the relationships among race/ethnicity, income, pollution, and human capital in Pittsburgh from 1910 to 2010.

Quote from Randall Walsh and co-authors on zoning and pollution

Equitable Growth is building a network of experts across disciplines and at various stages in their career who can exchange ideas and ensure that research on inequality and broadly shared growth is relevant, accessible, and informative to both the policymaking process and future research agendas. Explore the ways you can connect with our network or take advantage of the support we offer here.

Employer concentration suppresses wages for several million U.S. workers: antitrust and labor market regulators should respond

Posted on by Maria Monroe
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Overview

Introductory economics textbooks often feature perfectly competitive labor markets, where a large number of identical firms compete to hire identical workers, and switching jobs, hiring and firing workers, and creating new job vacancies is easy and costless. In a perfectly competitive labor market, workers are paid wages equal to the marginal product of their labor.

But real-world labor markets are not like this. A large body of evidence in the labor economics literature recognizes that jobs differ on a variety of characteristics besides pay, among them skill requirements, tasks, credentials, benefits, hours, work environment, and coworkers. Workers also differ in how much they value these different characteristics. And the process of matching workers to jobs is time-consuming and expensive for firms to find, screen, hire, and train workers, and for workers to search for and apply for jobs.

Employer concentration suppresses wages for several million U.S. workers: Antitrust and labor market regulators should respondDownload

All of these factors—differentiated jobs, heterogeneous worker preferences, and search frictions—mean that every labor market is intrinsically characterized by a baseline level of monopsony power, where firms have the ability to set wages below workers’ productivity.

On top of this baseline level of monopsony power, other factors can further reduce the degree of labor market competition. One important factor is employer concentration. This is the phenomenon where a labor market has only a few large employers. If there are fewer employers, then workers have fewer options to choose from for a job, which limits competition for their labor and gives employers outsize power over workers’ pay.

In the past, employer concentration was often thought to be a niche issue, confined to a few factory towns or rural hospitals. But, in more recent years, a number of researchers have documented higher-than-expected employer concentration across large swathes of the U.S. labor market. These scholars, among them Jose Azar of IESE Business School, Ioana Marinescu of University of Pennsylvania, Marshall Steinbaum of University of Utah, Efraim Benmelech of Northwest University, Nittai Bergman of Tel Aviv University, and Hyunseob Kim of Cornell University, also find evidence that local labor markets with higher employer concentration have lower average wages, suggesting that employer concentration might be suppressing wages by increasing employers’ monopsony power.

In a new Washington Center for Equitable Growth working paper, Employer Concentration and Outside Options, co-written by me and Gregor Schubert of Harvard University and Bledi Taska of Burning Glass Technologies, we present a new way to estimate a causal effect of employer concentration on wages. In this issue brief we outline our approach to causal estimation and a new data set we use to define workers’ labor markets, and present our findings that employer concentration reduces wages for a significant subset of U.S. workers, predominantly those in low outward-mobility occupations and lower-population areas. We then close with a discussion of possible policy responses, including increased antitrust scrutiny of labor markets and increased use of policies that raise wages directly (such as minimum wages or empowered unions), as part of a broader agenda to tackle the wage suppressive effects of monopsony power.

How to measure the effects of employer concentration

While it seems plausible that employer concentration might matter for workers’ pay in theory, it is more difficult to estimate how much it matters in practice. Why? One of the biggest difficulties is discerning the degree to which there is a causal relationship between employer concentration and wages. Collecting data on employer concentration and wages enables researchers to observe that labor markets with higher employer concentration also tend to have lower wages on average. But this negative relationship could be driven by changing local economic conditions that affect both concentration and wages, rather than being a result of concentration causing lower wages.

Imagine, for example, a situation where a local labor market is in decline, with falling productivity and businesses shrinking or closing. A quick look at the data for this local labor market would tell economists that employer concentration is rising and pay is falling, but the fall in average pay might be caused by the decline of the labor market in general and not by the rise in employer concentration. This kind of argument drives substantial skepticism around the idea that employer concentration might be affecting workers’ pay in a meaningful way.

In our new working paper, my co-authors and I try to address this problem using a new way to estimate a causal effect of employer concentration on wages, building on the cutting-edge econometric work on granular instrumental variable estimation by Xavier Gabaix of Harvard University and Ralph Koijen of University of Chicago, and on shift-share instruments by Kirill Borusyak of University College London, Peter Hull of University of Chicago, and Xavier Jaravel of the London School of Economics. These econometric tools enable us to identify changes in employer concentration across local labor markets which are not driven by local economic conditions, meaning that we are more likely to be able to estimate a causal effect of concentration on wages (rather than a simple correlation).

The basic logic of our approach is this—we predict the change in employer concentration in an individual local labor market using changing nationwide hiring behavior of large firms that are active in those labor markets. We assume that on average large firms don’t base their national hiring decisions on the local economic conditions in any individual occupation and metropolitan area, which means the changes in local employer concentration that we identify are unlikely to be driven by local economic trends. In econometric parlance, the predicted change in employer concentration that we estimate for each local labor market is plausibly exogenous to local economic conditions and therefore our empirical analyses are less likely to suffer from the bias I discussed above.

A second problem in understanding employer concentration is defining the scope of workers’ true labor markets. To understand which jobs are feasible for different workers to move into, we build a unique new data set on workers’ occupational mobility patterns, constructed from the resumes of 16 million U.S .workers sourced by labor market analytics company Burning Glass Technologies. We use this data to make sure we consider the full scope of workers’ labor markets when estimating the effects of employer concentration on wages. (Our new data on occupational mobility—the most granular of its kind for the U.S. labor market—is publicly available for research use here.)

It is also important to note how we measure employer concentration itself. Different research papers take different approaches. In our paper, we follow previous research in measuring employer concentration with a Herfindahl-Hirschman Index, or HHI, the sum of the squared vacancy shares accounted for by each employer, for more than 100,000 U.S. local occupational labor markets over 2013–2016, using data on firms’ job postings from Burning Glass Technologies.

How much does employer concentration matter in the U.S. labor market?

Using the methodology described above, my co-authors and I estimate a large, negative causal effect of employer concentration on workers’ hourly pay for a subset of U.S. workers. Our results suggest that more than 10 percent of the U.S. workforce is likely to be in labor markets where pay is suppressed by at least 2 percent as a result of employer concentration, and several million of these workers are in labor markets where pay is suppressed by 5 percent or more. These are not trivial amounts of money. For a typical full-time worker making $50,000 a year, a 2 percent pay reduction is equivalent to losing $1,000 per year and a 5 percent pay reduction is equivalent to losing $2,500 per year.

Who are the people most affected by employer concentration? The most-affected workers tend to be identifiable by three factors:

  • They are in occupations with low outward mobility, usually because they have skills that are very specific to their occupation or have invested in training, licensing, or certification, so that it’s difficult to find a comparably good job outside their chosen occupation.
  • They are in lower-population areas, which matters because there tend to be fewer firms in places where there are fewer people.
  • They are in industries that tend to have a high concentration of employers.

Taken together, these factors mean that a very large share of the most-affected workers are healthcare workers in smaller cities (which tend to have highly concentrated healthcare sectors), including registered nurses, licensed practical and vocational nurses, and nursing assistants, pharmacists and pharmacy technicians, and phlebotomists, lab technologists, and radiologic technologists. Another occupation that appears to be strongly affected by employer concentration is security guards, who seem to have most of their employment opportunities at only a few large firms.  

Our paper suggests that a focus on occupational mobility is particularly important. We find that the effect of employer concentration on wages is at least four times higher for workers in occupations with low outward mobility—such as the healthcare occupations or security guards mentioned in the previous paragraph—than it is for occupations with high outward mobility such as bank tellers or counter attendants. For workers in the lowest quartile of outward mobility, our results suggest that moving from the median level of employer concentration to the 95th percentile reduces average hourly pay by between 4 and 8 percent. To put this into context, median annual pay for a registered nurse is $73,300 and for a pharmacy technician is $33,950. So a 4 percent to 8 percent pay reduction would mean roughly $3,000 to $6,000 less income per year for a typical registered nurse or $1,400 to $2,700 less per year for a typical pharmacy technician. (See Figure 1.)

Figure 1

The effect of within-occupation employer concentration on wages is more than 4 times greater for low outward mobility occupations than for high outward mobility occupations

Our research isn’t the first or last word on this issue. Each new research paper adds a small piece to an ever-growing collage of research on employer concentration. Elena Prager of Northwestern University and Matthew Schmitt of the University of California, Los Angeles, for example, analyze hospital mergers, finding that mergers which increase hospital concentration to high levels substantially reduce the wages of nurses and other healthcare occupations. And David Arnold at the University of California, San Diego, finds that merger and acquisition activity that significantly increases local labor market concentration leads to an average decline in worker wages of 2 percent.

A number of other papers demonstrate correlations between wages and measures of employer concentration at the level of local occupations and industries, all of which are robust to a large variety of control variables. In addition, Yue Qiu at Temple University and Aaron Sojourner at the University of Minnesota also find that workers in highly concentrated labor markets receive less non-wage compensation in the form of health benefits, and U-Penn’s Marinescu, along with Qiu and Sojourner, find that workers in highly concentrated labor markets are more likely to be subject to labor rights violations.

This evidence overall clearly refutes the idea that employer concentration is a non-issue, affecting only a handful of workers in factory towns. Yet it’s also worth emphasizing that, by our best read of the evidence, employer concentration is not likely to be an important factor in wage determination for the majority of U.S. workers. Similarly, it seems unlikely that changes in employer concentration can explain more than a small share of the macro-level trends of rising inequality or wage stagnation (as argued in more detail by Kevin Rinz at the U.S. Census Bureau, and by David Berger at Duke University, Kyle Herkenhoff at the Federal Reserve Bank of New York and the University of Minnesota, and Simon Mongey at the University of Chicago).

Rather, the bulk of the evidence suggests there is a subset of workers—at least several million across the United States—whose wages are suppressed by employer concentration. These are the workers any policy response designed to mitigate the effects of employer concentration should focus on.

What does this mean for anti-monopsony policymaking?

The policy area where these findings are most directly relevant is antitrust, which is explicitly designed to tackle excessive market power. U.S. antitrust authorities have, until recently, almost never considered labor markets in merger scrutiny or in anti-competitive behavior suits. Over recent years, there have been growing calls for antitrust authorities to increase their role in preventing anticompetitive behavior in labor markets, including the Washington Center for Equitable Growth’s own recent report on antitrust.

Two papers in particular—one by U-Penn’s Marinescu and Herbert Hovenkamp and the other by Suresh Naidu at Columbia University and Eric Posner at the University of Chicago—argue that antitrust authorities should use employer concentration as a screen for possible anti-competitive effects of mergers and acquisitions, as they already do routinely in product markets. They propose that labor markets where mergers would increase employer concentration beyond a certain threshold would be subject to further, more detailed scrutiny before any decision as to whether the merger should be allowed to go ahead.

Our findings would support this policy move, with one caveat. Our results underscore the importance of the definition of the local labor market for the underlying effect of employer concentration. Marinescu and Hovenkamp argue that in the screening process antitrust authorities should measure employer concentration at the level of individual local occupations, but we find that the effects of employer concentration on wages are more than four times as high for occupations with low outward mobility—such as the healthcare workers or security guards mentioned earlier —than for occupations with very high outward mobility, among them cashiers, bank tellers, or counter attendants.

This finding suggests that antitrust authorities should consider not only employer concentration within a local occupation, but also the possibility for outward mobility from that occupation when carrying out this merger scrutiny. While this is a small tweak to the overall policy direction, it could have important ramifications. Our methodology would suggest that mergers to even relatively low levels of employer concentration for occupations with low outward mobility such as nurses should be a greater concern than mergers which increase concentration to high levels for occupations with high outward mobility, such as bank tellers or cashiers. We give some concrete examples where this might matter in our paper.

Increasing antitrust scrutiny in U.S. labor markets is important and feasible, but it’s also important to note that in many cases, increased antitrust scrutiny cannot address the wage effects of employer concentration. This is because very often employer concentration arises not because of M&A activity but rather because of firm growth, which antitrust authorities have less power to do anything about. In these labor markets, other policy tools are needed to address the wage suppression arising from employer concentration.

In addition, and perhaps more importantly, it may not always be desirable to reduce firms’ size. If there are economies of scale, large firms may be substantially more productive than small firms: think of a factory that may need a minimum scale to operate with cutting-edge technology. In cases like these, if two firms merge, the productivity gains from the increased scale may be greater than the wage suppression arising from the increase in employer concentration. Indeed, if workers receive higher pay as a result of these productivity gains, then it is quite possible that even as employer concentration reduces wages relative to productivity, pay might be higher in a concentrated labor market than in a counterfactual world where the employers were broken up into smaller firms.

In cases like these, enabling firms to stay large while also ensuring that workers share in the productivity gains of the large firms may be a better solution than breaking firms up or preventing mergers. How might this be done? Roughly speaking, there are two categories of policies. One set of policies raises wages externally: through minimum wages at the lower-income end of the labor market, and perhaps through sectoral or occupational wage boards for workers higher up in the income distribution. See, for example, this proposal by economist Arindrajit Dube at the University of Massachusetts Amherst.

Another set of policies empowers workers directly to seek better compensation and working conditions, by increasing workers’ formal bargaining power, whether through increased support for the firm-level unions that are more common in the United States or through the type of sectoral bargaining between groups of unions and firms which is prevalent in much of continental Europe. For these policies, it is important to ensure that increases in bargaining power designed to provide countervailing power against concentrated employers tackle the issues raised by the fissuring of the workplace and the legal status of independent contractors. See, for example, work by Brandeis University’s David Weil and work by Wayne State University’s Sanjukta Paul.

Raising minimum wages and empowering unions are, in addition, effective more broadly as a response to all sources of monopsony power in the labor market (not just as a response to the monopsony power generated by employer concentration). And indeed, the greater degree of underlying monopsony power in the labor market, the less likely it is that minimum wage increases or union drives reduce employment: recent work by IESE’s Jose Azar, Emiliano Huet-Vaughn at Pomona College, U-Penn’s Marinescu, Burning Glass Technology’s Taska, and Till von Wachter at the University of California, Los Angeles, for example, finds that minimum wage increases do not have negative employment effects in highly concentrated labor markets.

Finally, workers’ vulnerability to employer concentration can also to some extent be reduced by enabling workers to move more easily, both between geographic locations and between occupations. One promising avenue for some occupations may be to increase the degree to which occupational licenses and certifications are mutually recognized across different U.S. states and the District of Columbia: the University of Minnesota’s Janna Johnson and Morris Kleiner find that mutual recognition of occupational licensing has a substantial effect on workers’ geographic mobility. Another avenue would be increasing housing supply and reducing housing costs in high-wage cities, which would increase workers’ ability to move to places with higher-paying jobs: work by Peter Ganong at University of Chicago Harris School of Public Policy and Daniel Shoag at Harvard Kennedy School suggests that part of the decline in geographic mobility for low-income workers over recent years can be explained by high housing costs.

Conclusion

Overall, the increased concern over employer concentration from researchers and policymakers is justified. A growing body of compelling causal evidence suggests that employer concentration reduces wages for a non-trivial subset of U.S. workers, particularly those in low-outward-mobility occupations, low-population regions, and highly concentrated industries. Importantly, though, employer concentration does not appear to be a major factor in wage suppression for the majority of American workers.

Still, there is a strong case for substantially increased antitrust scrutiny of labor markets, using employer concentration—measured appropriately to reflect workers’ mobility—to screen M&A applications for potential anti-competitive effects. In addition, the growing body of evidence on employer concentration further strengthens the case for a substantial increase in the use of policies that raise wages directly via higher minimum wages, wage boards, and empowered unions as part of a broader agenda to tackle the wage suppressive effects of monopsony power.

—Anna Stansbury is a Ph.D. candidate in economics at Harvard University and a Ph.D. scholar in Harvard’s Program in Inequality and Social Policy

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Brad DeLong: Worthy reads on equitable growth, January 20–25, 2021

Posted on by Maria Monroe

Worthy reads from Equitable Growth:

1. In previous decades, our claims to understand the relationship between the structure of the U.S. economy on the one hand and possibilities for equitable growth on the other have been a combination of guesses and platitudes. Now, finally, we are closing in on some real knowledge. The combination of the empirical turn in economics and the availability of massive new data sets collected by our information technology systems makes the promise for research progress very bright indeed. And Equitable Growth is on it. Read Christian Edlagan and Maria Monroe, “Understanding the role of market structure in equitable growth,” in which they write: How does market organization and firm behavior affect economic growth and its distribution? In this installment of Expert Focus, we highlight the industry- and market-specific analyses of researchers helping to advance our understanding of the complex relationship between industrial organization and market structure, antitrust law and competition policy, and economic inequality and growth … Leemore Dafny: “we continue to rely heavily on private insurers … [to] administer and sell commercial insurance … [and] because public insurance programs increasing  rely on private insurers to deliver benefits to enrollees … Policymakers ought to look more closely …” Ying Fan: “There are too few products in the US smartphone market … The welfare effect of a merger may be underestimated when we take it to account the effect of the merger on product choice …” Nathan Miller: “If the objective was to prevent price increases for consumers, the MillerCoors merger should not have been approved. The reason is almost entirely do the coordinated effects …” John Van Reenen: “if girls were as exposed to female inventors as boys are to male inventors, the gender gap in innovation would fall by half …” Nancy Rose: “Government has likely retreated too far from the role it assumed almost 130 years ago with the passage of the Sherman Antitrust Act to ensure open, fair, and competitive markets.”

2. Back last spring, Equitable Growth warned about how unemployment insurance systems needed to be immediately changed to deal with what was about to come down the pike. In the Trump administration, of course, none of this work was actually done. But that the need for reform was ignored then does not mean that the reform is not still needed now. And now there is a chance for action, if somebody makes it a priority. Read Alix Gould-Werth, “Fool me once: Investing in unemployment insurance systems to avoid the mistakes of the Great Recession during COVID-19,” in which she writes: “To be able to respond nimbly to the next twists and turns in the coronavirus recession, policymakers should … increase the federal taxable wage base to the same level as the Social Security taxable wage base and index it to inflation so that states have adequate resources for program administration[;] redesign benefit extensions so that the program responds quickly and efficiently to macroeconomic changes[;] implement a standardized minimum benefit level and minimum benefit duration that are generous enough to incentivize workers to apply for benefits.”

3. Disability insurance appears to have much larger effects on social outcomes than the money amounts involved had led me to guess. I think this is because people use it as a last-gasp insurance program. It is highly unreliable. There are a great many people who ought to qualify for it and who, indeed, ought to have had it for years, but who did not consider it as an option until their financial affairs got dire. Nevertheless, many of them do not get benefits when they do apply. That is is a great shame. Read Manasi Deshpande, Tal Gross, and Yalun Su, “The effects of disability programs on financial outcomes,” in which they write: “A Social Security Administration rule … instructs government examiners to use more lenient standards for applicants who are above age 55 relative to those who are below age 55. A similar change in rules occurs at age 50 … We can attribute any differences in financial distress after the decision to the higher likelihood of being approved for disability benefits above the age cut-off … Being approved for disability benefits at the initial stage (before appeals) reduces bankruptcy rates by 30 percent over the next 3 years. Among homeowners, approval reduces foreclosure rates by 30 percent and reduces rates of home sales by 20 percent over the next 3 years … Many recipients use their disability benefits to stay in homes that they would have otherwise lost to foreclosure or sale … These effects are large relative to the size of disability benefits—on the order of $9,000 annually for the Supplemental Security Income program and $15,000 annually for the Social Security Disability Insurance program. Why are the effects so large? … Disability applicants apply for these programs after several years of increasing financial distress. At the time they apply, a large fraction of applicants are at risk.”

Worthy reads not from Equitable Growth:

1. The Federal Reserve continues to see itself as being all-in with respect to providing support for the U.S. economy. I confess that I wish that they were buying more bonds. I am not sure I understand why they have settled into this particular policy configuration. But every drop is very helpful. Read Steve Matthews, and Kyungjin Yoo, “Fed to Taper Asset Purchases in 2022 or Later, Say Economists,” in which they write: “Federal Reserve officials meeting next week are likely to put off any changes in their bond-buying program until 2022, when a tapering of purchases may begin, according to economists surveyed by Bloomberg News. About 88% of the 40 respondents to a Jan. 15-20 questionnaire said the Federal Open Market Committee’s next move will be to shrink purchases gradually rather than to increase their pace … “The release of pent-up demand, powered by monetary and fiscal policy, pushes the risks for both growth and inflation on the upside in the second half of 2021 and 2022,” economist Lynn Reaser of Point Loma Nazarene University said in a survey response … Many of the economists surveyed said they have altered forecasts in light of the fiscal stimulus, with virtually all of them raising their outlook for economic growth … Chair Jerome Powell as well as other Fed policy makers have suggested they don’t see any reason to change their bond buying or interest rates anytime soon. “Now is not the time to be talking about exit,” Powell said in a virtual speech Jan. 14. The FOMC last month pledged to continue to make $120 billion in monthly asset purchases until there’s “substantial further progress” toward employment and inflation goals. The economists in the Bloomberg survey don’t expect that to be met for some time … Nearly half of the economists are looking for a 2023 liftoff, while 40% see the first rate hike happening in 2024 or later … With super-easy monetary policy forecast, Powell might well get reappointed as chair by Biden when his term expires in 2022, according to economists. A second term is seen as likely to be offered, almost three-quarters of the respondents said.”

2. This still may be the last word on the minimum wage debate. It is nuanced. But it is not very nuanced. I continue to think that the sweet spot is clearly the proper coordinated mix of minimum-wage increases and expanded earned-income tax credits. Read Doruk Cengiz, Arindrajit Dube,  Attila Lindner, and  Ben Zipperer, “The Effect of Minimum Wages on Low-Wage Jobs,” in which they write: “We estimate the effect of minimum wages on low-wage jobs using 138 prominent state-level minimum wage changes between 1979 and 2016 in the United States using a difference-in-differences approach. We first estimate the effect of the minimum wage increase on employment changes by wage bins throughout the hourly wage distribution. We then focus on the bottom part of the wage distribution and compare the number of excess jobs paying at or slightly above the new minimum wage to the missing jobs paying below it to infer the employment effect. We find that the overall number of low-wage jobs remained essentially unchanged over the five years following the increase. At the same time, the direct effect of the minimum wage on average earnings was amplified by modest wage spillovers at the bottom of the wage distribution. Our estimates by detailed demographic groups show that the lack of job loss is not explained by labor-labor substitution at the bottom of the wage distribution. We also find no evidence of disemployment when we consider higher levels of minimum wages. However, we do find some evidence of reduced employment in tradable sectors. We also show how decomposing the overall employment effect by wage bins allows a transparent way of assessing the plausibility of estimates.”

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Brad DeLong: Worthy reads on equitable growth, January 12–19, 2021

Posted on by Maria Monroe

Worthy reads from Equitable Growth:

  1. Read the very excellent new book of essays assembled by Equitable Growth and Berkeley‘s Labor Center on how to boost wages here in America, Boosting Wages for U.S. Workers in the New Economy: “The U.S. labor market is shackled by decades of wage stagnation for the majority of workers, persistent wage disparities by race, ethnicity, and gender, and sluggish economic growth. The steady increase of income inequality since the 1970s leaves generations of U.S. workers and their families unable to cope with the daily costs of living, let alone save for emergencies or invest in their futures—conditions that have left many families ill-prepared for the “stress test” of the coronavirus recession. These labor market ills particularly affect women and workers of color … There is increasing evidence that broad structural inequality leads to a misallocation of talent and the undervaluation of different types of work, which contributes to anemic economic growth and slower productivity gains. Boosting Wages for U.S. Workers in the New Economy, a joint effort of Equitable Growth and the Institute for Research on Labor and Employment at the University of California, Berkeley, presents a series of essays from leading economic thinkers, who explore alternative policies for boosting wages and living standards, rooted in different structures that contribute to stagnant and unequal wages.”
  2. Here is, I think, the most interesting idea about how to boost wages in America I have seen recently. It comes from my colleague Benjamin Schoefer. He proposes a framework of bargained sector-wide minimum wages for different worker skill levels. This has the possibility of getting us more quickly to wage levels that the market would eventually reach after he sustained period of high-pressure growth, and thus make growth more equitable. Read Benjamin Schoefer, “Collective bargaining as a path to more equitable wage growth in the United States,” in which he writes: “Rising wage inequality in the United States means that the median wage has not kept pace with the mean wage in recent decades. Moreover, the United States has performed worse in this regard than many of its international peers … I will first examine the decoupling of median wage growth from mean wage growth and, in turn, the decoupling from productivity growth … I will then consider the role of collective bargaining institutions in these patterns … Finally, I will review policies the United States could pursue that have the potential to foster more equitable wage growth … industrywide and cross-industry wage boards to set minimum wages for workers in the middle rungs of the wage distribution, not just those on the lower rungs … The coronavirus recession … has led to a uniquely slack labor market among many segments of the economy and has hurt the bargaining position of many low-wage workers in particular. Without strong and sustained wage growth that is broadly distributed across the U.S. labor force, the eventual economic recovery will almost certainly take longer to reach the vast majority of U.S. workers.”

Worthy reads not from Equitable Growth:

  1. This, from Bloomberg Businessweek, is well worth reading If you want to orient yourself as to the likely changes in the macro configuration of the world economy that we are likely to see over the next generation. Read Tom Orlik and  Bjorn Van Roye,”An Economist’s Guide to the World in 2050,” in which they write: “China’s rise is just one part of a larger shift that’s already under way and looks set to accelerate in the decades ahead … A remarkable period of stability, stretching from the end of World War II through to the early 21st century, is coming to an end. The center of economic gravity is shifting from West to East, from advanced economies to emerging markets, from free markets to state controls and from established democracies to authoritarian and populist rulers. The transition is already upending global politics, economics and markets. This is just the beginning … For the past 40 years, since the Reagan and Thatcher revolutions, the free-market ideal has been the organizing principle for the global economy … The rise of alternative models, in government as in economics, poses questions that the West has so far proved unable to answer … For businesses, investors and policy makers, history isn’t over. It’s just getting started.”
  2. The very intelligent Michael Schuman believes that the reign of Xi Jinping may well be a disaster for China’s future economic growth. So far, China has managed to hit the sweet spot between market, forward-looking industrial-policy guidance, and command-and-control to keep financial flows that would be totally unsustainable in a neoliberal market economy somehow in balance. This has been an extremely complex balancing act. Schuman thinks that Xi Jinping does not understand how it has been accomplished. He is focused on cementing his power and eliminating any possibilities of the growth of strong forces pushing for political liberalization. Achieving those goals may well be incompatible with maintaining the balance that has produced such rapid economic growth. Yet China has done many things over the past four decades that outside observers, especially those of us of even slightly neoliberal persuasion, thought would be impossible. Read his “The Undoing of China’s Economic Miracle,” in which he writes: “The country’s paramount leader is turning away from reforms that helped it grow and develop. That will have consequences beyond its borders: China’s economic “miracle” wasn’t that miraculous. The country’s high-octane ascent over the past 40 years is, in reality, a triumph of basic economic principles: As the state gave way to the market, private enterprise and trade flourished, growth quickened, and incomes soared. This simple lesson appears, however, to be lost on Xi Jinping … Classically trained economists frown upon Xi’s program. He’s ticking just about every box of what not to do to propel incomes and innovation. Yet we shouldn’t immediately dismiss his plans as doomed to fail. As a gargantuan market of 1.4 billion people, China can develop local companies of size and scope without bothering much with the outside world. (Ma’s Ant is a prime example.) If the program works, economists may have to rewrite their textbooks. Yet the undertaking is fraught with risks. By favoring the state sector, Xi is funneling valuable money and talent to notoriously bloated and inefficient government enterprises instead of far more nimble and creative private firms. The negative effect shows up in miserably poor productivity—a disaster for an aging society still catching up with the richest nations—and mounting debt, now nearly three times the size of national output … Xi is preparing for protracted conflict between the world’s two largest economies by attempting to fireproof China from measures President-elect Joe Biden might use against him. Yet in doing so, he is also repositioning the Chinese economy in the world.”
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Weekend reading: Boosting wages and living standards for U.S. workers edition

Posted on by Maria Monroe

This is a post we publish each Friday 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 relevant and interesting articles 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

For decades, the majority of U.S. workers experienced stagnating wages, sluggish economic growth, and disparities in pay based on race, ethnicity, and gender. These broad structural trends and inequality result today in the misallocation of talent and the undervaluation of certain occupations and industries—which, in turn, restricts economic growth and productivity. This week, Equitable Growth (in partnership with the Institute for Research on Labor and Employment at the University of California, Berkeley) published a series of essays that puts forward new policy ideas to create an economy that works for everyone. The book of essays, titled Boosting Wages for U.S. Workers in the New Economy, features a diverse group of leading economic thinkers who present alternative ideas for policymakers to boost wages and living standards by addressing structural impediments to economic growth and fair pay. The essays are organized in three main sections: worker power, worker well-being, and equitable wages. Kate Bahn and Jesse Rothstein provide an overview of the book, summarizing each of the three sections and the essays within them, and explaining why creating structures to support worker empowerment and reduce wage inequality is essential to broadly shared economic growth.  

After last week’s dismal Jobs Day report, Kate Bahn and Carmen Sanchez Cumming delve deeper into the data and focus specifically on the experience of the U.S. retail sector. This industry is particularly harmed by the ongoing coronavirus recession due to the nature of its in-person services, which have declined significantly amid public health restrictions. But the retail sector had several preexisting dynamics that may have influenced the impact of the pandemic, write Bahn and Sanchez Cumming, including the rise of e-commerce over the past decade. They then look at what these factors mean for U.S. retail workers, who tend to be some of the most vulnerable in the U.S. labor force, and provide ideas for how policymakers can protect these workers both in the short and long term.

The U.S. social safety net is a vital support system for many U.S. workers and their families, and has been particularly important in the coronavirus pandemic and recession. While many studies have shown the benefits of many of the safety net’s programs, from Unemployment Insurance to the Supplemental Nutrition Assistance Program, there is always more to discover about these policies and their impact. Enter the Equitable Growth 2021 Request for Proposals—which, Hilary Hoynes explains, features important questions surrounding human capital and development, and the role of the safety net in ensuring well-being for workers and families. Researchers studying these questions can help guide policymakers as they look for the most effective and timely investments to ensure worker well-being amid the coronavirus recession.

Another area of the 2021 Request for Proposals is the impact of rising inequality on the macroeconomy. Atif Mian explains why the oft-held belief that inequality doesn’t have much of an effect on macroeconomic outcomes is misguided. His recent research on savings behaviors finds that the rich save more than their less well-off counterparts, exacerbating inequality and putting downward pressure on aggregate demand, which can be offset by increased borrowing from nonrich households. This borrowing, however, can become a future drag on spending. Mian looks at the consequences of this so-called indebted demand and its implications, showing why Equitable Growth’s research network provides important lessons for policymakers looking to address extreme inequality.

Links from around the web

Front-line healthcare workers across the United States face an almost constant lack of personal protective equipment, inconsistent safety measures, grueling hours, and heightened personal health risks amid the coronavirus pandemic. Many are expressing feelings that the systems and employers meant to protect them have failed­—and, reports NPR’s Aneri Pattani, many are  expressing a renewed interest in unionization. Studies show that healthcare facilities with unions experience better patient outcomes, fewer workplace hazards, and even lower mortality rates from COVID-19, the disease caused by the coronavirus. Pattani writes that many healthcare workers who previously opposed unionization are changing their minds as a result of the pandemic, which is amplifying many problems these workers face on a daily basis, from short-staffing to insufficient PPE provision.

The December 2020 unemployment report released late last week was bad, acknowledges Neil Irwin in The New York Times’ The Upshot blog. But there is a silver lining, too. Despite the data revealing a backslide in the economic recovery, there is a clear path forward out of the downturn, Irwin argues, thanks to the prospect of mass vaccinations against the virus. Much of the current jobs crisis is contained in industries that are directly affected by pandemic-related restrictions, such as leisure and hospitality, suggesting that these jobs will come back once enough of the public is vaccinated and feels comfortable engaging in in-person leisure activities, such as dining out and traveling. And though most other sectors of the economy are not yet back to their pre-pandemic employment levels, Irwin points out that many are steadily rehiring. These trends, alongside a new U.S. Congress more receptive to passing coronavirus stimulus legislation, indicate that there is reason to be optimistic.

One potential piece of the next coronavirus stimulus legislation was unveiled on January 14 by President-elect Joe Biden—his proposed $1.9 trillion coronavirus relief package. Vox’s Emily Stewart explains the proposal, called the American Rescue Plan, and details how its three buckets of funding—$400 billion for combatting the coronavirus, including vaccination and testing efforts, $1 trillion in direct relief for families, and $400 billion in aid to communities and businesses—aim to both shore up the U.S. economy and deal with the virus. Stewart details the specific items President-elect Biden includes in the proposal, from $1,400 payments to individuals to a $15 minimum wage, and more. While this is a big deal, in terms of the size and scope of the proposal, Stewart reports that some on the left worry it doesn’t go far enough, fearing a repeat of the sluggish recovery after the Great Recession of 2007–2009 and proposing added steps, such as canceling student loan debt.

Friday figure

Percent change in employment in selected U.S. industries, January 2020–December 2020

Figure is from Equitable Growth’s “U.S. retail sector’s recession experiences highlight continuing labor market travails” by Kate Bahn and Carmen Sanchez Cumming.

Understanding the macroeconomic consequences of rising income and wealth inequality in the United States

Posted on by Maria Monroe
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One of the big questions in economics today is to understand how rising inequality matters for the U.S. economy as a whole. There has been a sharp increase in income and wealth inequality over the past four decades, driven largely by a growing share of income and wealth going to the top 1 percent of income and wealth holders in the United States. What impact does this persistent rise in extreme inequality have on the macroeconomy?

It is naturally difficult to understand the influence of slow-moving forces that take decades to build. As the proverbial frog who fails to jump off the water that is slowly coming to a boil teaches us, slow-moving but persistent forces may be the most important. The effects of rising inequality over the past four decades on our economy may be the most consequential going forward.

How may increasing inequality affect the macroeconomy? In many macroeconomic models that are used to analyze policy, including those with heterogenous agents, inequality does not have much of an effect on macroeconomic outcomes. The reason is that the models typically assume that preferences are homothetic, technical parlance for everyone having a similar tendency to save out of their lifetime or permanent incomes. An important implication of this assumption is that permanent shifts in the distribution of income, as observed in the United States and other peer economies, do not have much of an impact on the macroeconomy.

Yet economists now know from a wealth of empirical data that the key assumption of everyone saving in a similar fraction out of a lifetime of income is not true. In particular, it is now well-documented that the very rich tend to save a much higher fraction of lifetime income. This particular behavioral trait has very important implications for the macroeconomy in the face of rising income and wealth inequality.

In joint work with Ludwig Straub of Harvard University and Amir Sufi of the University of Chicago Booth School of Business, we show that when the rich save more out of their lifetime income, an increase in inequality leads to a persistent fall in the long-term interest rate and an growing reliance on credit for sustaining aggregate demand. The central element in our theory is that greater savings rates among rich households mean that a rise in extreme inequality leads to downward pressure on aggregate demand. The downward pressure on aggregate demand can be countered through increased borrowing by nonrich households.

This kind of upswing in aggregate demand, however, is “indebted,” meaning the boost in credit-driven spending today becomes a drag on spending tomorrow, when the amount borrowed by the nonrich has to be paid back to the rich, who will not spend the debt repayment back into the economy at the same rate. This is what we refer to as “indebted demand.”

An important consequence of indebted demand is that it can only be sustained over time if  interest rates fall. A decline in interest rates reduces the debt service payment that the nonrich owe to the rich, thus reducing the potential drag on aggregate demand. In short, rising income and wealth inequality generates debt to sustain demand, which, in turn, reduces interest rates going forward.

As we show in a companion paper, the theory of indebted demand fits the empirical patterns observed in the United States. A rise in the share of income for the top 1 percent of income earners generated a substantial increase in total savings by the top 1 percent as a share of the economy. Importantly, this growth in savings was not associated with a rise in real investment in the U.S. economy, thus creating a savings glut that we refer to as “saving glut of the rich.”

We find that the saving glut of the rich financed dissavings by the bottom 90 percent of the income distribution in the United States to sustain aggregate demand. Moreover, as predicted by the indebted demand framework, the increase in inequality and debt-driven consumption has been associated with a persistent decline in the long-term interest rate, which has fallen all the way down to negative numbers in real terms.

An important implication of the indebted demand framework is that once the private household sector is no longer willing or able to dissave further in order to absorb the saving glut of the rich, government has to step in by running a fiscal budget deficit to absorb the saving glut and generate demand. In the absence of a sufficiently strong fiscal policy in the face of high inequality, there is a danger that the U.S. economy will fall into a liquidity trap, or secular stagnation.

The indebted demand framework also has important implications for the conduct of monetary policy. In an age of rising inequality that puts downward pressure on aggregate demand, the easing of monetary policy helps by making it easier for households to borrow and boost demand. Yet the rise in debt subsequently puts downward pressure on interest rates. Monetary policy thus has limited ammunition: Lowering rates today helps boost demand, but also makes “normalization” of rates harder in the future.

The core policy lesson to come out of the indebted demand framework is that persistently high inequality poses a structural challenge to the macroeconomy. An economy where too high a share of income or wealth is concentrated in the hands of a few can push the economy into a corner, with very high levels of debt and ultra low interest rates. A high debt, low interest rate environment can create other problems as well, such as creating financial fragility and financial asset bubbles, and reducing intergenerational mobility.

Extreme inequality is one of the defining issues of our times. The Washington Center for Equitable Growth has created a valuable space for researchers to come together and analyze the causes and consequences of the multiple dimensions of inequality. I hope that young scholars will use this opportunity to help us understand the nexus between inequality and the broader economy.

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New Equitable Growth book presents broad structural changes to boost U.S. wages for more equitable and sustainable economic growth

Posted on by Maria Monroe
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The Washington Center for Equitable Growth today publishes its latest book, Boosting Wages for U.S. Workers in the New Economy, in conjunction with a virtual launch event virtual today on the subject featuring several of the authors of the essays in the new book.

This book, a joint effort of Equitable Growth and the Institute for Research on Labor and Employment at the University of California, Berkeley, presents a series of essays from leading economic thinkers, who explore alternative policies for boosting wages and living standards, rooted in different structures that contribute to stagnant and unequal wages. The essays cover a variety of strategies, from far-reaching topics such as the U.S. social safety net and tax policies to more targeted efforts emphasizing laws governing American Indian tribal communities and the barriers facing women and workers of color in the science, technology, engineering, and mathematics fields.

The U.S. labor market is held back by decades of wage stagnation for the majority of workers, persistent wage disparities by race, ethnicity, and gender, and sluggish economic growth. The steady increase of income inequality since the 1970s leaves generations of U.S. workers and their families unable to cope with the daily costs of living, let alone save for emergencies or invest in their futures—conditions that have left many families ill-prepared for the “stress test” of the coronavirus recession. These labor market woes particularly affect women and workers of color due to decades of gender inequality and structural racism erecting barriers to opportunities.

There is increasing evidence that broad structural inequality leads to a misallocation of talent and the undervaluation of different types of work, which contributes to anemic economic growth and slower productivity gains. Creating an economy that works for everyone and serves those who are historically marginalized requires addressing underlying economic structures that form the foundation for U.S. labor market policies. These unequal structures entrench barriers to opportunity based on race, ethnicity, and gender, and exacerbate the power imbalances that allow employers to undercut wages and allow gains of growth to accrue to the few while stifling a robust, dynamic U.S. economy.

The essays in our new book demonstrate that efforts to improve workers’ access to good jobs do not need to be limited to traditional labor policy. Labor income is still how most Americans achieve security and stability, but the determination of those earnings does not take place in a vacuum. Policies relating to macroeconomics, to social services, and to market concentration also have direct relevance to wage levels and inequality, and can be useful tools for addressing them. A theme that runs across all of these essays is that worker empowerment is crucial to ensuring wage equality and financial security across the U.S. labor market.

The essays in Boosting Wages for U.S. Workers in the New Economy provide a set of roadmaps for encouraging wage growth and reducing wage inequality. The essays outline why the creation of underlying economic structures that allow workers, particularly those who face the greatest barriers, to advance in their careers, contribute to productivity growth, and share in the gains of a robust and resilient economy are key to ensuring the U.S. economy recovers from the coronavirus recession and progresses into another period of economic growth that is more equitable and sustainable. Dealing with the baleful economic consequences of economic inequality now, which the current pandemic has laid bare, would result in stronger and more sustainable economic growth in the years and decades ahead.

Foreword: Boosting Wages for U.S. Workers in the New Economy

Posted on by Maria Monroe
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The anemic wage growth that has characterized the U.S. economy for decades has deep structural causes that defy easy solutions. For decades, the benefits of economic growth have gravitated toward those at the very top of the income ladder, contributing to growing and increasingly dangerous economic inequality. While we Americans might value shared prosperity as a society, it will remain an elusive goal without comprehensive action to combat stagnant wages. Policy choices have led us to where we are today, and transformative new policies will be required to make real progress.

The Bernard and Anne Spitzer Charitable Trust is honored to support the Washington Center for Equitable Growth and the Institute for Research on Labor and Employment at the University of California, Berkeley in the development and publication of this book, Boosting Wages for U.S. Workers in the New Economy, which makes an important contribution to the advancement of our vision of a more equitable and sustainable economy.

As the report notes, for decades, two ideas for lifting the wages of low- and middle-income workers have been prevalent: raising the minimum wage and enhancing education. While research confirms that both are necessary and have important effects, the evidence also suggests that they are not nearly sufficient to overcome the enormous forces in the U.S. economy that exert downward pressure on wages. Those forces are so strong that even in the extraordinarily tight labor market that existed just prior to the coronavirus recession, wages barely budged.

It is clear that structural changes are needed—no single intervention will solve the problem of wage stagnation. This volume includes 10 commissioned essays by forward-looking scholars that outline a wide-ranging set of ideas for tackling this problem. The approaches presented are not confined to traditional labor or human capital issues, but generally fall under three categories:

  • Increasing worker power, which has been weakened dramatically with the decline in union membership resulting from both government policy and employer practices
  • Improving worker well-being, not only by improving access to education but also by repairing and strengthening the social programs that support families
  • Addressing the wage disparities that exist between White workers and Black and other workers of color, between men and women, between employees from different firms, and between workers in different geographic areas

This project brings together a set of labor scholars ranging across multiple disciplines—economics, sociology, management, and law—all of whom are diverse not only in race and gender, but also in the kinds of colleges and universities where they write, teach, and conduct their research. And they are diverse in another way: They are at varying points in their careers. This is a collection of established experts and rising stars with ambitious ideas and a range of perspectives.

Equitable Growth and the Institute for Research on Labor and Employment created a rigorous process to develop the project. They provided authors with feedback on their original drafts in terms of both content and presentation. They convened a half-dozen workshops, all conducted virtually amid the pandemic. And they brought together academics in the relevant fields, policy experts in Washington and elsewhere, and advocates working in the policy arena to make change. I hope you will agree that the results are outstanding.

The project is designed to provide policymakers throughout the new Congress and the new administration with an actionable agenda for transforming the U.S. economy by raising wages, reducing inequality, and producing shared prosperity.

—Jean Ross is senior program officer at the Bernard and Anne Spitzer Charitable Trust.

Broad structural change is needed to boost wages in a U.S. economy that is more equitable to produce strong, sustainable economic growth

Posted on by Maria Monroe
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Overview

The U.S. labor market is shackled by decades of wage stagnation for the majority of workers, persistent wage disparities by race, ethnicity, and gender, and sluggish economic growth. The steady increase of income inequality since the 1970s leaves generations of U.S. workers and their families unable to cope with the daily costs of living, let alone save for emergencies or invest in their futures—conditions that have left many families ill-prepared for the “stress test” of the coronavirus recession.

These labor market ills particularly affect women and workers of color due to decades of gender inequality and structural racism erecting barriers to opportunities. There is increasing evidence that broad structural inequality leads to a misallocation of talent and the undervaluation of different types of work, which contributes to anemic economic growth and slower productivity gains.

Boosting Wages for U.S. Workers in the New Economy

Creating an economy that works for everyone and serves those who are historically marginalized requires addressing underlying economic structures that form the foundation for U.S. labor market policies. These unequal structures entrench barriers to opportunity based on race, ethnicity, and gender, and exacerbate the power imbalances that allow employers to undercut wages and allow gains of growth to accrue to the few while stifling a robust, dynamic U.S. economy.

Existing efforts to address wage stagnation and persistent disparities tend to be limited to two narrow approaches: minimum wages and educational investments. Both are critically important, but neither are sufficient to overcome the unequal structures in the U.S. labor market. Minimum wages reach only the bottom of the wage distribution, while increasing education as a response to stagnating or falling wages at each education level amounts to asking workers to run faster on a treadmill, making little progress against the overall deterioration of worker compensation.

This book, a joint effort of the Washington Center for Equitable Growth and the Institute for Research on Labor and Employment at the University of California, Berkeley, presents a series of essays from leading economic thinkers, who explore alternative policies for boosting wages and living standards, rooted in different structures that contribute to stagnant and unequal wages. The essays cover a variety of strategies, from far-reaching topics such as the U.S. social safety net and tax policies to more targeted efforts emphasizing laws governing American Indian tribal communities and the barriers facing women and workers of color in the science, technology, engineering, and mathematics fields.

These essays demonstrate that efforts to improve workers’ access to good jobs do not need to be limited to traditional labor policy. Labor income is still how most Americans achieve security and stability, but the determination of those earnings does not take place in a vacuum. Policies relating to macroeconomics, to social services, and to market concentration also have direct relevance to wage levels and inequality, and can be useful tools for addressing them.

We divide the essays presented in this book into three broad themes:

  • Worker power
  • Worker well-being
  • Equitable wages

Here are brief synopses of each of these themes.

Worker power

In recent decades, worker compensation has failed to keep up with economic growth and productivity. This is, in large part, a reflection of eroding worker bargaining power, which has not been strong enough to ensure that workers receive their fair share of the gains. Decades of declining unionization, poorly enforced labor market protections, and competition policy biased toward corporations have eroded worker bargaining power in the United States. A critical part of boosting workers’ earnings is to reverse this erosion and ensure that workers have the bargaining power to claim their share of employer profits.

A first step to boosting wages is making sure that legal protections and statutory minimum wages already on the books are enforced. In their essay titled “Strategic enforcement and co-enforcement of U.S. labor standards are needed to protect workers through the coronavirus recession,” Janice Fine, Daniel Galvin, Jenn Round, and Hana Shepherd at Rutgers University’s School of Management and Labor Relations highlight novel evidence on the prevalence of wage theft. This occurs when employers violate minimum wage or overtime pay statutes, essentially stealing the wages to which workers are legally entitled.

Unfortunately, workers have little recourse against this wage theft. The enforcement of these laws requires workers to file claims of their own accord, an expensive and risky proposition that is generally out of reach for exactly the groups of workers most at risk of wage theft. Fine and her co-authors propose strategic enforcement for likely violators, such as targeting wage theft investigations for employers in industries with higher rates of wage theft, and co-enforcement with organizations that are more effective at identifying violations, such as worker centers embedded within economically marginalized communities.

But the enforcement of labor standards takes place in an increasingly fissured and global economy. Work is increasingly outsourced from large companies to small contractors, where the large employer may control the work process but can disclaim responsibility for the treatment of workers. This depresses wages and reduces workers’ ability to claim the benefits of their productivity.

Economist Susan Helper at Case Western Reserve University discusses what she calls “supply chain dysfunction,” or when the outsourced company has little power against the outsourcing company so they must manage supply chain inefficiencies by cutting their own costs, which exerts a further downward pressure on wages. In her essay, “Transforming U.S. supply chains to create good jobs,” Helper examines how production is connected across companies and space. She proposes a new industrial policy that addresses the power imbalances of production in the United States. Small companies need to be able to share in the value created by supply chains so they can provide quality jobs, and collaboration and partnership must be promoted, so that supply chain ecosystems across manufacturing and service industries create dynamic and healthy labor markets.

Another, related factor influencing worker bargaining power is the increasing concentration of the economy into a small number of large, dominant employers that are able to exert substantial wage-setting power. In neoclassical models, the fact that many employers are competing for each worker’s labor ensures that workers will be compensated in proportion to their contributions, but when employment is concentrated (known as “monopsony”), this assurance falls apart. In “Boosting wages when U.S. labor markets are not competitive,” Ioana Marinescu at the University of Pennsylvania’s School of Social Policy and Practice reviews the evidence relating labor market concentration to wages, and proposes antitrust enforcement and increasing worker power as two tools to offset the wage-setting power that comes from further concentration.

It is not only microeconomists who are grappling with the growing disconnect between productivity and wages. This is also an important challenge to standard macroeconomic models. In “Collective bargaining as a path to more equitable wage growth in the United,” economist Benjamin Schoefer at the University of California, Berkeley reviews the macroeconomic literature on the presumptions and evidence for how the macroeconomy works, and finds various policies that promote worker bargaining power, such as sectoral wage determination, may help workers share in the fruits of their own productivity growth.

The policies in any of these essays work in tandem with fostering worker voice. Growing attention on fostering worker power is evident in initiatives such as the clean slate for worker power agenda from Harvard Law School’s Labor and Worklife Program. The proposals in the clean slate agenda would boost the effectiveness of each of the topics in this series, including a pathway toward sectoral bargaining and more protections for workers on-the-job.

Worker well-being

The second group of essays considers ways to improve worker well-being, given existing bargaining relationships. In “U.S. labor markets require a new approach to higher education,” economist Andria Smythe at Howard University points to universities—anchors of local economic activity and innovation—as key institutions that can contribute to worker well-being. She demonstrates that broad policies that increase access to education also support the higher education industry, which, in turn, fosters an innovative U.S. economy, creating a virtuous cycle that links individual skill-building to local economic activity to a more equitable U.S. economy across cities and regions of the nation.

Furthermore, Smythe details how accessible higher education tightens labor markets by eliminating the need for students to work while in school, which often both limits their engagement with school and takes jobs that might otherwise go to nonstudents. More accessible higher education would increase demand for workers and increase worker bargaining power.

Another policy approach is to adopt labor market policies that enable workers’ compensation to go further. An essay by one of the authors of this introduction, Jesse Rothstein at the University of California, Berkeley, and Columbia University’s Sandra Black, titled “Public investments in social insurance, education, and child care can overcome market failures to promote family and economic well-being,” demonstrates how rising costs of key necessities, such as higher education and medical and child care, as well as increasing risk faced by workers, erodes worker well-being and thus their effective wages.

Rothstein and Black argue that the public provision of early childhood education, the alleviation of student debt, and the provision of comprehensive social insurance such as Unemployment Insurance, retirement security, health insurance, and long-term care insurance would all help build the foundation for workers to have a lower cost of living and security to invest in their economic futures. This kind of social safety net would mitigate downside risks while also fostering a more resilient economy, in which economic shocks and business cycles will be less likely to lead to permanent negative consequences for workers and families.

Another aspect of promoting wage growth for workers are tax policies that influence corporate investment and sharing the gains of productivity growth. In an essay titled “Targeting business tax incentives to realize U.S. wage growth,” economist Juan Carlos Suárez Serrato of Duke University describes the different ways that corporations respond to tax cuts. Do they take them as windfalls to distribute to shareholders, with no benefit for workers, or do they use them to invest in productivity enhancements that would lead to increased worker compensation? He suggests that the design of the tax cuts influences their allocation, and proposes that tax cuts need to be linked to wage gains for workers to ensure that companies share gains with workers to improve the well-being of their employees and their families.

Equitable wages

The third group of essays considers strategies for reducing wage disparities to create more equitable wage structures across the U.S. labor market for all U.S. workers. A labor market in which workers from historically marginalized backgrounds are able to access equitable opportunities is a labor market that works for everyone.

In her essay on racial and gender inclusion in the so-called STEM fields of science, technology, engineering, and mathematics, titled “Addressing gender and racial disparities in the U.S. labor market to boost wages and power innovation,” economist Lisa Cook at Michigan State University demonstrates how marginalized groups, particularly women and Black workers, face barriers at each stage of the innovation pipeline, limiting economic growth and prosperity for all. Cook argues for investments, mentoring support, and other practices to not only open the doors to STEM education and research for underrepresented groups, but also to allow Black and women innovators to share in the gains from their work.

Sociologist Robert Manduca at the University of Michigan demonstrates that a great deal of wage inequality ranges across geographic regions. In his essay, “Place-conscious federal policies to reduce regional economic disparities in the United States,” he proposes place-conscious universal policies to address geographic wage inequality. Increasing geographic inequality is exacerbated by deregulation in the transportation and communications industries and by weak antitrust enforcement, which favors increasingly powerful companies and well-connected urban areas. Manduca points out that the enforcement of national antitrust policy is especially important in those locations where there are dominant employers, such as those described in Marinescu’s essay. Universal programs, such as a broader social safety net and creating jobs through direct public investment and employment, can help boost wages in communities that have been left behind, increasing economic security for workers and families located in these economically depressed regions of the nation.

This book closes with an essay examining one of the most marginalized groups in the U.S. labor market, Native Americans, who face extremely high rates of poverty and unemployment due to myriad economic, social, and political injustices inflicted over centuries of oppression. In his essay, “Sovereignty and improved economic outcomes for American Indians: Building on the gains made since 1990,” Randall Akee at the University of California, Los Angeles reviews the current status of tribal communities across the United States. He considers what is needed to create structures, including improving infrastructure and education, that allow for economic growth and prosperity after centuries of marginalization, oppression, and genocide.

Policies that address structural economic issues in tribal reservations can also impact economic inequality in the surrounding regions, particularly in states in the West and Southwest, where American Indians make up larger shares of the population. Akee writes that the specific historical and cultural context of tribal sovereignty is a critical aspect of boosting wages for workers from these communities. He also calls for improving outcomes in tribal communities by  improving data collection and researching the barriers to economic development.

Worker empowerment matters for all policies

A theme that runs across all of these essays is that worker empowerment is crucial to ensuring wage equality and financial security across the U.S. labor market. The essays provide a set of roadmaps for encouraging wage growth and reducing wage inequality by the creation of underlying economic structures that allow workers, particularly those who face the greatest barriers, to advance in their careers, contribute to productivity growth, and share in the gains of a robust and resilient economy.

As the U.S. economy eventually recovers from the coronavirus recession and progresses into another period of economic growth, the policies developed by top academics in this series of essays provide a pathway for more equitable growth. Dealing with the baleful economic consequences of economic inequality now, which the current pandemic has laid bare, would result in stronger and more sustainable economic growth in the years and decades ahead.