Equitable Growth launches Vision 2020 book with discussion of research and policy ideas
The need for systemic change, the power of government to improve the U.S. economy and society, and the importance of connecting research, evidence, and data to the U.S. policymaking process dominated the conversation among a panel of scholars at the February 18 introduction of the Washington Center for Equitable Growth’s new policy book, Vision 2020: Evidence for a Stronger Economy.
The book presents 21 essays by leading academic economists and other social scientists containing innovative, evidence-based, and concrete policy ideas that are aimed at shaping the 2020 policy debate. They cover a wide range of issue areas, from tax and macroeconomics to racial and environmental justice, and from labor market reform to antitrust policies.
At the February 18 event, authors of four of the essays discussed their policy proposals: Robynn Cox, assistant professor of social work at the University of Southern California; Susan Lambert, professor of social service and administration at the University of Chicago; Fiona Scott Morton, professor of economics at Yale University, and Equitable Growth president and CEO Heather Boushey, who moderated the discussion.
Cox’s chapter, “Overcoming social exclusion: Addressing race and criminal justice policy in the United States,” calls for a number of actions, including:
- An audit of current federal crime-control policies and funding to determine what needs to be done to end mass incarceration and repair the criminal justice system
- The collection by state and local governments of unbiased data to understand the reasons for persistent racial disparities in criminal justice
- Incentives for states to repeal felon disenfranchisement laws
- A process of re-educating the American public about the history of race in the United States to “break flawed perceptions in the association between race and crime”
The first step in this process, she writes, should be reconciliation and atonement, which could address reparations for past and current oppressive policies. (Dania V. Francis writes separately about reparations in Vision 2020.)
At the book launch event, Cox noted that we “live in a society that has a dual criminal justice system in which individuals from different social groups are treated differently … We choose to punish differently based on who is committing the crime.” She added, “That seems to be based on age-old perceptions … about race and crime. One can view crime as a symptom of poverty, or you can say individuals have innate criminality and they’re committing crimes because of this innate criminality.”
Cox also explained that “colorblind” policies, whether relating to criminal justice or other policy areas, are not the same as “race-neutral” policies. “We’ve created policies that have been seemingly colorblind, but they have not been implemented in a race-neutral way,” she said, “either because they disproportionately seem to impact certain groups, which then continues to drive disparities and inequality, or because their actual implementation has been biased.”
She concluded, “When we’re making policies, we really have to consider not only this colorblind notion, that this policy is going to help the poor, but is it going to help the most marginalized groups in society? How does it impact racial disparities?”
To learn moreabout Cox’s Vision 2020 essay, see this Equitable Growth video:
Lambert’s contribution, “Fair work schedules for the U.S. economy and society: What’s reasonable, feasible, and effective,” addresses the problems of work schedule instability and unpredictability. Too many workers, especially low-income workers, are subject to employers setting and changing work schedules with insufficient notice, making it difficult to arrange childcare and healthcare, hold second jobs, and predict household earnings from week to week and month to month. Oregon and several U.S. cities have passed comprehensive scheduling laws that, generally, provide workers with two weeks’ notice of their schedules and a good-faith estimate of their hours, as well as greater say over their shifts and protection from arbitrary last-minute schedule changes. Lambert urges the federal government to consider national legislation based on the evidence of how well these and future local and state rules work.
At the February 18 session, Lambert noted the disproportionate impact of scheduling problems. “The most disadvantaged workers,” she said, “experience a constellation of problematic scheduling practices. For example, lower-paid workers, and African American workers compared to white workers, are at significantly higher risk of experiencing what we call the ‘triple whammy’ of having work-hour volatility plus short advance notice plus no say in when you work.”
She also addressed new technologies that enable employers to use algorithms to set schedules for efficiency. She said the new software “is a tool and not the cause of this instability and unpredictability.” But she added that the algorithms “can be used to provide stable and predictable schedules” and that some companies are, in fact, using the software that way.
For more on Lambert’s essay, see this video:
Scott Morton’s essay, “Reforming U.S. antitrust enforcement and competition policy,” lays out the data showing increasing corporate mergers and anticompetitive activity that have led to rising concentration in the U.S. economy and points out why and how antitrust laws are being underenforced. She proposes a number of changes to begin to correct the problem:
- She calls on Congress to approximately double the budgets of the Antitrust Division of the Justice Department and the Federal Trade Commission to allow for greater enforcement activities, noting that resources for enforcement have declined significantly since 2000, that the number of enforcement actions has declined, and that firms have been able to raise prices above marginal costs with greater frequency, signaling noncompetitive markets.
- She urges the appointment of leaders of the two enforcement agencies who are prepared to use existing authority to toughen enforcement of the antitrust laws and bring challenging cases to the courts.
- She calls on Congress to reform antitrust statutes to guide the courts more closely and thus deter and prevent anticompetitive conduct more effectively, pointing to increasingly pro-business court decisions based on loose interpretations of existing law. Such changes would:
- Overturn Supreme Court precedent that has permitted anticompetitive behavior on a large scale
- Prohibit courts from avoiding examination of the evidence in a case and just assuming that a market is or will become competitive
- Create simple rules (presumptions) that deter practices that, based on existing evidence, are likely to be anticompetitive
- Clarify that antitrust violations can result in not only higher prices but also reduced quality, harm to innovation, lower wages, and elimination of potential competition
- She urges creation of a new federal agency to regulate digital businesses that could take such actions as establishing standards for a competitive digital marketplace and considering whether consumers should be able to coordinate their use of social media applications or commerce websites (known as interoperability).
At the Equitable Growth event, Scott Morton decried the inability or unwillingness of federal judges to consider empirical economic evidence in their antitrust decision-making rather than relying solely on what she considers to be outdated antitrust theory and legal interpretations.
“We know a lot more about how markets work,” she said. “That progress has not translated into the courts, so not only are we enforcing less because of the push to make the judiciary believe that antitrust enforcement is not a good idea, but also we’re not giving courts the tools to enforce well, or when we give the courts those tools, they’re rejecting them and saying they’re too hard, we can’t do economics … Then, you’re throwing darts rather than using scientific tools to figure out whether consumers will be harmed.”
She said one possible reason for judges finding it too difficult to use economic analysis is that most do not get a lot of antitrust cases because of the randomness of how judges are selected for cases. She suggested the creation of a specialized trial court, made up of judges with some economic expertise, to hear cases brought under the federal antitrust laws.
To learn more about Scott Morton’s research, see the following video:
Heather Boushey noted on several occasions the reliance of policy proposals on newly available data, as well as the need for more going forward. In her Vision 2020 essay, “New measurement for a new economy,” she argues for the importance of new metrics in an age of inequality to show whether the U.S. economy is delivering benefits for all Americans. She points to GDP 2.0, an Equitable Growth initiative that urges policymakers to use data to show how the benefits of economic growth are distributed up and down the income ladder.
At the book release event, she also made a connection between data and the other issues discussed by panelists. “You can only analyze things for which you have data and that you know,” she said, “so if you have a set of policies, you know whether or not they were effective. But you don’t know anything about the policies that don’t exist or trends that you aren’t tracking. And so these questions about what kinds of data government should be creating, what kinds of data we could be using from the private sector, are imperative not just for evaluating failures of current policies but for knowing more, which is something that we really want to focus on a lot at Equitable Growth.”
Equitable Growth plans to distribute Vision 2020 to policymakers and others in the hope that its 21 essays can both contribute to the current policy debate and spur action on these critical issues in the coming months and years.
Brad DeLong: Worthy reads on equitable growth, February 15-21, 2020
Worthy reads from Equitable Growth:
- If you are in Washington, D.C. this event is definitely a thing to go to: “EconCon 2020,” an Equitable Growth co-sponsored “convening that brings together organizers, campaign professionals, researchers, experts, communicators, and advocates from across the country … Attendees will build connections, discuss pressing issues of the day, plan for the future, and learn how to fit a wide range of policy debates into a coherent progressive economic worldview. Together, and by using every channel available, we will be able to advance an economic vision that delivers shared, sustainable growth and true prosperity for all.”
- Watch Heather Boushey at The New School presenting her “Unbound: How Inequality Constricts…,” which I thought went very well.
- An excellent column from Claudia Sahm, “When will everyone who wants to work have a job in the United States?,” in which she writes: “Ayanna Pressley (D-MA) prefaced her questions directed to Federal Reserve Chair Jerome Powell at last week’s semiannual Humphrey-Hawkins congressional hearings with a history of the full employment mandate … President Franklin Delano Roosevelt called for a Second Bill of Rights, including a right to a “useful and financially rewarding job.” Supreme Court Justice Thurgood Marshall argued that the “right to a job” was secured by the 14th Amendment. Martin Luther King Jr. called for a job to all “who want to work and are able to work. After Dr. King’s assassination, Coretta Scott King carried on fight for the full employment mandate. She attended the signing of the Humphrey-Hawkins Act in 1978, and the reason why Powell was there to testify. Rep. Pressley then asked Powell, ‘Yes or no, given persistent concerns about inflation, do you believe the Federal Reserve can achieve full employment?’ Powell began by thanking her for the history, which he said he “did not know.’”
Worthy reads not from Equitable Growth:
- The manufacturing-sector recession during Trump’s term in office has been seriously underreported. It is a natural consequence of his macroeconomic policies: tax cuts—even (or is it especially?) those sold as boosting incentives to invest—wind up raising the value of the dollar and putting U.S. manufacturing under additional heavy import pressure. So it has been under Trump. Read Joe Ragazzo, “There’s No Resurgence In American Manufacturing. It’s A Myth.,” in which he writes: “By October of last year, U.S. manufacturing had seen two consecutive quarters of contraction. The sector shed 5,000 jobs in December and 12,000 jobs in January. In December, the Institute of Supply Management’s manufacturing index displayed the fastest rate of contraction since June 2009. And although the ISM suggests an uptick may be on the horizon, the sector still lags behind most others … Unlike most sectors, manufacturing is one in which Trump has taken direct action in the form of tariffs and despite his righteous, self-congratulatory bluster, they have likely amounted to a net decrease in employment … One could argue—and pundits do—that manufacturing is the symbolic foundation of the blue-collar support Trump supposedly has. Trump loves the working people, they say … It’s all nonsense. This administration’s policies have hurt manufacturing and continue to do so.”
- This is a very smart loopback on Trump trade policy. Read Brad W. Setser, “Lessons From Phase One of the Trade War With China,” in which he writes: “It is now possible look back at how China decided to respond to Trump’s tariff pressure. China never was prepared—it seems from the outside—to negotiate on China 2025 or the subsidies and procurement preferences at the center of its industrial policies … China views these programs as central to its efforts to upgrade its own technological capabilities and assure its future growth. At the same time, China’s determination to preserve an import-substituting industrial strategy almost guarantees future trade conflict. The means China uses to support its technological development are at odds with those employed by its large-economy peers and assure that any Chinese achievements can credibly be attributed to unfair (though not necessarily WTO illegal) practices. And, well, China’s vision of technological independence likely implies that over time its imports of advanced manufactures from the rest of the world will fall. And in a world where China doesn’t import (much), some of its trade partners may start to wonder why they keep their markets open to China and Chinese-made goods. But these trends won’t play out over the next year—Boeing has bigger problems right now than the C919, China doesn’t yet have indigenous manufacturer of jet engines, China’s efforts to build an indigenous semiconductor industry aren’t going to have a huge impact on its 2020 imports, and Germany’s machine tools haven’t yet been reversed engineered out of the Chinese market. China was able to use its currency to buffer the impact of the trade war without ever losing control—and without burning through a lot of reserves … China did not try to use its Treasuries as a weapon … China didn’t target U.S. manufactured exports in a big way … China did target American agricultural and energy exports, with mixed success.”
- Williams Janeway alerts us to industrial policy and venture capital in seriously historical perspective in “The Making of the Digital Revolution,” in which he writes: “The American VC industry has been the subject of academic analysis for 30 years now. But particularly over the past decade, this scholarship has become more objective and authoritative. Unlike in many other areas of finance or wealth management, U.S. venture capitalists’ investment performance can be examined through data provided by their own investors; it is not self-reported by the VC funds themselves. Such an examination reveals three basic facts about the industry. First, VC returns are highly skewed, with a small number of funds generating most of the excess returns relative to publicly available liquid investments. Second, there is persistence in VC returns, as opposed to the randomness one sees among investors in publicly traded financial assets. The performance of a VC fund’s first investment “predicts” the performance of its next, such that a small number of firms are responsible for all of the outperformance. Lastly, VC funds have concentrated their investing activities and overwhelmingly earned their returns in just two sectors of the economy: information technology and biomedical technology. That last fact, of course, corresponds with the leading role played by the state. In no other sectors of science and technology have political leaders crafted a legitimizing mission for such high-risk investments with such enormous potential returns.”
Weekend reading: Vision 2020 release edition
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
Equitable Growth this week released a book of 21 essays with innovative, evidence-based, and concrete ideas to shape the policy debate throughout this election cycle and for the next administration. The book, titled Vision 2020: Evidence for a Stronger Economy, covers a wide range of economic issues—including taxes, macroeconomics, racial and environmental justice, labor market reform, and antitrust policies—and is written by leading voices from academia, building on our conference last year of the same name. These ideas are needed now, more than ever before, due to the widespread and deep-rooted inequality that is present across our economy and society. Repairing the damage inflicted by this inequality will require a complete rethinking about how markets and government function, as well as bold ideas for ways to reimagine an economy that works for everyone, not just the wealthy few. This is likely to be the defining challenge of our time, and we hope that policymakers and leaders in the United States will be inspired to act by the suggestions presented in Vision 2020.
When will everyone who wants to work have a job in the United States, asks Claudia Sahm in her most recent column covering the Federal Reserve. Sahm examines the Fed’s mandate of full employment, which was under scrutiny this week during the semiannual Humphrey-Hawkins congressional hearings, where Fed Chair Jerome Powell testified. Despite the low rates of unemployment, questions remain about the Fed’s role in ensuring that all Americans who want to work can find a job that provides sufficient work hours, as evidence suggests that many people in the United States are not currently fully employed. Sahm reviews the history of the Fed’s “full employment” mandate, racial disparities in employment statistics, the role of inequality, and the Fed’s track record in this area over the past few years.
Links from around the web
Transparency about salaries helps to create more equitable workplace environments, especially for women and minorities, writes Susan Dominus for The New York Times. So, why is there so much secrecy around what we earn? Historically, employers have made concerted efforts to limit the discussion about pay within the office because it can be used against them in myriad ways, from discrimination lawsuits to union negotiations. But legally, thanks to the National Labor Relations Act of 1935, all workers are allowed to share salary information without fear of reprisal or being fired. And recently, almost 20 states (including the District of Columbia) have passed laws prohibiting punishment of employees for discussing their pay—yet, Dominus reports, recent studies show that two-thirds of private-sector employees are prohibited (either formally or informally) from doing so. The taboo surrounding salary sharing—and studies that show that pay transparency can increase worker unhappiness depending on where they are in the pay scale—may be to blame.
Kickstarter employees became the first group of big-tech workers to unionize, voting to form a union with the Office of Professional Employees International Union, reports Lauren Kaori Gurley for Vice. The decision to unionize comes during a period of growing labor organizing in the tech industry around issues from sexual harassment to carbon emissions. In fact, from 2017 to 2019, “the number of protest actions led by tech workers nearly tripled,” writes Gurley. While Kickstarter since its founding in 2009 has tried to distinguish itself from other big tech companies, the unionization sends a strong message to other tech workers across the industry.
The United States has been measuring the percentage of its population living in poverty the same way since 1963, writes Jeff Spross for The Week—and, he continues, that way in which we define poverty “is a conceptual trainwreck.” Not only has the measurement tool not been updated in nearly six decades, it is also based on a logic that barely makes sense. Spross goes through the history of the Official Poverty Measure, the more-recent release of the Supplemental Poverty Measure to attempt (quite badly) to address some of the shortcomings of the OPM, and the differences between how each looks at poverty. Ultimately, he argues, there is no silver bullet when it comes to measure poverty because how we define poverty “is an inescapably political question, and an inescapably moral one.”
Friday Figure
Figure is from Equitable Growth’s “When will everyone who wants to work have a job in the United States?” by Claudia Sahm.
When will everyone who wants to work have a job in the United States?
Rep. Ayanna Pressley (D-MA) prefaced her questions directed to Federal Reserve Chair Jerome Powell at last week’s semiannual Humphrey-Hawkins congressional hearings with a history of the full employment mandate. In her remarks, she noted that:
- In 1944, President Franklin Delano Roosevelt called for a Second Bill of Rights, including a right to a “useful and financially rewarding job.”
- Supreme Court Justice Thurgood Marshall argued that the “right to a job” was secured by the 14th Amendment.
- Martin Luther King Jr. called for a job to all “who want to work and are able to work.” She underscored that the March on Washington for Jobs and Freedom was a march for “economic justice.”
- After Dr. King’s assassination, Coretta Scott King carried on fight for the full employment mandate. She attended the signing of the Humphrey-Hawkins Act in 1978, and the reason why Powell was there to testify.
Rep. Pressley then asked Powell, “Yes or no, given persistent concerns about inflation, do you believe the Federal Reserve can achieve full employment?”
Powell began by thanking her for the history, which he said he “did not know.” To her question, he said, “[Full employment] that’s our goal. We will never accomplish our goal. We certainly have made some progress.” His reply is notable for its honesty and troubling for its pessimism. Congress gave the Federal Reserve its dual mandate of maximum employment and stable prices. Fed officials remain confident they will achieve their desired inflation target of 2 percent, so why give up on full employment?
Today, with the national unemployment rate at a half-century low of 3.6 percent, policymakers and the American public should reflect on the history of full employment and what it means to the well-being of families. The Federal Reserve has been repeatedly surprised over the course of the current economic expansion by how much more the U.S. labor market could strengthen. The national unemployment rate is now 0.5 percentage point below the Fed’s longer-run estimate that they made in December 2015. One-half of a percentage point may sound like a small difference, but it translates into 2 million more people with jobs today.
In addition, the official unemployment rate likely overstates how close we are to full employment. In a recent survey, 1 in 10 adults said they were not working and wanted to work. That rate is more than twice the official unemployment rate. The discrepancy is explained by adults who have not applied for a job in the past year. The official unemployment rate is only out of the people who are at work or searching for work. It does not include people who have been on the sidelines for so long that they have given up on finding a job. What’s more, another 2 in 10 adults were working but said they wanted to work more hours.
Taken together, these findings suggest that many people are not fully employed. During his testimony, the Fed Chair was correct when he pointed to recent progress in the labor market, which is definitely encouraging, yet the dismissals by Powell and his colleagues at the Federal Reserve at what more they could achieve on the employment front is not.
The fight for full employment rose out of the civil rights movement. Many decades later, black people remain considerably further from full employment than white people. At every level of education, African Americans are much more likely to say that they want to work more. This combines those who want a job and those who want more hours. Notably, black people with a bachelor’s degree or more are as likely as white people with a high school degree or less to want more work. It is impossible to say the U.S. economy has attained full employment or economic justice. (See Figure 1.)
Figure 1
The Federal Reserve recognizes these racial disparities, as well as other dimensions of economic inequality. In 2019, Powell spoke at a town hall meeting with teachers. He told them, “We want prosperity to be widely shared. We need policies to make that happen.”
That’s why the Federal Reserve and other parts of the government have their work cut out for them. Wealth and income inequality is high, and is rising. Households with incomes in the top 1 percent own almost $30 trillion dollars in wealth. Their wealth is nearly as much as the wealth owned by the bottom 80 percent of households by income. Eighty times as many households, including the middle class, have wealth on par with the top 1 percent of income earners. These massive differences in wealth have risen since the Great Recession and show no signs of abating. (See Figure 2.)
Figure 2
Clearly, the Federal Reserve alone cannot deliver shared prosperity. Fiscal policy is equally important. Even so, monetary policy can support the ongoing economic expansion and the gains in the labor income. Full employment will not deliver wealth equality without other government policies. But the Federal Reserve has a mandate from Congress to do its part and must remain dedicated to making sure anyone who wants to work and is able to do so has work.
Unfortunately, the track record of the Federal Reserve during the current expansion does not inspire confidence. At the Humphrey-Hawkins hearings 4 years ago, the national unemployment rate was 4.9 percent. That rate equaled the median of estimates at that time by the members of the Federal Open Market Committee of the unemployment rate’s longer-run normal level. That alignment implied that the unemployment rate was at or near the level below which the Federal Reserve believed inflation would begin to rise. They were wrong: inflation did not increase, even as the unemployment rate declined more.
Moreover, the FOMC members’ perception of a strong labor market then justified their decision to increase the federal funds rate in December 2015. It was the first time the Fed had raised rates since the financial crisis in 2008. We know today that the unemployment rate could go much lower without inflation reaching the 2 percent target set by the Federal Reserve.
Rep. Pressley in last week’s congressional hearings pressed Powell on that decision to raise rates in 2015 and the Fed’s underestimation of the strength of the U.S. labor market. Powell made clear that he was among the officials who had voted to raise rates. He was open about the mistakes of the past, adding that “hindsight is 20/20.” As he said, policymakers must make decisions with the information that they have at the time.
Even so, the Federal Reserve has not delivered on either side of its dual mandate—inflation or employment—for more than a decade. Given the data available today on its policy decisions, it seems like Powell is right, and we never will reach full employment.
Equitable Growth introduces book of innovative policy ideas for 2020
The Washington Center for Equitable Growth today is publishing a collection of 21 essays, with innovative, evidence-based, and concrete policy ideas to shape the 2020 policy debate. The essays, which will be introduced at an event in Washington, DC, cover a wide range of economic issues, including taxes, macroeconomics, racial and environmental justice, labor market reform, and antitrust policies.
The new book, Vision 2020: Evidence for a Stronger Economy, builds on last fall’s Equitable Growth conference of the same name and features leading voices from academia tackling the most pressing economic issues facing Americans today.
Recent transformative shifts in economic thinking illustrate how inequality obstructs, subverts, and distorts broadly shared economic growth. Undoing the economic damage caused by inequality and building the structures and institutions necessary to chart a new path will require systemic reforms in how markets and government work. Vision 2020: Evidence for a Stronger Economy offers some of the most promising, evidence-backed ideas for how to do just that.
At the release event, three book contributors—Robynn Cox of the University of Southern California, Susan Lambert of the University of Chicago, and Fiona Scott Morton of Yale University—will speak with Equitable Growth President and CEO Heather Boushey about their proposals.
Cox’s essay, “Overcoming social exclusion: Addressing race and criminal justice policy in the United States,” questions the idea of dealing with economic inequality through criminal justice reform, arguing instead for a widespread audit of current federal crime-control policies and funding to determine what needs to be done to end mass incarceration and repair the justice system.
Lambert’s contribution, “Fair work schedules for the U.S. economy and society: What’s reasonable, feasible, and effective,” addresses solutions to the problem of job schedule instability, which makes it difficult for many low-income workers to arrange childcare and predict their earnings.
Scott Morton’s essay, “Reforming U.S. antitrust enforcement and competition policy,” lays out the reasons for underenforcement of antitrust laws and proposes funding, personnel, and legislative changes to correct the problem.
Boushey’s essay, “New measurement for a new economy,” examines why it’s important in an age of inequality for policymakers to craft and make use of new metrics that show them and the public how the U.S. economy delivers for all Americans. What’s needed, she says, is GDP2.0 as an absolutely essential component of a policy agenda.
Reimagining an economy that works for all—providing good jobs and opportunities and rebuilding economic and political power for people and communities across the nation—is the defining challenge of our time. Equitable Growth has published Vision 2020 in the hope that the bold ideas advanced by its authors can inspire the country’s leaders to rise to that challenge.
Reforming U.S. antitrust enforcement and competition policy
This essay is part of Vision 2020: Evidence for a stronger economy, a compilation of 21 essays presenting innovative, evidence-based, and concrete ideas to shape the 2020 policy debate. The authors in the new book include preeminent economists, political scientists, and sociologists who use cutting-edge research methods to answer some of the thorniest economic questions facing policymakers today.
To read more about the Vision 2020 book and download the full collection of essays, click here.
Overview
Competitive markets deliver to consumers a variety of benefits: higher productivity, lower prices, better quality products, and more innovation. Yet firms have a financial incentive to restrain competition in order to obtain monopoly profits. There are three main harmful methods of limiting competition: colluding with rivals in a market, merging with rivals or potential rivals, and using anticompetitive techniques to exclude existing or potential entrants.
U.S. antitrust laws are designed to prevent these behaviors by making price-fixing, bid-rigging, and similar behavior illegal, requiring government review of mergers to prevent those that lessen competition, and prohibiting anticompetitive conduct by an incumbent with market power that tends to exclude entrants and rivals. Unfortunately, over the past few decades, these laws have not been operating in a way that generates and preserves vigorous competition in U.S. markets.
It is well understood that market power decreases innovation, productivity, and the efficient use of resources. Market power, however, also contributes to growing inequality. Shareholders and senior executives who benefit from increased market power through higher salaries and increased stock prices are disproportionately wealthier than consumers, on average. Furthermore, consumers, suppliers, and workers may be harmed by paying higher prices for monopoly products or services and receiving lower compensation for the products and services (inputs or wages) they supply to monopsonists (buyers with market power).1
Consumption, by contrast, is not nearly so concentrated. Joshua Gans at the University of Toronto’s Rotman School of Management and his co-authors report that the consumption of the top 20 percent of the wealth distribution in the United States is approximately equal to that of the bottom 60 percent, but their equity holdings are 13 times larger. Thus, if a dollar of monopoly profit is transferred to lower prices, most of that dollar moves from benefitting the top 10 percent through the value of their stock or dividends to instead benefitting the bottom 90 percent through lower costs of purchases.
Therefore, antitrust enforcement redistributes wealth without incurring the traditional shadow costs arising from taxation and, indeed, is an actively beneficial form of redistribution for the economy.2 Because antitrust enforcement both redistributes income and wealth to the bottom 90 percent of the population, as well as increases efficiency, it should be the first choice of policymakers concerned with equity. The standard for anticompetitive harm that courts use today is the protection of consumer welfare—meaning price, quality, and innovation, now and in the future. Antitrust enforcement using the best available economic tools—developed, in some cases, decades ago—generates the evidence needed to show where such anticompetitive conduct is present.
The underenforcement described below is the fault neither of this standard nor of the economic tools themselves—though they could, of course, be better. The antitrust underenforcement we see today is primarily the result of decisions made over the past 40 years in the courts.
The four policies I recommend to reverse this harmful trend are:
- Dramatically increase the budgets of two federal antitrust agencies, the Federal Trade Commission and the Antitrust Division of the U.S. Department of Justice, which would be less expensive than it might appear because the two agencies collect disgorgement and restitution awards that flow back to consumers.
- Appoint leaders of these two agencies who are committed to using the best tools available to reverse the decline in competition. Aggressive but appropriate enforcement will either lead to good results or will identify failures in the law or by the judiciary to protect competition and consumers.
- Support and pass new legislation so that Congress can make it clear to the courts how it would like federal antitrust laws to be enforced and require courts to adopt up-to-date economic learning.
- Create a new “Digital Authority” to enforce privacy laws, protect digital identities and consumer data from being monopolized by private firms with market power, and create baseline conditions conducive to competition in digital marketplaces.
This essay will first address the “hot” topics in antitrust today, such as technology markets and digital platforms, as well as important everyday markets such as agriculture, transport, and pharmaceutical products, and then turn to my recommended reforms.
Market power has increased
The evidence for the failure of current U.S. antitrust policy is detailed in my report from May 2019 titled “Modern U.S. antitrust theory and evidence amid rising concerns of market power and its effects,” and its accompanying database.3 Economic evidence of rising market power comes from large samples of firms and industries. One widely discussed study of all publicly traded firms finds that markups (the difference between the price charged to a consumer and the cost to make an additional unit) have risen sharply since 1990 among firms in the top half of the markup distribution.4 Macroeconomists have further documented a declining share of national incoming going to workers and a rising share going to profit.5 New theories whose empirical implications are only now being explored also are possible contributors to rising market power. For instance, the huge growth in overlapping equity ownership of rival firms by diversified financial investors over the past four decades has plausibly led to less aggressive competition in many industries.6
Still more evidence of market power comes from labor markets—in this case monopsony power, which is exercised by a buyer with market power (such as an employer) to pay less for its inputs (such as workers). Because workers have specialized skills and are often geographically constrained, monopsony power is common. Recent studies find that employers have monopsony power over college professors and nurses.7 Wages for nurses may stagnate after hospital mergers for this reason. The extensive use of noncompete agreements in employment contracts involving low-wage fast-food workers and the no-poach agreements between a number of high-tech firms over software engineers and between rail equipment suppliers over their workers, provide additional examples of anticompetitive conduct that harms workers.8
Evidence that antitrust laws are falling short is plentiful. Many cartels go undiscovered, and tacit collusion is probably even more prevalent because it is harder for antitrust enforcers to prosecute and deter.9 Anticompetitive horizontal mergers (between rivals) appear to be underdeterred.10 A variety of clever strategies used by incumbents to exclude entrants, either by purchasing them when they are nascent or using tactics to confine them to a less threatening niche or forcing them to exit have been successfully deployed in recent years, often when antitrust enforcement is late or absent.11
Each of these sources of concern can be critiqued, but together they make a compelling case. Some of the evidence may have benign explanations in part, such as the growing importance of fixed costs, for example, when creating software or pharmaceuticals that leads naturally to higher markups, or the increasing benefit of being on the same platform with other users (known as “network effects” in the case of a social media site). Firms in industries with high fixed costs or large network externalities may exhibit high profits and productivity and low labor shares, and may earn high profits because they had a good idea early and executed well, thereby getting adoption from many consumers.12 Nonetheless, the overall picture is clear that market power has been growing in the United States for decades. Moreover, even where the explanation for growing market power is benign, we must ensure that companies do not use anticompetitive tactics to protect their position.
Firms with market power need not compete aggressively to sell their products, so they tend to raise prices, reduce quality, and/or innovate less. Market power can also contribute to slowed economic growth by, for example, suppressing productivity increases.13 Theoretical and empirical economic studies convincingly show that innovation is harmed by anticompetitive conduct.14
This is why antitrust enforcement is such a terrific policy tool to strengthen competition—it does not come with an efficiency downside, as do most policies that redistribute income. Policies that enhance competition are unambiguously beneficial for efficiency, as well as inclusive prosperity, with minor qualifications.15 Other policies for addressing inequality, in particular, such as labor market and tax policies, may create disincentives or allocative efficiency losses that must be weighed against their distributional benefits. Policies to enhance competition, by contrast, offer what is close to a free lunch.16
An agenda to confront market power
An antitrust enforcement policy agenda to confront rising market power has four parts: increase enforcement resources; appoint agency leaders committed to using the best tools to combat the decline in competition; reform statutes to deter and prevent anticompetitive conduct more effectively; and use regulatory tools to foster competition. Let’s look at each of these policy components in turn.
Increase resources for enforcement
The resources expended on enforcing the antitrust laws in the United States are lower as a proportion of Gross Domestic Product than they were for most of the mid-1900s and have experienced a notable decline since 2000. Interestingly, this decline coincides with a rise in markups by firms, an increase in U.S. Supreme Court opinions protecting monopolists, and increasing policies that benefit incumbents. These patterns are consistent with the interests that favor corporate profits over consumers and those firms gaining more control of the political process to achieve all of these goals.
Approximately doubling the budget of both federal antitrust agencies would restore resources to a level where the agencies would be able to combat much more of the anticompetitive conduct present in the economy. In increasing resources, Congress should also consider whether it should provide funds to bolster the enforcement efforts of state attorneys general.
Appoint leaders committed to using the best tools available to enforce competition rules
Effective antitrust enforcement requires the appointment of enforcers who will vigorously protect consumers using modern economic tools. This will inevitably require litigation in the face of hostile legal rules, and possibly losses. Yet aggressive but appropriate enforcement will either lead to good results or identify failures by the judiciary to protect competition and consumers.
Leadership at the two agencies that is committed to reversing the decline in competition could take full advantage of existing antitrust laws. The game theory revolution (creation of tools to understand strategic interactions) in microeconomics beginning in the 1980s and the development of empirical techniques from the 1990s onward provide underutilized tools to identify and quantify harmful practices that can be attacked under the current antitrust rules.17
The enforcement agencies already use econometric methods, sophisticated simulations, bargaining theory, and other tools to identify harmful conduct and choose which cases to bring to court, yet in some instances, courts have trouble understanding these tools and resist accepting them as state of the art. Too often, court decisions, such as in the merger of AT&T Inc. and Time Warner Inc., reject modern economic ideas.18 Rather than change strategies, enforcers must continue to rely on the best arguments and evidence even if there is a chance that in the short run a court will not understand. Sound economics is critical to this approach: It shows where there is harm to consumers and explains how that conduct is harming consumers. Over time, the economic arguments can educate all of society, both the public and the courts. This is not an easy task but generates broad-based benefits.
The history of pharmaceutical pay-for-delay litigation amounts to a long string of losses in court for the Federal Trade Commission against drugmakers, eventually followed by success.19 This history shows that the agencies are capable of convincing courts to change their views when they rely on sound economics and persevere. Moreover, publicly demonstrating the harm through an ultimately unsuccessful court challenge can clarify to the public and to Congress when a court is ideologically opposed to protecting consumers from that harm.
One of today’s significant challenges is convincing courts to do more to protect potential competition from anticompetitive conduct.20 When markets become more concentrated because of network effects or economies of scale, the primary locus of competition shifts from competition in the market to competition for the market. In that setting, consumers rely on competitors who are about to enter, could potentially enter, or who are nascent competitors in the market to put pressure on oligopolists or dominant firms, making potential competition a critical source of consumer welfare.
While antitrust enforcers have had some success in attacking conduct by a monopolist that excluded nascent competition, as in high-profile litigation involving Microsoft Corp. two decades ago, doing so is particularly challenging when the excluded product poses a future competitive threat but has not yet had substantial marketplace success.21 The next leaders at the antitrust agencies must understand the need to bring cutting-edge cases to protect potential competition even in the face of legal hurdles.
Reform antitrust statutes to deter and prevent anticompetitive conduct more effectively
Increasing resources and more aggressive enforcement alone will not solve the problem. Judicial decisions interpreting the antitrust laws have significantly crippled antitrust enforcement. These decisions reflect, at best, an archaic economic understanding of competition or, at worst, simply bad economic reasoning.
Under a series of U.S. Supreme Court decisions over the past decade, for example, it is doubtful that the government could have successfully broken up AT&T’s phone monopoly in the 1980s. That break up, arguably the government’s most successful monopolization prosecution, focused on AT&T’s refusal to allow MCI, a long-distance competitor, to connect its long-distance service to local phone monopolies. In Verizon Communications v. Trinko, the Supreme Court dramatically expanded a monopolists’ ability to avoid antitrust liability when it refuses to deal with competitor or potential competitor, and also implied that antitrust concerns are subordinate in an industry subjected to the regulation.22 More recently, the Supreme Court misapplied basic economic reasoning in a case that, under some interpretations, has the potential to almost exempt technology platforms from antitrust enforcement: Ohio v. American Express.23 Since technology platforms comprise an ever-increasing share of economic activity, this situation is of grave concern.24
Even where the antitrust plaintiffs have been successful, the difficulty and cost of those successes suggest systematic underweighting of the benefits of competition and deference to the desire of the corporation for increased market power. The government’s long battles over stopping pay-for-delay deals and anticompetitive hospital mergers are notable examples of this misalignment, as is the approval by the government of the Sprint-T-mobile merger. In all of these cases, the corporations did not seek that market power on the merits, but through regulation (Trinko or state-supervised hospital mergers), exclusion (pay for delay and American Express), or merger (AT&T-TimeWarner or Sprint-T-mobile).
Despite the government’s success in some merger litigation, this success only occurs in transactions that most clearly violate the law.25 The fact that the two antitrust agencies must litigate cases that are clearly anticompetitive—rather than the parties not even considering the deal in the first place or abandoning it after the government makes its concerns known—speaks to the limitations of current antitrust legal doctrine.
It would likely take decades to reverse this body of accumulated legal doctrine, even if every future case that was litigated were decided with perfect accuracy. Fortunately, Congress is the final arbiter on competition law and can change it to reflect the desire of society for competitive markets. Congress has not substantively amended those laws in more than 60 years. A broad foundation of economic research supports retooling our antitrust laws for the 21st century and restoring the vigor that was originally intended. Although legislation can take many forms, successful antitrust reform legislation should accomplish four goals:
- Overturn Supreme Court precedent that has inoculated exclusionary conduct from antitrust scrutiny even when it harms competition by eliminating or harming competitors
- Prohibit courts from assuming that some aspect of a market is competitive or will become competitive rather than assessing the evidence in the case
- Create simple rules (known as presumptions) that will lower the resource cost of enforcement for conduct and acquisitions that economic research shows are likely to raise competitive problems
- Clarify that the antitrust laws are designed to protect competition that may manifest itself across a broad range of outcomes such as higher prices, reduced quality, harm to innovation, lower input prices, and elimination of potential competition
Lastly, Congress could consider two ways to raise the expertise level of judges. One is to require the court to hire its own economic expert in an antitrust case, paid by the parties. The neutral expert’s task would be to help the court understand the economics presented by each side. A second option is to create a specialized trial court to hear cases brought under the federal antitrust laws.26 Doing so would allow antitrust cases to be heard by judges with experience in evaluating complex economic evidence. A sophisticated judge would encourage litigants to rely on the best economic arguments and modern economic tools applied to the facts in the case, improving the accuracy of judicial decisions and discouraging judicial acceptance of the erroneous general economic assumptions that have supported relaxed antitrust enforcement.27 A term on such a specialized court should be of relatively short duration to limit the possibility of capture or entrenchment.
Download FileReforming U.S. antitrust enforcement and competition policy
Complementary regulation that promotes competition: Create a federal digital authority
There is a real need for federal agency to regulate digital businesses. This new agency could create a baseline level of competition in an area that lacks it. Regulations under its purview could enhance competition by, for example, facilitating digital-data portability that would allow a consumer to take her own data in a usable format from one provider to a competitor (such as moving purchase history from Amazon.com to Jet.com).
A new agency also could define and regulate “interoperability” in the digital arena; for example, a Verizon phone can call an AT&T phone because they are interoperable. A digital authority could ensure social media sites were also interoperable so that a person who uses Snap, for example, could follow her friends who post content on Instagram or another site. And it could consider the creation of open standards that promote competition, such as a standard for micropayments. These payments in fractions of a cent cannot practically be made today because the transaction cost is higher than the amount being paid. But micropayments may be critical in compensating consumers for their attention, may be an important dimension of competition between platforms, and may aggregate to significant benefit to consumers. By creating one system, a regulator could enable price competition in attention markets.
In addition, this new regulator could be tasked with enforcing somewhat stricter antitrust laws for those digital platforms or sectors that Congress felt required additional scrutiny and speed, or where competition was particularly valuable for society. This would allow a faster, more specialized agency to protect small entrants into digital marketplaces from exclusion or discrimination by the incumbent platform. It would also allow for review of even the smallest acquisitions when those small firms are being acquired by the largest incumbents. In general, the agency could have a mandate to protect and facilitate entry to address competition problems in the digital sector.
—Fiona M. Scott Morton is the Theodore Nierenberg Professor of Economics at the Yale University School of Management. (This essay draws on ideas developed in prior work jointly with Jonathan Baker, a research professor of law at American University Washington College of Law.)
Improving competition to lower U.S. prescription drug costs
This essay is part of Vision 2020: Evidence for a stronger economy, a compilation of 21 essays presenting innovative, evidence-based, and concrete ideas to shape the 2020 policy debate. The authors in the new book include preeminent economists, political scientists, and sociologists who use cutting-edge research methods to answer some of the thorniest economic questions facing policymakers today.
To read more about the Vision 2020 book and download the full collection of essays, click here.
Prescription drugs are among the most effective and cost-effective interventions in medicine, and the drug industry plays an important role in bringing these products to market, which can require substantial resources. Yet drug prices in the United States continue to rise without a direct connection to the costs of development, which can make breakthroughs unaffordable for many patients, leading to bad clinical consequences.
Rising drug prices also are a major driver of U.S. healthcare spending, now accounting for about one-fifth of overall spending, with one private insurer reporting that 25 percent of healthcare dollars are going to prescription drugs.28 The United States spent about $476 billion on prescription drugs in 2018.29 This is an increase of about $100 billion as compared to $361 billion in spending in 2014,30 with the discovery and testing of new drugs accounting for additional tens of billions of taxpayer and private dollars.
In recent years, there have been great advances in the use of prescription medications for treating heart disease and certain types of cancer, but high prescription drug prices have threatened to limit the availability of new transformative medications such as treatments for the hepatitis C virus infection,31 new gene therapies for devastating illnesses, and decades-old products such as insulin32 and antibiotics.33 By contrast, many key pharmaceutical therapies for chronic diseases such as high blood pressure and depression can be obtained for $4 per month or less, due to a vibrant generic drug marketplace in the United States.34
In this essay, I will review the origins of high prescription drug prices in the United States, as well as various policy mechanisms that can lead to more rational spending. There are four main periods in the development process of a prescription drug:
- The discovery process leading up to approval by the U.S. Food and Drug Administration
- The brand-name-only period of market exclusivity that lasts a median of 12–14 years or more after drug approval35
- The end of market exclusivity and the transition to a competitive market with the introduction of generic drugs
- The multisource generic drug period
High drug prices are driven by a variety of factors in each of these time periods, and the policy solutions that I present in this essay vary based on when in the process the drug currently sits. These policy recommendations, in their entirety, would dramatically lower spending on prescription drugs while ensuring continued funding for true innovation.
Drug discovery period
Government-funded research laboratories and those based in nonprofit academic centers are the origin of most key fundamental discoveries on which new drugs are based and are frequently cited in the research underlying new drugs.36 This support is derived from taxpayer funds through the National Institutes of Health. Whether the seminal study leading to the development of a new therapeutic approach arises through public support or in the private sector, considerable (and costly) work is then required to bring a drug to market. This is generally done within the pharmaceutical company that comes to own the intellectual property for a given compound.
Studies show the central role that public funding plays in the discovery, development, and even clinical testing of a growing number of transformative drugs.37 As a result, there is concern that the public funds this key research that generates innovation while manufacturers then obtain exclusive rights to the products and charge high prices to the very taxpayers who funded the research in the first place.
More government and academic institutions supported by public funding have sought to patent and license the discoveries they make that are relevant to drug discovery. In a recent study, my colleagues and I examined all new drugs—excluding biologics, or those drugs produced from living organisms, as opposed to drugs produced through chemical synthesis—approved in the United States from 2008–2017 and found that publicly supported research in nonprofit institutions or spin-off companies that had their origins in public-funded research made important late-stage intellectual contributions to at least one in four of these new drugs.38 But few such patent licenses have traditionally not had clauses that restrict manufacturers’ ability to charge excessive prices to government payers or return royalties to support future public funding of science.
Policy recommendations for the drug discovery period
One way to lower drug prices when public funding leads to patents covering approved prescription drugs would be for the National Institutes of Health to require a reasonable pricing provision in the technology transfer from the public sector to the private sector. This provision could, for example, require that the ultimate price of the product be no greater than its value-based price—a price reflecting the drug’s potential ability to improve patient outcomes over comparable interventions—as determined by independent organizations.
A less-effective version of such a clause was part of the NIH Combined Research and Development Agreement process from 1989–1995, but it was never implemented fully and ultimately was dropped under substantial lobbying pressure from the pharmaceutical industry.39
Notably, according to the Bayh-Dole Act of 1980, which established the basic rules for commercialization of technology arising from government funding, the federal government retains a license in such patents and can even “march-in” to invalidate an exclusive commercialization license if the product is not made available on “reasonable terms.” The NIH, however, does not interpret reasonable terms as applying to pricing and has never invoked the march-in provision when public interest groups have requested such a move.
In addition, few drugs have all of their patents linked to government funding because pharmaceutical manufacturers usually build a broad thicket of dozens, or hundreds, of patents around the product prior to approval. So, it is unlikely that greater reliance on the march-in provision will serve as an effective lever to reduce drug prices in all but a few cases.40
Finally, it is important for policymakers to recognize that focusing on patented technology misses the manifold ways that information and insights generated by publicly funded science get taken up by for-profit manufacturers and applied to drug discovery. Many of the policy proposals discussed subsequently in this essay can lead to more rational drug prices and are ethically justified by the publicly supported science currently serving as a primary engine of innovation for the for-profit pharmaceutical industry.
Brand-name-only period
After drugs are approved by the U.S. Food and Drug Administration, manufacturers hold patents and other exclusivities on their products to prevent direct competition. There is thus no direct competition that could help lower drug prices. Competition between brand-name drugs that treat the same conditions has not been shown to effectively lower prices, apart from a few cases. In such an environment, the most direct way to lower prices is to empower the buyers to negotiate better terms with the exclusivity-holding manufacturers. So, the best solution is to provide the U.S. government with the authority to negotiate reasonable prescription drug prices that reflect the value that the treatments provide to patients.
Currently, in the United States, brand-name manufacturers can set any price they choose during the market exclusivity period, while the buyers’ markets for prescription drugs are served by a patchwork of public and private payers with far less equivalent negotiating power.41 Medicare—the government program that covers payment for people older than 65 years of age—is forbidden by law from negotiating prices with drug manufacturers. This is despite Medicare’s ability to negotiate or set the price for every other kind of medical service it covers. This imbalance in power between the sole-source supplier and the multiple, competing buyers is made worse by various rules and restrictions on the payers and their abilities to decline to cover certain drugs.
Medicare Part B, for example, accepts payment rates for FDA-approved drugs based on their average sales price, and Medicare Part D plans must cover at least two drugs in each class in addition to substantially all drugs in six “protected classes” (including cancer and HIV).42 But Medicare cannot negotiate the price of these mandatory drugs on behalf of the individual plans that implement coverage. Similarly, Medicaid programs, which cover care for the poor and disabled, are required to list virtually all FDA-approved drugs on their formularies.43
In the private sector, insurers can refuse to pay for particularly costly drugs that have equivalently less expensive alternatives, but they may also impose high co-payments to discourage patient demand for such lower-value medications. The latter approach is counteracted by manufacturer coupons to patients and patient assistance programs.44 For these and other reasons, commercial payers receive lower rebates, on average, than Medicare.
Policy recommendations for the brand-name-only period
During this period, the most direct way to address excessive drug prices would be for the government to negotiate the price of drugs. Numerous other countries have health technology assessment organizations that assess a newly approved drug’s clinical value and help determine what a fair price would be based on how well it is expected to perform against other available treatments.45 These publicly funded organizations gather data on the effectiveness, safety, and cost of new drugs, compared with other interventions, to assess whether the payer should cover the price.
This does not occur in the United States, making it difficult for value-based assessments to drive medication use and cost. Currently, several smaller public and private entities take on this role.46 The United States needs a similar body operating at the national government level that can make such a determination within the first year after approval; until then, manufacturers might be permitted to charge the price they believe is appropriate.47 Past legislative efforts to establish such a body have been derailed by the political process, but it would be best situated within the Department of Health and Human Services and could accept information about the cost of development and cost of failure as a way of determining a rational, value-based price.
Once the price is established, price increases each year should not be able to exceed inflation, unless the manufacturer brings new evidence that changes knowledge about the drug’s value. Similarly, future technology that lowers the cost of care for the indication should lead to price declines. As a safety net for particularly essential and high-priced medications for which a negotiated price cannot be reached, the government has the authority to reimburse pharmaceutical manufacturers at a fair market-value price for use of their intellectual property (along with a reasonable royalty rate to account for the cost of failure) under Section 25 of the U.S. Code, §1498.48
During this period, brand-name pharmaceutical manufacturers spend billions of dollars annually to persuade physicians and patients to use their products, but there is a shortage of noncommercial information disseminated about drug benefits, risks, and cost effectiveness. As an alternative, we need to support independent programs designed to generate unbiased information about evidence-based management of disease and then invest in actively disseminating this educational information to physicians, so that it can translate optimally into more cost-effective prescribing.49
In addition, at present, manufacturers are limited to only actively promoting their drugs primarily for the diseases or conditions that the FDA has reviewed and approved, even though prescribing for non-FDA-approved (or “off label”) prescription drug uses can be common. Recent federal court decisions interpreting the First Amendment have extended protection of commercial speech and put these rules in jeopardy, potentially allowing manufacturers to engage in widespread promotion of off-label drug uses. Such uses often lack the same level of evidence as FDA-approved uses, and so can be potentially dangerous to patients.50 And they can be costly to the system, too.51 Thus, the FDA must reaffirm its commitment to current off-label marketing rules, which should be enforced even under the evolving commercial speech doctrine in this area.52
Transition to a competitive market period
The only type of competition that consistently and substantially lowers drug prices comes from introduction to the U.S. market of interchangeable, FDA-approved generic drugs. When the market exclusivity period ends for a given medication, generic manufacturers can enter the market and prices generally fall, reducing healthcare spending by patients and payers and promoting greater access to the drug.53
Yet brand-name manufacturers often employ product life-cycle management strategies to extend market exclusivity periods.54 This involves exploiting the interpretations of the standards for patenting under the Patent Act and seeking “secondary” patents on peripheral aspects of the drug, such as its appearance or coating, that can extend market exclusivity periods indefinitely. In one review of two HIV medications, my colleagues and I identified 108 different patents covering the products that could have extended their market exclusivity by 12 years or more.55 This practice also can be extended further to “tertiary” patents covering a drug’s delivery via a device, such as an injectable pen, a patch, or an inhaler.56
Secondary and tertiary patents also enable product-hopping strategies, in which manufacturers introduce new versions of their products with incremental changes that do not provide advancements in drug efficacy, safety, or convenience that are commensurate to the higher prices being charged. In one case, a manufacturer of an antibiotic successively changed its formulation from capsules to tablets and then altered its strength and scoring marks, allowing it to stay ahead of generic entry.57
In addition, manufacturers use various strategies to prevent the timely entry of generic drugs. These include filing Citizen Petitions with the Food and Drug Administration, restricting supplies of their product for generic manufacturers to use in bioequivalence studies, and entering into settlements with generic manufacturers seeking to challenge patents that include agreements to drop the challenge and delay or terminate its plans to market a competing generic product.
Policy recommendations during the transition to a competitive market period
There are currently some pieces of legislation being considered in Congress that try to address generic-delaying strategies in a piecemeal way, such as by making it illegal to restrict samples or requiring greater disclosure of a product’s patent landscape. Similarly, more common use of the administrative Patent Trial and Appeals Board’s patent review process—such as automatic Patent Trial and Appeals Board review at the time any drug patent is listed with the FDA—could help weed out insufficiently innovative patents.58 Congress also could change federal law and direct the Food and Drug Administration to grant interchangeability ratings to drugs that offer nonclinically significant changes.
The states also have a role to play. Regulations permitting or requiring the substitution of generic drugs for brand-name products is managed at the state level, with variation across the states. These state laws could be adapted to permit “therapeutic substitution” of drugs proven to work comparably even if they are not pharmaceutically equivalent, such as a tablet and a capsule.
Another policy solution that would help prevent secondary and tertiary patents from delaying generic entry would be to restrict a brand-name drug’s market exclusivity period to a particular time period and not permit secondary or tertiary patents—or any of the other strategies—from being able to block FDA approval of a generic version. My colleagues and I have proposed that manufacturers be restricted to the single patent for which they seek and receive Patent Term Restoration (a period of up to 5 years to account for time spent in clinical trials and FDA review), plus the 6-month patent extension manufacturers receive for testing their drugs in children. At the end of this period, generics should be permitted to enter, no matter what other patents have been obtained. The failure of a generic to enter the market should spark a formal federal investigation to determine whether some anticompetitive strategies have been used.
Multisource generic period
After a drug has lost exclusivity protection, prices may not fall if there are not enough generic manufacturers in the market.59 Similarly, older, off-patent drugs can transition from markets served by multiple manufacturers to markets served by three or fewer, allowing the remaining manufacturers more flexibility to raise prices. Such older products may not be lucrative enough for other generic manufacturers to enter the market.
Policy recommendations for the multisource generic period
In the past, long delays in generic drug approval times at the FDA have limited generic entry in these kinds of cases, but the agency has substantially accelerated review times due to increased funding from user fees starting in 2012. More resources must be invested at the FDA to ensure that there are not unnecessary delays in generic drug approval and that guidances are produced in a timely fashion for the types of studies generic manufacturers will need to complete to receive FDA approval of interchangeable products, particularly for complex small molecule products (generic versions of nonliving organic compounds) and biosimilars (competitor versions of biologic drugs).
Importation is a possible solution in cases of high prices for off-patent drugs, particularly if there are manufacturers selling these products in other similar regulatory systems around the world that, for any reason, have decided not to pursue FDA approval yet. In one study of 170 off-patent drug products being sold in the United States by three or fewer manufacturers, more than half (109, or 64 percent) had at least one manufacturer approved by a non-U.S. regulator and 32 (19 percent) had four or more.60
In these cases, a process for facilitating United States-wide imports, followed by an expedited process for formal FDA approval, could help prevent and respond to price spikes.61 Here’s just one example: Pyrimethamine—the drug used for a complication of advanced HIV that was famously subject to a 5,000 percent price increase in the U.S. market by Turing Pharmaceuticals, from $13.50 to $750 per pill—is being sold by some manufacturers for as little as $0.03 per pill.62
Another solution would be to pursue a system of government-sponsored drug manufacturing. In recent years, some private organizations have developed their own efforts at drug manufacturing, and other nonprofit drug manufacturers have emerged. A government-run manufacturing plant, as proposed in Congress in 2018, could be set up to ensure a continued supply of off-patent products that for-profit generic manufacturers have lost interest in producing.
Download FileImproving competition to lower U.S. prescription drug costs
Conclusion
There is no one single solution for reducing unnecessary spending on prescription drugs because the market changes so substantially during the course of a drug’s development and then its widespread use after FDA approval. But with sensible changes directed toward the different forces that affect the market at different times, the United States can help contain rising drug costs, better ensure that we pay for clinical value in the system—rather than whatever price drug manufacturers believe they can extract—and better ensure availability of important drugs for the patients who need them.
—Aaron S. Kesselheim is a professor of medicine at Harvard Medical School Program and the Director of the Program On Regulation, Therapeutics, And Law, or PORTAL, in the Division of Pharmacoepidemiology and Pharmacoeconomics in the Department of Medicine at Brigham and Women’s Hospital. His research is supported by Arnold Ventures, with additional support from the Engelberg Foundation and the Harvard-MIT Center for Regulatory Science.
Wage and employment implications of U.S. labor market monopsony and possible policy solutions
This essay is part of Vision 2020: Evidence for a stronger economy, a compilation of 21 essays presenting innovative, evidence-based, and concrete ideas to shape the 2020 policy debate. The authors in the new book include preeminent economists, political scientists, and sociologists who use cutting-edge research methods to answer some of the thorniest economic questions facing policymakers today.
To read more about the Vision 2020 book and download the full collection of essays, click here.
Overview
When a firm cuts wages by 5 percent, how many workers will quit in the next year? If the labor market works the same way as the market for chairs, then virtually all of the workers should leave for other firms. This is because, in a perfectly competitive market, there will always be another firm that is willing to pay the worker the value of what she produces. But ask any human resources manager or any worker, and they will tell you that it is extremely unlikely that all the workers would leave their jobs.
Recent economic research is able to quantify this: Between 10 percent and 20 percent of workers will quit. New estimates of this number—known as the elasticity of a firm’s labor supply—which rely on administrative data or innovative experiments, are arriving all the time.63
Economists have a word for this phenomenon: monopsony power. While literal monopsony power in the sense of a labor market with one employer is rare, the modern model of monopsony applies to markets where there are still many firms. The fundamental reason employers have this power is that jobs are complex transactions where the preferences of both workers and firms over job characteristics and performance are important and idiosyncratic. Because job shopping is rare and sporadic, workers don’t have many tools with which to figure out how much they will value a particular job before they take it.
A modern job in the United States is integrated in a constellation of relationships among co-workers and managers. Many workers possess skills that are specialized for particular employers and particular tasks. They also have preferences about their work environment. They may need to have a short enough commute. They may enjoy working with certain people. And they may have strong preferences about the communities in which they live.
Furthermore, searching for a job in the labor market takes time and energy. All potential job offers are not immediately observable by all workers who might accept them. Both of these facts mean that employees will only slowly respond to wage changes at their jobs. They may poke around the web for new job listings or they may ask their friends or former colleagues about possible job opportunities. None of this happens quickly, however, giving firms monopsony power over their workforces.
Monopsony power hinders wage growth for workers, which, in turn, slows consumer demand and reduces overall savings in the U.S. economy. This slows U.S. economic growth over the long term. Understanding the influence of monopsony power on the U.S. labor market is important because it helps make sense of why, from the point of view of employers, labor is often scarce. This perception often leads employers to demand policies that increase the supply of properly skilled workers, be they training programs, education, or increased migration. Some of the perceived “skills gap” may simply be because employers can’t find skilled workers at a wage they are willing to pay.
Fortunately, there are a number of policy actions that can be taken that are effectively “free lunches,” in the sense that there may be room for policymakers to increase wages without reducing employment. Other basic labor market institutions, such as unions, wage mandates, and mandated benefits may also improve workers’ welfare.
In this essay, we review the evidence for firms’ monopsony power in the U.S. labor market and explain what this means for wage growth and wage inequality. We then explain why, in a labor market where monopsony power is ubiquitous, policies that restrain firms’ wage-setting power and policies that bring workers to the bargaining table will stimulate wage growth without costing jobs. Furthermore, policies that encourage competition in the labor market—such as restricting the use of noncompete or nonsolicit agreements—are likely to help workers throughout the wage distribution.
All of these outcomes, we argue, could help ameliorate income inequality in the United States and generate more broad-based and sustained economic growth.
Economic evidence for U.S. labor market monopsony
The academic literature on monopsony—and the term itself—date back to 1933, when Joan Robinson published The Economics of Imperfect Competition.64 Mainstream mid-20th century U.S. labor economists were enthusiastic proponents of the view that laissez-faire labor markets were characterized by monopsony.65 Sometime in the late 20th century, however, this viewpoint fell out of favor, and economists started to emphasize models where wages were determined primarily by the value of an individual worker’s skill.
In recent years, research using new matched employer-employee data, which allows researchers to track workers’ careers across employers, casts doubt on the idea that workers’ wages are only determined by their individual skills. Pioneering recent research asked a simple question: Do workers’ wages depend not only on their skills but also on the identity of the firms they work at?66
One answer comes courtesy of graphs such as the one below, produced using Oregon unemployment records. Figure 1 shows that the wage gains experienced by Oregonian workers who transition from the firms paying the lowest overall wages (by quartile) to those in the highest quartile of wage payers is strongly positive and is similar to the wage decreases experienced by their counterparts who transition the other way. Figure 1 also shows that while workers do transition to higher-wage jobs more than to lower-wage jobs (as measured by the thickness of the line), there are almost as many transitions from high-wage firms to low-wage ones. (See Figure 1.)
Figure 1
This would not be true if workers’ wages depended only on their skill levels. In that case, workers’ wages would not depend on the identity of their employers. This empirical research shows that firms played an independent and significant role in determining wages. In short, the outdated “law of one price” for an individual worker is, at best, a suggestion in the labor market.
Of course, there are a variety of reasons workers at different firms may be paid different wages. There could be differences in how productive workers are at different firms or differences in working conditions. The cleanest test for the presence of firms’ monopsony power involves experimentally manipulating wages and seeing how much turnover among employees changes. What monopsony models predict is that the separations response to randomized wages is low, as it is for new recruits. That means that only some of the workers leave, and that the firm is still able to recruit new workers, though fewer of them.
The recent availability of administrative data from firms and labor market platforms, such as Amazon Mechanical Turk and Burning Glass, have made it possible to examine contexts where wages can be experimentally manipulated in “real world” labor markets. One of these studies comes from the type of labor market that would seem to be the least likely to be plagued by monopsony power: an online labor market with thousands of workers and thousands of easy-to-find employers. Economist Arindrajit Dube at the University of Massachusetts Amherst and his co-authors conducted a series of experiments on Amazon Mechanical Turk, where they asked workers who had already completed a simple task if they would like to complete a given number of additional tasks at a specific rate.67 The take-up of this offer across workers with different, randomly assigned wage offers allowed the researchers to estimate the amount of wage-setting market power held by employers posting on the platform.
The researchers found that, even in this setting, there were sufficient frictions—economic parlance for the difficulty workers face in searching for jobs—such that a 10 percent increase in the offer increased take-up by only 1 percent, on average. This means that because workers aren’t able to easily match into the best possible job option, they end up accepting lower wage offers than would be predicted in a competitive market.
Another popular research strategy to identify firms’ monopsony power focuses on documenting the extent of concentration in the labor market and then examining the impact of this concentration on wages.68 Intuitively, more concentrated markets are those in which there are fewer employers competing for workers.69 The two federal antitrust agencies, the Federal Trade Commission and the Antitrust Division of the U.S. Department of Justice, have long used the Herfindahl-Hirschman Index, or HHI, a measure of concentration in product markets when evaluating the impacts of potential mergers. Finance professor Efraim Benmelech at the Kellogg School of Management at Northwestern University and his co-authors use administrative data from the U.S. Census Bureau to calculate the level of concentration of each labor market in the United States. The researchers find an HHI level of 2,300.70
This research shows that firms, at the very least, enjoy moderately concentrated labor markets for their employees. The main antitrust agencies in the United States classify product markets as concentrated if the HHI level is more than 1,500; the cutoff for a market to be considered highly concentrated is 2,500. By this metric, many labor markets in the United States are moderately concentrated. Researchers also uniformly find a negative correlation between concentration and wages, meaning that wages are, on average, lower in more concentrated markets.71
Mergers in more concentrated product markets typically face more government scrutiny. New research by labor market economists question whether mergers in more concentrated labor markets should also face antitrust scrutiny. While some economists have found that the average merger has no impact on wages, more careful research—such as by Elena Prager at Northwestern University and Matt Schmitt at the University of California, Los Angeles—finds that mergers greatly reduced wages for workers with healthcare industry-specific skills, who have fewer outside options than workers with more general skills.72 That is, hospital mergers reduced wages for workers in more concentrated markets.
In some cases, reducing wages may even be an explicit goal of the merging firms. Recent research conducted in Denmark finds that firms there target high-wage firms for acquisition, then, after the acquisition, they fire the managers and lower workers’ wages.73 As we discuss in the final section of this chapter, scrutinizing mergers for impacts on labor market outcomes is well within the orbit of current U.S. antitrust legal doctrine and enforcement capacity.
Implications of monopsony in the U.S. labor market for wages and wage inequality
Firms with monopsony power set pay policies, taking into account that if they want to hire more workers, they have to pay higher wages. This leads to workers earning less than they produce, as well as to higher unemployment. The unemployment created by firms’ monopsony power is not a result of market power, per se, but rather firms’ inability to perfectly pay each worker the minimum amount required to get that worker to become an employee at the firm.
Because employers cannot observe each worker’s reservation wage—the minimum the firm would have to pay to get the worker to accept the job—employers pay relatively uniform wages to their employees. So, even a small degree of monopsony power—a labor supply elasticity of around 4 (meaning 40 percent of the workers leave if the firm cuts wages by 10 percent)—would imply that workers take home only about 80 percent of what they produce, with the rest accruing as profits for their employers.
These pure monopsony profits can raise the measured capital share of income, which, in the national accounts, combines pure economic profits with the returns to productive capital, as well as the wealth-to-income ratio and the ratio of market-to-book values of firms. The increase in all these measures are part of the so-called Piketty facts, named after the Paris School of Economics professor Thomas Piketty, the author of the best-selling Capital in the 21st Century.74 These facts point to the increasing importance of wealth in the economy, and a monopsonistic lens suggests that some of this rise may be due to the erosion of policies that mitigated the use of monopsony power.
And because capital income is more concentrated than labor income, these pure monopsony profits would likely increase overall income inequality as well. Yet the inequality induced by these additional profits could be offset somewhat by some high-income workers facing potentially quite high degrees of monopsony power (think software engineers, whose high levels of pay shouldn’t obscure the fact that they work for employers who have considerable market power due to concentration and anticompetitive conduct such as no-poaching agreements).
Lowering monopsony power may, in fact, raise wages for some already high-paid occupations. In the United Arab Emirates, for example, research by one of the co-authors of this essay, Suresh Naidu, and the co-authors of that paper find that weakening monopsony power raised wages the most both at the bottom and at the top of the wage distribution.75 While the overall effect of monopsony on income inequality is an open question, there are reasons to suspect monopsony is, on net, disequalizing.
Firms’ monopsony power also can contribute to racial and gender wage gaps. In fact, the original use of monopsony, first put forward by the famous 20th century economist Joan Robinson, was to explain why equally productive workers might earn different wages. In her formulation, monopsony power might lead to a gender wage gap, as employers could use “female” as a tag for less elastic labor supply, identifying workers who are less willing (or able) to leave their current jobs for better opportunities elsewhere. They could then exploit this fact to pay these workers lower wages.
There are at least three reasons women and minorities may be less elastic and thus earn lower wages. First, as in the original Robinson formulation, women, particularly married women, may face geographic constraints on their job search that men do not face. For instance, women may need to work close to their homes if childcare is not widely accessible.
Second, the presence of discriminatory employers in the U.S. labor market can lead to a wage gap—even at the firms that do not discriminate. This is because the presence of discriminatory employers affects the wages of nondiscriminatory employers, worsening the overall labor market for some individuals more than others.
Third, some groups of workers, including women and minorities, may have less access to information about new openings than their nonminority male colleagues, making the market effectively less competitive for them.76 This may contribute to gender and racial wage gaps. A commonly cited statistic is that half of all jobs in the United States are found through informal contacts or social networks, which are themselves segregated and unequally distributed.77
Then, there’s the rising practice among companies that use or sell software, which these firms claim can accurately predict which workers are likely to leave, as well as when and at what wage. An important open question today is whether modern human resource analytics, by predicting turnover and retention and producing recommended wage policies based on the data of many firms, facilitates employer collusion on wages or wage discrimination.
If firms use these predictions to target wage increases or bonuses—and do not train their algorithms to be gender- and race-blind—then this may lead to a wage gap over time. Yet software tools that make competing offers increasingly visible to workers may prove to play some role in mitigating monopsony. The interaction of technological change and labor market monopsony is clearly an area that needs further research.
Public policy implications of monopsony in the U.S. labor market
There are several ways policymakers can address the potential negative consequences of firms’ market power on wages and employment in the U.S. labor market. First, antitrust regulation could be updated to more comprehensively and explicitly cover labor market monopsony.78 This means both considering potential labor market harms when evaluating mergers and acquisitions, and increasing the amount of funding available to the two federal antitrust agencies to investigate anticompetitive practices, including wage fixing or no-poaching agreements.79
Even in the absence of antitrust action, policies that encourage firms to compete more aggressively for workers, such as restrictions on the use of noncompete clauses or nonsolicit agreements, may be effective at helping workers throughout the wage distribution. Using data from the U.S. Census Bureau, researchers find that increased enforceability of noncompete clauses across states in the United States led to lower wage growth and decreased job-to-job mobility.80 Using discontinuities in laws at state borders, these researchers further showed that the enforceability of noncompetes had spillover effects on workers who were not directly affected. These results highlight why noncompete clauses and nonsolicit agreements reduce workers’ wages both by reducing workers’ ability to take advantage of new opportunities and by reducing their ability to renegotiate their wages on the job.
A classic intervention in the presence of monopsony power is the minimum wage. By restraining firms’ wage-setting ability at the lower end of the U.S. labor market, policymakers can increase wages for the lowest-paid workers and stimulate higher wages for those just above them on the wage ladder. What’s more, modest increases in the minimum wage can lead to gains in both wages and employment.
The reason increases in the minimum wage may increase employment is that, in the absence of a minimum wage, firms with market power have to trade off the benefit of hiring more workers against the cost of raising wages for all workers (not just the additional worker). A minimum wage removes this trade-off for many firms. Prior empirical research documents that increases in the minimum wage increased employment in the most concentrated labor markets.81 These include areas of the country where there are few firms hiring stock clerks, cashiers, or other retail sales workers. In Germany, the minimum wage has also been shown to reallocate labor from low-productivity to high-productivity employers.82
Of course, changes in the minimum wage only benefit low-wage workers. But if firms’ monopsony power is pervasive even for mid- to high-wage workers, then tools such as unions or wage boards—which can raise wages for workers further up in the wage distribution—may also have quite limited disemployment effects. A few states, including New York and New Jersey, already have wage boards, whose power could be strengthened. These institutions could be copied in other states.
Finally, in the presence of monopsony power, policies that nominally target large individual firms, including public-sector employers, may have economywide effects. A classic paper by economists Douglas Staiger at Dartmouth College, Joanne Spetz at the University of California, San Francisco, and Ciaram Phibbs at Stanford University showed that increases in wages at government-funded Veterans Administration hospitals led to wage increases at nearby hospitals due to labor market competition.83 One way to partially reconcile the interests of small businesses and workers may be to target wage increases to large employers (including the government), and rely on labor market competition to transmit those increases to smaller employers.
Download FileWage and employment implications of U.S. labor market monopsony and possible policy solutions
Conclusion
Labor market monopsony in the United States means that firms pay workers much less than the value of what their workers produce. Policymakers can hope to stimulate wage growth both by promoting competition in the labor market and by placing constraints on firms’ wage-setting capabilities. In doing so, policymakers also can help tackle rising U.S. income inequality and set the table for more sustainable, broad-based economic growth.
—Sydnee Caldwell in 2020 will be an assistant professor of business administration at the University of California, Berkeley’s Haas School of Business and an assistant professor of economics at UC Berkeley. Suresh Naidu is a professor of economics and international and public affairs at Columbia University.
Aligning U.S. labor law with worker preferences for labor representation
This essay is part of Vision 2020: Evidence for a stronger economy, a compilation of 21 essays presenting innovative, evidence-based, and concrete ideas to shape the 2020 policy debate. The authors in the new book include preeminent economists, political scientists, and sociologists who use cutting-edge research methods to answer some of the thorniest economic questions facing policymakers today.
To read more about the Vision 2020 book and download the full collection of essays, click here.
Overview
Just 6 percent of private-sector workers belong to a union in the United States, down from a peak of nearly a third in the early 1950s.84 Yet this steep decline in membership does not reflect a lack of worker demand for unions. If anything, workers’ interest in joining unions has increased over this period. In 2017, nearly half of all nonunion workers expressed interest in joining a union if one were available at their jobs.85 U.S. laws governing labor organizing and collective bargaining clearly do not reflect what most workers want.
Indeed, workers across the country are strongly supportive of some aspects of traditional unions, especially collective bargaining. They also value features of labor organizations that are either prohibited by existing federal and state labor laws or are not widely available, such as industry- or statewide collective bargaining and union-administered portable health and retirement benefits. These kinds of worker preferences for labor union representation have been suppressed in the United States for most of the 20th century up to today.
In this essay, I briefly examine the ossification of U.S. labor law over this time period, alongside the steady decline in union membership since the early 1960s. I then summarize new academic research that probes workers’ preferences for labor representation and organization that could inform reforms to federal labor law.86 I conclude by describing a range of possible federal legislation that could help bring labor law in line with the preferences espoused by majorities of U.S. workers—reforms that give workers greater access to representation and voice, broaden access to collective bargaining rights, build the provision of social benefits and training into unionization, and expand the scope of collective bargaining.
The ossification of U.S. labor law—and its heavy toll
Several trends are immediately apparent in the rise and fall of private-sector union membership in the U.S. labor force from 1920 to present day. First, membership remained relatively low until the mid-1930s. Amid the Great Depression, President Franklin Delano Roosevelt signed into law a sweeping bill intended to provide a comprehensive federal right for private-sector workers to organize unions and collectively bargain with their employers. Coupled with a later surge in wartime manufacturing, the National Labor Relations Act of 1935 boosted union membership to around a third of the private-sector workforce.
Yet, as important as the National Labor Relations Act was for the U.S. labor movement, the law still imposed substantial limits on union growth.87 It excluded large portions of workers from its reach, including the disproportionately nonwhite agricultural and domestic-workers labor force, as well as public-sector employees and any worker with supervisory or managerial duties, however limited. The law and subsequent amendments and court cases also sharply curbed union rights to picket, boycott, and strike against recalcitrant employers, thus weakening workers’ most important economic leverage. What’s more, penalties for employers who violated workers’ rights during union drives have remained low and poorly enforced, creating strong incentives for businesses to flout federal law.88
Most crucially, the law established a firm-based model of organizing and bargaining—as opposed to one where workers in an entire industry or region could bargain with broad swaths of employers. Firm-based bargaining may have worked well in an economy dominated by massive factories employing tens of thousands of workers. But today, when many employers contract or franchise out most of their workers, it makes unionization virtually impossible in many sectors.89 (See Figure 1.)
Figure 1
These cracks in federal labor law—alongside the increasing brazenness of employers in opposing union drives—greatly contributed to the sharp decline in union membership since the 1960s and 1970s. Today, union membership in the private sector is now lower than it was before the passage of the National Labor Relations Act—and the fall in membership has exacted a significant toll on U.S. workers and the economy as a whole. Decades of research demonstrates that unions boost both unionized and nonunionized workers’ wages and benefits.90 Stronger unions also compress top-end pay, contributing to lower levels of income inequality.91 Aside from their effects on pay, unions give workers greater voice in the workplace, and this leads to safer and more equitable working conditions.92
Unions are important outside of the workplace, too. Stronger unions foster civic skills and political participation among workers and then channel that mobilization into representing the interests of low- and middle-income workers and their families.93 A number of studies indicate that economic policies are more aligned with the preferences of less-affluent citizens where union membership is higher.94
What workers want from labor representation
U.S. workers have not been clamoring for the demise of the labor movement. If anything, support for unions has actually increased over the past five decades. About a third of nonunion workers said that they would join a union if they could in 1977 and again in 1995, and this proportion grew to nearly half of all nonunion employees in a 2017 poll.95 Looking more broadly, more than 60 percent of workers in 2018 said that they approved of unions, compared to only 30 percent who disapproved.96
While these results indicate strong worker support for unions, they do not say much about the specific representation that workers would want from labor organizations. To answer that question, I have been working with Thomas Kochan and William Kimball at the Massachusetts Institute of Technology’s Sloan School of Management to understand how workers think about workplace representation and the kinds of labor law reforms that would best match workers’ preferences. To that end, we have conducted large-scale, nationally representative surveys of workers, asking respondents to indicate how likely they would be to join and financially support various labor organizations. We varied how these organizations were structured, which permitted us to identify how much respondents valued individual characteristics of unions.
The characteristics we described in the survey included some common features of traditional U.S. unions, but also features of new organizations operating outside of conventional labor law (sometimes called “alt-labor” groups) and components of unions from other countries currently absent from the United States.
Which features of labor organizations were most—and least—important to workers? The most important features of hypothetical labor organizations to workers as they were considering whether they would join an organization include the following 12 characteristics in Figure 2. The presence of all of these features made workers more likely to say that they would join and support a labor organization. But some of these characteristics were clearly more popular than others. (See Figure 2.)
Figure 2
Several broad conclusions emerge from our findings. First, some features of traditional unions are still very popular with workers, especially collective bargaining at the firm or establishment level. But workers also voiced considerable enthusiasm for other potential features of labor organizations that are uncommon or even barred under current U.S. workplace law. Workers found the idea of sectoral or regional bargaining—much more common in Western Europe than in the United States—about as appealing as traditional collective bargaining. Expanding the scope of labor bargaining beyond the individual shop floor to whole industries or states would go far in rebuilding labor power in the United States, giving unions the opportunity to match the national scale of capital.
Another set of features that workers found very appealing involved portable social benefits administered through unions. Workers were substantially more likely to say they wanted to join unions that offered health insurance, retirement benefits, jobless benefits, and training and job search help that they could take with them from job to job. While some unions in the United States offer all those services, most do not. The provision of social benefits and training programs through unions could be an effective way for unions to attract new members, engage existing members more deeply, and raise revenue independent of member dues.
In fact, research indicates that the Nordic countries have managed to retain very high rates of union membership precisely because labor organizations in those countries are responsible for administering unemployment insurance and retraining programs.97 Similar findings from research I have conducted with public-sector unions in the United States also bolster this conclusion—providing highly valued benefits, such as training and professional development, to union members can foster increases in union interest and participation.98
The final bundle of attributes that attracted worker interest related to greater input in management decisions at the shop-floor level (determining how workers do their day-to-day jobs) and at the firmwide level (determining how businesses structure their operations). Unions in the United States have frequently shied away from these activities, even where they are legal.99 Our results buttress the idea that workers would be supportive of unions that did much more to gain voice on workplace issues, both small and large alike.
National reforms for building greater worker representation and voice
In all, our findings reveal a substantial gap between the labor organizations that workers say that they want and the representation they actually receive in the workplace. Not only do most workers who say they want traditional unions fail to receive any union representation at all, but current labor law also bars unions from offering many of the benefits and services that workers say they most value.
New federal legislation offers the most promise in overhauling labor law in the United States. There are several areas where policymakers ought to pursue change. Here are four proposals.
Giving workers greater access to representation and voice
At a basic level, Congress ought to make it easier for workers to form and join traditional unions. This means expediting union elections, giving union organizers greater rights to communicate with workers and share information about unions, and, above all, ensuring that employers have strong incentives not to violate existing worker protections. It also means strengthening workers’ rights to strike, boycott, and picket employers—without these tools, workers are outmatched against the economic and political strength of business.
More ambitiously, Congress might consider requiring regular union elections across all workplaces. Polling I have conducted indicates that only about 1 in 10 nonunion workers say they would know how to form a union at their job if they wanted to.100 Automatic, regularly scheduled union elections would thus go far in granting workers the functional right to form a union, regardless of whether there are union organizers at a worksite or if union leaders deem a workplace a strategic target.101 In a similar vein, Congress could mandate that all employers permit some minimal level of worker representation and voice—perhaps through joint management-worker committees—that could turn into, or complement, full-blown unions with collective bargaining rights if workers expressed sufficient interest.
Broadening access to collective bargaining rights
Given the importance of collective bargaining to U.S. workers, Congress ought to close the exclusions that exist in the National Labor Relations Act—specifically those that shut out many disproportionately minority workers from the benefits of such bargaining. All domestic workers and agricultural and public-sector employees should have the right to bargain with their employers, as should workers who are low-level or intermediate supervisors or managers.
Congress also should ensure that employers cannot simply turn workers into independent contractors to avoid unionization drives. Independent contractors and other self-employed individuals working for businesses that exercise substantial control over working conditions and pay should be permitted to organize and bargain with employers, just like conventional employees. Similarly, labor law should permit bargaining between workers and their immediate employers, as well as other businesses with substantial control over working conditions, as in franchise and contracting relationships. And Congress should ensure that employers bargain in good faith with newly recognized unions, rather than dragging out negotiations to end union drives.
Building the provision of social benefits and training into unions
Congress might create more opportunities for unions to provide the sort of social benefits and training opportunities that workers indicated they value very highly in my research. Unions are currently limited in their ability to offer health insurance and retirement plans as benefits in the organizing process, but they should be permitted to do so.
Congress also ought to free unions up to offer portable health and retirement plans to workers across entire industries. Union-administered plans could compete with employers and other private alternatives, raise nondues revenue for the union, and generate stronger incentives for workers to enroll as dues-paying members. Unions should have the legal right to manage these funds independently of employers—something they cannot do under current law.102
One especially promising approach to labor-administered social benefits is for Congress to permit states to run unemployment insurance benefits through unions, as is common in Northern European countries. Not only would union-run jobless funds give workers good reasons to join unions, but they could also be paired with high-quality training and job skills programs tailored to the needs of specific sectors and employers.
Expanding the scope of collective bargaining
On the most sweeping level, Congress could move the National Labor Relations Act beyond the traditional, firm-based model for organizing and bargaining by giving unions greater scope for representing workers across entire sectors or regions. While there are a number of different models that Congress might pursue, at a minimum lawmakers should set ground rules about how union and employer representatives would be defined and the rights and responsibilities of union, employer, and government representatives in bargaining and contract administration and enforcement.103
At the same time, moves toward broader levels of collective bargaining need to be accompanied by greater voice for workers at the shop-floor level. Accordingly, Congress might consider expanding the reach of unions to help address workers’ grievances in their day-to-day jobs. That could mean, for instance, combining sectoral or regional bargaining with mandatory worker committees as described above. Those committees could deal with shop-floor grievances and firm-specific contract negotiations, while sectoral or regional labor representatives negotiate broader wage and benefit standards.
Download FileAligning U.S. labor law with worker preferences for labor representation
Conclusion
As these reforms suggest, there is enormous scope for improving the representation and voice that workers possess on their jobs. Moving forward on these priorities will not only help better align labor law with worker preferences but also help to accomplish many of the other goals described in this set of policy essays. A reinvigorated U.S. labor movement holds the promise of directly boosting stagnant pay and benefits for workers, improving working conditions and safety, closing yawning gaps in compensation between business executives and the workers they employ, and curbing abuses of employer power in the U.S. labor market. More broadly, history suggests that policies aimed at broadly shared prosperity and growth are only possible when supported by vibrant unions.104 For all these reasons, an overhaul of U.S. labor law ought to be a top—and early priority—for the Congress and the president in 2021.
—Alexander Hertel-Fernandez is an assistant professor of international and public affairs at Columbia University.