A first-time meta-analysis of monopsony demonstrates its breadth across labor markets

Posted on by Maria Monroe

The role of monopsony in determining wages in labor markets worldwide is increasingly recognized across the economic literature. As economist Arindrajit Dube of the University of Massachusetts Amherst noted during his “Fireside Chat: the Rise of Monopsony Power in the Labor Market” at Equitable Growth’s Vision 2020 conference late last year, the rise in monopsony power is likely due to changing institutional structure and the influence of policies—such as the decline of unionization in the United States and a declining real value of the federal minimum wage—rather than simply increasing corporate concentration.

Monopsony is commonly understood as labor markets with few or only one employer—picture the prototypical isolated mining town on the 19th century U.S. frontier—but that is just one example of the conditions that lead to monopsony. Broadly, monopsony is any time workers are constrained in how they search for and match into new jobs, which economists commonly measure by estimating labor supply elasticity, or how much a worker’s labor supply changes in response to differences in wages. In a new Equitable Growth working paper by Anna Sokolova and Todd Sorensen of University of Nevada, Reno, the two economists examine all the research available around the world estimating labor supply elasticity to conduct a meta-analysis on the scope and extent of monopsony across labor markets.

This is the first meta-analysis of monopsony measured by labor supply elasticity. Sokolova and Sorensen combine the results of different studies to get a broad estimation of the degree of monopsony across the economy. To do this, they review the literature across monopsony studies (and other studies that are not explicitly on monopsony but estimate labor supply elasticity) from 1977 to 2019, including yet-to-be-published recent working papers.

Using Google Scholar, the authors gathered more than 500 papers potentially pertinent to monopsony. Their criteria for inclusion:

  • Studies needed to present elasticity estimates or estimates that allowed for the calculation of elasticity.
  • Each of the studies must report a standard error to measure the predicted accuracy of the estimation.

This resulted in 53 studies with 1,320 estimates of elasticity with standard errors. This breadth of studies is key to the robustness of their meta-analysis.

In addition to collecting data on elasticity estimations, Sokolova and Sorensen gather information on research design, including data, identification strategy, and publication. These last steps inform best research practices and potential biases resulting from research design.

The studies are differentiated between so-called direct measures of elasticity, largely following the model demonstrated by Alan Manning in Monopsony in Motion, which rely on the dynamic job search model looking at transitions into and out of a job, and inverse measures of elasticity, which rely on the relationship between the stock of workers at a given time at a certain wage. The two economists find that direct measures of elasticity are more common in the literature (1,140 of the 1,320 estimates) and find a greater degree of wage-setting power than inverse measures.

Across all studies with direct measures of monopsony, firms have wage-setting power that implies they can underpay workers at a median level of 58 percent, compared to a median implied wage markdown of only 7 percent found in studies relying on an inverse measure of monopsony. This shows that estimation methods greatly influence research findings.

For economists, another useful feature of this paper is that the research by Sokolova and Sorensen also digs into the specific empirical tools that economists use to measure elasticity, among them estimation strategies ranging from linear probability models to binary choices models to hazard models. They also include whether it was published in a top journal, citations, geographic location, demographic variables where available, among other aspects of research design. And they test the degree of publication bias, which refers to selective reporting of estimates, particularly those that confirm prior assumptions.

As the authors contend, the variety of results across these studies can differ due to variation in the underlying features of different markets and economies. The results also can differ due to a reinforcing combination of the effect of methodology, identification strategy, and data features, and due to variation in the rigor of published papers. To account for the difficulty in analyzing which studies are more accurately reflective, Sokolova and Sorensen use a so-called meta-regression analysis by performing so-called Bayesian Model Averaging. Using their measures of study design, the Bayesian Model Averaging estimates a weighted average of the results of all possible models using Posterior Model Probability, which reflects how well each model performs compared to others.

Again, for economists, this novel contribution to the monopsony literature provides a method by which Sokolova and Sorensen can determine “best practices” for elasticity estimation and weight those results accordingly. Given the Bayesian analysis of the parameters of studies that estimate elasticity, the authors conclude that there is strong evidence of monopsonistic competition, resulting in potentially sizeable wage markdowns.

Indeed, the sum of the evidence is clear from the painstaking estimations in Sokolova and Sorensen’s meta-analysis—monopsony is a broad force across labor markets and results in wage markdowns for many workers. It appears to be more common in certain industries such as healthcare. For some workers, the effects on their wages may be massive, with the highest markdown in the studies they compile implying wages are 95 percent lower than would be predicted in a competitive market, where workers could search for and match into jobs seamlessly.

Given these anticompetitive conditions, there are structural constraints on how economic growth is shared between firms and their workers, with workers losing out. In the United States, policies that give workers more power to bargain over their wages and lift the floor on wages and working conditions push back against these structural forces to ensure that the people who create economic value, through producing goods or providing services, are able to share in it.

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The State of the Union speech should not ignore inequality that obstructs, subverts, and distorts the U.S. economy

Posted on by Maria Monroe
President Donald J. Trump delivering last year’s State of the Union address at the U.S. Capitol, Tuesday, Feb. 5, 2019, in Washington, D.C.

When President Donald Trump delivers his State of the Union address to Congress tonight, he will undoubtedly devote a significant portion of his speech to the U.S. economy. He will tout the low unemployment rate, the continuing growth of Gross Domestic Product and jobs, and rising stock markets.

Some of these metrics, such as jobs and unemployment, are incomplete measures for how average Americans are faring in the economy, given that wages are not growing commensurate with a tight labor market. GDP and the stock market are not at all useful. Since the 1980s, economic growth in the United States has not been broadly shared, with nearly all of the additional income going to the wealthy. And stock ownership is skewed significantly to those at the top of the income and wealth ladders.

But beyond these well-known metrics, there is plenty of evidence of long-term trouble in the U.S. economy, and a significant cause of that trouble is deepening inequality. As Equitable Growth President and CEO Heather Boushey writes in her book Unbound: How Inequality Constricts Our Economy and What We Can Do about It, there are numerous avenues by which inequality obstructs, subverts, and distorts the U.S. economy in ways that limit opportunity, give outsized power to large corporations and the wealthy, and reduce consumption and investment.

Here are six graphs that provide a more complete understanding of the state of the U.S. economy, showing how inequality is affecting families, businesses, and the overall economy.

Inequality obstructs intergenerational mobility

Inequality undermines productivity and innovation by obstructing mobility—the capacity of a child, particularly a low-income child, to achieve economic success beyond that of her parents. The opportunity to attend college has long been an avenue to greater mobility. But there is an increasing gap in college completion between those at the bottom of the income ladder and those at the top. For those born in the early 1960s, 5 percent of children from the bottom income quartile completed college, versus 36 percent of those in the top quartile. But for those born between 1979 and 1982, the difference was far greater, with the bottom quartile having moved up only to 9 percent while the top quartile jumped to 54 percent. (See Figure 1.)

Figure 1

Another metric for mobility is the likelihood of a child growing up to be an innovator, as measured by the likelihood of holding a patent. The chances of holding a patent rise if one had the good fortune to grow up wealthy while the chances are unlikely for a poor child to grow up to be an innovator. (See Figure 2.)

Figure 2

Concentrated economic power subverts government institutions

The concentration of economic power that accompanies inequality subverts the governmental institutions responsible for managing the U.S. economy. The political polarization that afflicts our politics and enables wealthy and corporate donors to sharpen and exploit political differences for their benefit has risen in tandem with inequality since the 1980s. (See Figure 3.)

Figure 3

Pressure from these same interests—large corporations and the wealthy—has led to tax cuts that constrict the ability of government to invest in the future—in people, in infrastructure, and in research—as government investment as a percentage of GDP has steadily declined, especially since the 1980s. (See Figure 4.)

Figure 4

Inequality distorts microeconomic decisions, affecting the U.S. macroeconomy

Economic inequality distorts day-to-day decision-making by consumers and businesses, and those distortions show up at the macroeconomic level. A good example is the impact of inequality on consumption. Consumer purchases make up 70 percent of the U.S. economy, so consumption is critical to the health of the economy. But the wealthy spend a considerably lower portion of their income on consuming than do most Americans—and when a greater share of income goes to the wealthy, consumption, and thus the economy, suffers. (See Figure 5.)

Figure 5

When the U.S. economy features excessive economic concentration, as it does today, large corporations are able to crowd out small ones and stifle innovation. One of the ways this shows up in economic data is a decline in business investment as a percentage of GDP. Less business investment means less innovation, lower productivity, and greater inequality, as more profits go into the hands of shareholders. (See Figure 6.)

Figure 6

The negative effects of inequality show up in many ways throughout the U.S. economy. Any description of today’s economy that does not include a discussion of inequality, its causes, and its effects is at best incomplete and at worst misleading. These are important points to remember during the president’s State of the Union speech tonight.

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Encouraging banks to serve the credit needs of everyone

Posted on by David Evans

“Steady as she goes” could sum up the news from the Federal Reserve last week—that is, if we are talking about its interest-rate decision.

Monetary policy is a key mandate of the Fed from Congress—as discussed here last week. But it is not its only obligation. Importantly, the Federal Reserve also oversees many activities at banks across the country. Last Wednesday, the same day as the Fed’s vote on monetary policy, Congress held a hearing on the Community Reinvestment Act—one of the Federal Reserve’s long-standing oversight duties. These exchanges before the House Committee on Financial Services could only be described as “hang on, it’s a wild ride.”

News coverage of the hearing, such as that found here or here, as well as the hearing itself, can be hard to follow. You thought monetary policy was a black box? Debates about the Community Reinvestment Act are a bewildering mix of technical jargon and heated “she said-he said” exchanges.

So, why care? If you have a credit card in your wallet, bought a house with a mortgage, or took out a car loan, this duty of the Federal Reserve and other financial regulators affects you. If you or a family member don’t have any of the above, then the Community Reinvestment Act matters even more.

I want you to be able to follow the debate, so today, I will answer some key questions, such as: What is the Community Reinvestment Act? Why do we need it? How could we make it better? We must hold the Federal Reserve accountable to its mandate of stable inflation and maximum employment. Likewise, it needs to make sure that banks and credit markets serve Main Street.

What is the Community Reinvestment Act?

In 1977—the same year that the dual mandate was enacted—Congress gave the Federal Reserve an obligation to encourage banks to meet the credit needs of the communities where they operate. Banks cannot exclusively lend to the middle class and the rich. They cannot take deposits in a neighborhood and then choose not to serve those customers. Anyone with the ability to repay a loan, regardless of the color of their skin or the neighborhood they call home, deserves equitable access to credit. The Federal Reserve, with the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation, oversee this charge from Congress.

Why do we need Community Reinvestment Act?

The act was born out of an ugly history of racial discrimination in lending in the United States. For more, see Richard Rothstein’s Color of Law. Until the 1960s, banks often would not lend to minorities and minority communities. The U.S. government itself drew red lines on map—a process referred to as redlining—to tell banks where they could not make mortgage loans backed by government guarantees. Again, the federal government told banks not to lend to people of color, as you can see from a redlined map of Philadelphia from the 1930s. (See Figure 1.)

Figure 1

Leaders of the civil rights movement protested this discrimination. As one of the many voices, the Rev. Martin Luther King, Jr. highlighted this and other “manacles of segregation” in his “I Have a Dream” speech in 1963. Congress eventually listened and passed a series of laws to end discrimination in the U.S. housing market, including the Fair Housing Act of 1968, the Equal Credit Opportunity Act of 1974, and the Home Mortgage Disclosure Act of 1975. The Community Reinvestment Act in 1977 completed the historical legislation to fight racial segregation in housing.

How could we make Community Reinvestment Act better?

The task facing the county in 1977 was formidable. Moreover, with any regulation, the implementation and enforcement of that regulation matter. When Congress passed the act, it did not tell the Federal Reserve and other regulators how to make it happen. Together, the regulators developed criteria for banks and a process to examine their actions. Banks that fall short are limited in their ability to expand their operations or merge with other banks.

To educate banks and bring community groups into the conversation, the Federal Reserve created its Community Development function. At all 12 Reserve banks across the country, staff support the act. At the Board of Governors in Washington, the Division of Consumer and Community Affairs oversees the work across the Federal Reserve System. The Community Reinvestment Act is so important and its legacy so ugly that it demands vigorous efforts.

Over time, the banking industry changes, as do communities. Moreover, financial regulators learn what works and what doesn’t. In 1995, after years of public input and collaboration across the government, Congress passed a new Community Reinvestment Act. Now, 25 years later, the need to modernize the act is, again, a focus. The purpose of the act is not yet fulfilled—neighborhoods today still differ sharply and substantially by race and income. Massive differences in wealth remain. (See Figure 2.)

Figure 2

This time, the policy discussion is different. The driver is not racial equity. It is changes in the banking industry and the regulatory burden on banks. The desire for more transparency and clarity in the Community Reinvestment Act from both banks and community groups is valid. Unfortunately, the three agencies are not working together with a common plan.

Joseph Otting, the comptroller of the currency, set the current rethink in motion. He chose a pace faster than the prior rule writings and pushed out a proposal. The Federal Deposit Insurance Corporation joined; the Federal Reserve did not. Lael Brainard, a governor at the Federal Reserve Board, explained why they did not sign on at an event earlier this year: The Federal Reserve agrees that the Community Reinvestment Act is important but disagrees on how, specifically, to improve it. The fact that regulators are not moving forward together is a red flag.

Last week, Otting told the congressional Committee that he had “personally read each of 1,500 comments” on his initial proposal. Listening to the public is essential, but the public must pay attention and share its views in order for the Fed to and other regulators listen. Here’s your chance to be heard: Submit a comment before March 9 on the new proposal.

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Weekend reading: Studying the Fed edition

Posted on by Maria Monroe

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

Equitable Growth round-up

The most important economic decision taken this week may have been made not by Congress or the executive branch, but by the Federal Reserve’s Federal Open Market Committee, argues our Director of Macroeconomic Policy Claudia Sahm in the debut of her new column. The connection between the Fed and its decisions and U.S. workers and their wages is stronger than you might think, she continues, describing the historical context surrounding the meeting this week, including the Fed’s actions during and after the Great Recession. Despite the Fed’s dual mandate to pursue both stable prices and maximum employment across the nation, almost every policy meeting of the Fed discusses inflation while its commitment to pursuing maximum employment for all groups of workers has been more halfhearted. Likewise, there have been few discussions about the unequal effects of policies on different racial groups. But, Sahm concludes, this may change in the future, as the Fed has begun reviewing its approach to monetary policy.

Why is the gender wage gap in the United States persisting despite many efforts to close it? While discrimination and differences in the places women tend to work can explain some of the difference, write Heather Boushey and Kate Bahn, research shows that women’s continued greater responsibility for family care also plays a role. In a reproduced column that originally appeared in 2019 in the Labor and Employment Relations Association journal LERA Perspectives on Work, Boushey and Bahn review the research on the role of care in the labor market and how other economic trends and structures, such as monopsony, affect the gender wage gap.

Earlier this week, legislators in Congress held hearings on various proposals to provide paid family and medical leave to U.S. workers, including the FAMILY Act, which, Alix Gould-Werth writes, is the most universal and ambitious of the pending plans. Equitable Growth released a fact sheet late last week covering evidence from the states that have existing paid leave proposals, as well as states that are currently implementing paid leave, to provide insight into what aspects are most important to allowing workers to balance their caregiving and labor market responsibilities.

Harvard University’s Labor and Worklife Program recently launched its “clean slate for worker power” agenda, which provides a series of policy recommendations surrounding the legal framework around organized labor in order to ensure all workers experience the gains of economic growth. Kate Bahn summarizes some of the policy proposals found in the agenda, including graduated representation, ways to address the exclusion of certain types of U.S. workers from representation, and support for workers to participate in our democracy, such as by voting. Bahn concludes that this new agenda “would shape the economic forces that determine individual and collective well-being so that the concerns of today’s economy, such as rising monopsony power and persistent racial inequality, are addressed through a rebalancing of power toward the workers who contribute to economic growth.”

Equitable Growth’s Director of Tax Policy Greg Leiserson wrote a chapter called “Taxing Wealth” in a new book published by The Brookings Institution’s Hamilton Project. He makes the case for reforming the taxation of wealth in the United States, detailing four specific approaches and the economic effects, the pros, and the cons of each one. You can read the abstract on our website, and find the full chapter over on the Brookings site.

In Brad DeLong’s Worthy Reads column, he recommends and provides analysis on some of the week’s most important content, both from Equitable Growth and around the web.

Links from around the web

The idea of “full employment,” one of the Federal Reserve’s mandates, has long been a politically charged term in the United States because economists don’t agree on how low exactly unemployment can fall without triggering inflation. Case in point: In 2019, the Fed was forced to lower interest-rate increases that it had put in place in 2018, in part because it had underestimated the number of jobless U.S. workers. But, writes Matthew Boesler for Bloomberg Businessweek, “Fed officials are currently engaged in some deep introspection about what they got wrong. At the center of those discussions is the notion of full employment.” Boesler goes through the political history of the term, which began around the Great Depression as something “more than just a single number estimated under scientific pretenses by central bank technocrats,” and has since evolved and been redefined under different economic schools of thought and presidential administrations.

A recent analysis at the Brookings Institution delved into the monthly jobs reports put out by the U.S. Bureau of Labor Statistics to examine the positive trends—low unemployment rates, a decade of growth, higher wages—in more detail. The researchers, Martha Ross and Nicole Bateman, found a much less rosy picture than what we often read about: 53 million workers between the ages of 18 and 64 earn barely enough to live on, about $18,000 per year on average. They show that these statistics are not only describing young people just entering the labor market, or students working part-time, or otherwise financially secure workers, but actually that millions of hardworking adults “struggle to eke out a living and support their families on very low wages.” And, rather than just pushing for upskilling, more training, and higher education, Ross and Bateman argue that we need to take a closer look at the jobs our economy is providing, the wages those jobs are paying, and to whom specifically.

Why do we talk so much about providing families with choices when it comes to care responsibilities, asks Claire Cain Miller in The New York Times’ The Upshot blog, when many parents, and especially mothers, feel they actually have little choice in the matter when making decisions about work and family? The word “choice” ignores the structural barriers that are actually forcing these choices: The United States doesn’t provide universal paid family leave, free childcare, or public preschools to working families, and rising costs from healthcare to housing are overwhelming household budgets, while many women still experience earnings inequities after giving birth. Cain Miller dissects the idea of choice in the context of U.S. political history, particularly in the arena of family and gender policy, and how “the language of choice continues to shape policy debates.”

The United States is potentially facing yet another housing crisis: many Americans’ inability to afford housing, even at the lowest entry point of the housing market and regardless of the desire to rent or buy. This is likely because there simply isn’t enough housing to go around, writes Felix Salmon for Axios, and prices are rising too fast. A recent study shows that “entry-level houses are worth on average 50 percent more than they were at the beginning of 2012,” and certain metropolitan areas in the country have seen prices go up by as much as 89 percent since 2012. The cost of building housing has also gone up, meaning builders have less incentive to create new units. “Whether you rent or own ultimately matters much less than whether you have a place to live at all,” Salmon concludes.

Friday Figure

Figure is from Equitable Growth’s “Why Americans need to know more about the Federal Reserve” by Claudia Sahm.

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Brad DeLong: Worthy reads on equitable growth, January 25-31, 2020

Posted on by Maria Monroe

Worthy reads from Equitable Growth:

  1. Two more weeks to submit letters of inquiry! Equitable Growth’s “2020 Request for Proposals are due by Wednesday, February 12.
  2. This is truly great from Equitable Growth new hire Claudia Sahm: “Why Americans need to know more about the Federal Reserve.”
  3. Equitable Growth’s Heather Boushey at the Aspen Institute. Very much worth watching her “Measure What Matters: Realigning Measures of Economic Success with Societal Well-Being.”
  4. Very smart from Jason Furman, “Data and Privacy in Online Platforms’ Market Power,” in which he writes: “The major digital platforms are highly concentrated and, absent policy changes, this concentration will likely persist with detrimental consequences for consumers. More robust competition policy can benefit consumers by helping to lower prices, improve quality, expand choices, and accelerate innovation. These improvements would likely include greater privacy protections given that these are valued by consumers. However, it is not clear that competition will be sufficient to adequately address privacy and several other digital issues. More robust merger enforcement should be part of the solution to expanding competition, including better technical capacity on the part of regulators, more forward-looking merger enforcement that is focused on potential competition and innovation, and legal changes to clarify these processes for the courts. A regulatory approach that is oriented toward increasing competition by establishing and enforcing a code of conduct, promoting systems with open standards and data mobility, and supporting data openness is essential. This is because more robust merger enforcement is too late to prevent the harms from previous mergers, and antitrust enforcement can take too long in a fast-moving market.”

 

Worthy reads not from Equitable Growth:

  1. At a deep level, the argument over technology, employment, the workforce, and robots requires that we understand how our tools for thought—for augmenting human intellect—have worked, do work, and will work. And this requires that we have good answers to questions such as the ones asked by Michael Nielsen in his slide show “Engelbart: Augmenting Human Intellect,” in which he asks: “Augmenting intellect with paper and pencil: What is 427 x 784? Hard for an unaided human. Even harder: what is 721,269,127 x 422,599,421? Both problems become easy with paper and pencil. This is strange, a priori: wood pulp + wood + graphite = more intellectual capability! We’re used to this, but that doesn’t mean we understand it. What’s actually going on? For what class of problems does paper and pencil help? For what class of problems does it not help (or hinder)? How much can it help?”
  2. Back from nine years ago now—how technology cannot be the successful key to development because it is a force multiplier for both honesty and dishonesty, both fair-dealing and corruption, for competence and incompetence. And the problems of economic development have always been primarily problems of corruption, dishonesty, and incompetence. Read Kentaro Toyama, “Technology Is Not the Answer,” in which he writes: “Information technology amplified the intent and capacity of human and institutional stakeholders, but it didn’t substitute for their deficiencies. If we collaborated with a self-confident community or a competent non-profit, things went well. But, if we worked with a corrupt organization or an indifferent group, no amount of well-designed technology was helpful … We also expect too much from other technologies, institutions, policies and systems.”
  3. If you believe that the proper purpose of markets is to be effective societal decision-making mechanisms for choosing the path to equitable growth, then financial markets raise to special concerns. As John Maynard Keynes put it, the special object of financial markets is then “to defeat the dark forces of time and ignorance which envelop our future.” But here there are two problems: First, people have a very limited ability to form reasonable expectations and make correct judgments, and so the building blocks of which financial markets are constructed are far from adequate. Second, the bandwidth of the signals that are financial market prices is not wide enough to allow for the coordination of expectations and beliefs——even when supply balances demand in financial markets, many people’s expectations will be brutally disappointed even if there are no surprise events in the outside world, and that disappointment of expectations is a cause of major trouble. The Clower-Leijonhufvud UCLA macro school of the 1960s worried intensively about these issues. It was ignored. Now it has only one remaining eloquent standardbearer. Read David Glasner, “My Paper “Hayek, Hicks, Radner and Four Equilibrium Concepts” Is Now Available Online.”
  4. And another very worthwhile piece from the very sharp David Glasner: one that I had missed. Read his “What’s Wrong with DSGE Models Is Not Representative Agency,” in which he writes: “The basic story always treats the whole economy as if it were like a person, trying consciously and rationally to do the best it can on behalf of the representative agent, given its circumstances. This cannot be an adequate description of a national economy, which is pretty conspicuously not pursuing a consistent goal. A thoughtful person, faced with the thought that economic policy was being pursued on this basis, might reasonably wonder what planet he or she is on. An obvious example is that the DSGE story has no real room for unemployment of the kind we see most of the time, and especially now: unemployment that is pure waste … While Solow’s criticism of the representative agent was correct, he left himself open to an effective rejoinder by defenders of DSGE models who could point out that the representative agent was adopted by DSGE modelers not because it was an essential feature of the DSGE model but because it enabled DSGE modelers to simplify the task of analytically solving for an equilibrium solution. With enough time and computing power, however, DSGE modelers were able to write down models with a few heterogeneous agents (themselves representative of particular kinds of agents in the model) and then crank out an equilibrium solution for those models … Chari also testified at the same hearing, and he responded directly to Solow, denying that DSGE models necessarily entail the assumption of a representative agent and identifying numerous examples even in 2010 of DSGE models with heterogeneous agents … But debunking the claim that DSGE models must be representative-agent models doesn’t mean that DSGE models have the basic property that some of us at least seek in a macro-model: the capacity to explain how and why an economy may deviate from a potential full-employment time path … The basic approach of DSGE is to treat the solution of the model as an optimal solution of a problem … The policy message … is that unemployment is attributable to frictions and other distortions that don’t permit a first-best optimum that would be achieved automatically in their absence from being reached. The possibility that the optimal plans of individuals might be incompatible resulting in a systemic breakdown—that there could be a failure to coordinate—does not even come up for discussion. One needn’t accept Keynes’s own theoretical explanation of unemployment to find the attribution of cyclical unemployment to frictions deeply problematic … A modeling approach … attributing … all cyclical unemployment to frictions or inefficient constraints on market pricing, cannot be regarded as anything but an exercise in question begging.”
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“Women’s Work-Life Economics”

Posted on by Maria Monroe

This article, “Women’s Work-Life Economics,” originally appeared in the 2019, Volume 23 of “LERA Perspectives on Work,” a magazine published by the Labor and Employment Relations Association, or LERA.

More than 50 years ago, President Johnson signed into law the Equal Pay Act. It bans employers from discriminating against employees by paying employees of one sex less than those of the opposite sex for equal work. Yet large gaps remain in the pay of men and women—and pay gaps are even larger for women of color relative to white men. While discrimination and differences in where women work can explain some of the gap, scholars have documented that women’s continued greater responsibility for care—both inside the home and in caregiving jobs—is also an important factor.

There are signs that the care gap is likely to increase—or least not diminish. Changing population structure has led to an increasing demand in care for both the elderly and children, as well as everyone in between. This has posed a particular challenge for women and their families, as women’s earnings are increasingly crucial to family economic well-being, and women primarily also shoulder the caregiving responsibilities in their families. To understand causes as well as solutions, the role of care in the labor market is key in reversing troubling trends and historical gender disparities we see in the economy.

Who provides care and who has access to the supports to provide care are also important factors in a larger economic trend—growing economic inequality. There has been a long-term rise in inequality for families and workers. While total income growth was 2.1 percent in 2014, it was only 0.4 percent for the bottom half of the income distribution and 5.3 percent or the richest 1 percent (Piketty, Saez, and Zucman 2017). Inequality exacerbates the aforementioned trends: women at the top of the income distribution are more likely to have access to benefits such as paid leave that help them balance good jobs in the labor market with family caregiving responsibilities. This means that workers earning hourly wages, those who work in the service industry, and Latinos in particular are less likely to have access to paid time off (Glynn, Boushey, Berg, and Corley 2016).

Evidence demonstrates that increasing market concentration (Rinz 2018) and job-search frictions (Webber 2015) are important causes of rising inequality in pay. Thus, in order to understand trends in women’s pay, we need to explore far more than “women’s choices;” the combination of care work—both inside the home and in caregiving jobs—and rising inequality together create the need for a broader framework. Looking at the labor market through the lens of monopsony can provide such a framework, allowing us to see the intersection of job search, wage offers, and employers who hire women workers.

Monopsony describes any labor market where individual employers have the ability to set wages, rather than wages being determined by competitive forces as predicted by the canonical example of a free market. The classic example is a company town, where the dominant employer does not have to compete with other businesses for hiring workers, and workers are captive to accept pay lower than the value they contribute to the production process. But monopsony occurs any time employers can set wages low and they do not lose all of their workers as a result. This happens when workers face search frictions, due to asymmetrical information, mobility costs, or heterogeneous preferences for work (Manning 2003).

Monopsony is common in some of the largest female-dominated industries. Researchers Elena Prager and Matt Schmitt find that hospital mergers slowed wage growth for affected hospital staff, such as nurses and pharmacists (Prager and Schmitt 2019). There is also evidence that monopsony influences pay for teachers in Missouri (Ransom and Lambson 2011; Ransom and Sims 2010). Nursing and teaching, of course, are among the most common occupations for women.

But there are other factors at play. Another way to think about monopsony is whether workers have options when it comes to job searches and choices. Since women are more likely to have caregiving responsibilities and be secondary income earners in their families, the scope of their job search and mobility may be more limited to a greater degree than for men or for women without caregiving responsibilities and may also make them appear less sensitive to pay when making employment decisions. When women face constraints—such as needing shorter commutes to accommodate family needs (Kimbrough 2016)—this imposes limits on how they make choices.

Using the Longitudinal Household-Employer Dynamics survey from the U.S. Census, Douglas Webber found that, across the economy, women have a lower labor supply elasticity com-pared to men, leading to wages being 3.3 percent lower for women due to monopsony (Webber 2016). He attributes this disparity to the marriage-and-children penalties women face that most men do not. Such dynamics often result in de facto monopsony, where individual employers can subsequently keep women’s wages suppressed because women are limited in their ability to find a job elsewhere.

There are indications from the evidence we have now, however, that looking at care work through the lens of monopsony can help explain trends in women’s pay. Not only are health care and education concentrated labor markets, but also caregiving jobs more broadly may be likely to face monopsony because of the nature of the work itself, where caring for others is a central feature, and social expectations of care workers limit bargaining power.

We can see this in various trends. Caring labor is defined as interactive service work to improve the capabilities of the recipient. It is a sector of the economy that spans both formal paid labor as well as household production within families (Folbre 2012). Additionally, the word “care” is used to describe this work because feelings of concern for the well-being of the care recipient are likely to affect the quality of the services provided (Folbre 2012; Folbre and Weisskopf 1998; Nelson 2011). This type of work, as Kate Bahn notes, offers “intrinsic rewards but also imposes constraints” (Bahn 2015). When there is the expectation that one must care to do work well and that continued interaction and interpersonal connection will lead to better care, workers may also appear to be less pay sensitive, as it is exceedingly difficult to make wage demands in the face of a gendered devaluation of the skill required for this work. Given that (in general) caring labor pays less than occupations with similar required skills without a caring aspect, this may be a key factor in the gender pay gap (England, Budig, and Folbre 2002).

There is also an external downward pressure on wages in caring-labor markets because those who need attentive, quality care the most are those who are least able to pay for it: children and the elderly. But the improved capabilities of these populations have both inherent and economic value, such as educating the future workforce and delaying the need for more intensive care as one ages with dignity. There is a role for policy in improving both the pay and provision of caring labor to the benefit of the workers and the recipients. This will subsequently improve economic outcomes of families who have care needs, such as parents who are able to engage in paid market work when they know they can count on access to affordable and high-quality care for their children.

Policies that support this sector of the economy may also improve opportunities for all workers’ labor-market outcomes since providing affordable and high-quality care helps people balance family-care responsibilities with labor-market participation. Framing this as monopsony helps us account for the causes behind lower earnings and estimate the degree to which earnings could be increased without threatening competition in the economy.

Understanding the specific causes of monopsony helps guide effective policy solutions. If women are likely to face monopsony, the policies that limit the effects of monopsony will have a particular benefit to women, like unions and a higher minimum wage, as well as stronger antitrust enforcement in concentrated industries where women are disproportionately represented. David Card, Thomas Lemieux, and W. Craig Riddell (2004) have found that unions mitigate the gender wage gap due to women’s increasing representation among unionized workers (albeit alongside the overall decline in union representation in the United States). Likewise, the theory of monopsony predicts that unions may provide a countervailing market power to employers’ monopsony power (Paul and Stelzner 2018). The same is true of minimum wages: because of women’s overrepresentation among low-wage workers, increases to the minimum wage will disproportionately benefit women and people of color (Huizar and Gebreselassie 2016) and statutory minimum wages will offset wage-setting on the part of the employer (Robinson 1969).

In addition to addressing monopsony explicitly through unions and with minimum wages and better-enforced antitrust laws, policies that increase job mobility and alleviate the dual pressures to care for one’s family and engage in market work will help workforce outcomes for women workers. The economy would benefit from universal family-friendly policies, like the universal family care credit proposed by the advocacy organization Caring Across Generations. If these policies are not universal, like the optional employer-provided policies that workers currently rely on, we will continue to have segmented labor markets with a gulf between those who have access and those who not, limiting the job search of those without access and leading to an increased likelihood of monopsony wages.

The framework of monopsony provides a tool to understand the constraints that workers face in the economy when employers have the power to set wages. This demonstrates how women are particularly limited in their job search, reducing their own economic well-being when they face monopsonistic exploitation and serving as a drag on the economy. But this tool also provides an opportunity to understand what factors have given employers wage-setting power and how we can balance these forces with unions, increased minimum wages, and policies that provide for care needs and balance care responsibilities.

References

Bahn, Kate. 2015. “The ABCs of Labor Market Frictions: New Estimates of Monopsony for Early Career Teachers and Implications for Caring Labor.” Ph.D. Dissertation, New School University.

Card, David, Thomas Lemieux, and W. Craig Riddell. 2004. “Unions and Wage Inequality.” Journal of Labor Research 25, no. 4: 519–559.

England, Paula, Michelle Budig, and Nancy Folbre. 2002. “Wages of Virtue: The Relative Pay of Care Work.” Social Problems 49, no. 4: 455–473.

Folbre, Nancy. 2012. For Love and Money: Care Provision in the United States. New York, NY: Russell Sage Foundation.

Folbre, Nancy, and Thomas Weisskopf. 1998. “Did Father Know Best? Families, Markets, and the Supply of Caring Labor.” In Economics, Values and Organization, edited by Avner BenNer and Louis G. Putterman, pp. 171–205. Cambridge, UK: Cambridge University Press.

Glynn, Sarah Jane, Heather Boushey, Peter Berg, and Danielle Corley. 2016 (Apr.). “Fast Facts on Who Has Access to Paid Time Off and Flexibility.” Report, Center for American Progress.

Huizar, Laura, and Tsedeye Gebreselassie. 2016 (Dec.). “What a $15 Minimum Wage Means for Women and Workers of Color.” Policy Brief, NEL Project.

Kimbrough, Gray. 2016. “What Drives Gender Differences in Commuting Behavior: Evidence from the American Time Use Survey.” Working Paper No. 16-4, University of North Carolina, Greensboro, Department of Economics.

Manning, Alan. 2003. Monopsony in Motion: Imperfect Competition in Labor Markets. Princeton, NJ: Princeton University Press.

Nelson, Julie A. 2011. “For Love or Money: Current Issues in the Economics of Care.” Journal of Gender Studies 14: 1-19.

Paul, Mark, and Mark Stelzner. 2018.“How Does Market Power Affect Wages? Monopsony and Collective Action in an Institutional Context.” Working Paper, Washington Center for Equitable Growth.

Piketty, Thomas, Emmanuel Saez, and Gabriel Zucman. 2017. “Distributional National Accounts: Methods and Estimates for the United States.” Quarterly Journal of Economics 133, no. 2: 553–609.

Prager, Elena, and Matt Schmitt. 2019. “Employer Consolidation and Wages: Evidence from Hospitals.” Working Paper, Washington Center for Equitable Growth.

Ransom, Michael R., and Val E. Lambson. 2011. “Monopsony, Mobility, and Sex Differences in Pay: Missouri School Teachers,” American Economic Review 101, no. 3: 454–459.

Ransom, Michael R., and David P. Sims. 2010. “Estimating the Firm’s Labor Supply Curve in a ‘New Monopsony’ Framework: Schoolteachers in Missouri.” Journal of Labor Economics 28, no. 2: 331–355.

Rinz, Kevin. 2018. “Labor Market Concentration, Earnings Inequality, and Earnings Mobility.” Working Paper No. 10, Center for Administrative Records Research and Applications.

Robinson, Joan. 1969. The Economics of Imperfect Competition. London, UK: Springer.

Webber, Douglas A. 2015. “Firm Market Power and the Earnings Distribution.” Labour Economics 35: 123–134.

Webber, Douglas A. 2016. “Firm‐Level Monopsony and the Gender Pay Gap.” Industrial Relations: A Journal of Economy and Society 55, no. 2: 323–345.

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‘Clean slate for worker power’ promotes a fair and inclusive U.S. economy

Posted on by Maria Monroe
Union and labor activists gathered along Varick Street to urge the NY Wage Board on its first ever meeting to seek a $15 per hour minimum wage, May 20, 2015.

Harvard University’s Labor and Worklife Program, led by Sharon Block and Benjamin Sachs of Harvard Law School, recently launched its “clean slate for worker power” agenda addressing the dual crises of economic and political inequality in the United States. This policy report provides a series of recommendations to build a new vision for how the legal framework regarding organized labor can foster a rebalancing of power so that all workers can share in the gains of economic growth and be empowered in our democracy. Rather than focusing on reforming existing labor law, this clean slate agenda presents a wide-ranging collection of more up-to-date labor law proposals supported by evidence that shows that a vibrant labor movement with a focus on inclusiveness and with a variety of forms of representation can support wage growth and worker well-being across the U.S. income distribution.

This new labor policy initiative follows in the wake of a range of new exciting economics research that demonstrates the role of unions in ensuring labor market equity. In the paper “Unions and Inequality Over the Twentieth Century,” Henry Farber of Princeton University, Daniel Herbst of the University of Arizona, Ilyana Kuziemko of Princeton University, and Suresh Naidu of Columbia University find a clear inverse relationship between union density and income inequality in the United States. Similarly, the increasing attention to the role of monopsony in suppressing wages is seen in a recent Equitable Growth working paper by Mark Paul of the New College of Florida and Mark Stelzner of Connecticut College. The two economists demonstrate how collective action, such as union-led labor strikes, limit the ability of employers to exercise monopsony power and set wages at exploitative levels, yet importantly note that the right to strike relies on government support for labor movements.

These and other recent academic papers looking back into U.S. history and forward into the future of work highlight why the U.S. labor movement plays a role in ensuring workers can bargain to make sure they are paid equivalent to the value they contribute to a growing economy.

In order to ensure that a robust labor movement can address growing economic inequality, economists, policymakers, and union organizers alike also need to grasp the crucial role of racial and ethnic inequality in determining labor market outcomes. In this spirit, the clean slate agenda centers racial and ethnic equality as a goal of a robust labor law framework. This approach is key because historically, the U.S. labor movement has not focused on racial equity. Research needed along these lines could follow the lead of this study from 1990 by the late economist Rhonda Williams of the University of Maryland and legal scholar Peggie Smith of Washington University in St. Louis on Local 35 at Yale University (Local 35 is now part of the larger union UNITE HERE) that found the wage structure of the collective bargaining agreements covering maintenance workers at Yale upheld white male supremacy in wages.

More recent economics research finds that more inclusion of minority workers in the labor movement results in union representation becoming a force for narrowing racial and ethnic wage gaps. Research by the Economic Policy Institute finds that the union wage premium is higher for African American, Hispanic, and Asian workers—17.3 percent, 23.1 percent, and 14.7 percent, respectively—compared to a 10.9 percent union wage premium for white workers. And research by sociologists Jake Rosenfeld at Washington University in St. Louis and Meredith Kleykamp at the University of Maryland find that black workers are more likely to be represented by a union, demonstrating that this is due to “a protectionist theory of the labor movement,” in which marginalized workers are more likely to seek out employment covered by collective bargaining as a protection against racial discrimination.

In short, new evidence-based research shows that the historical legacies of racial inequality and recent rising income inequality and U.S. labor market monopsony all interact with the institutions that support worker power. These findings provide the foundation for establishing new directions for the U.S. labor movement and U.S. labor law.

In order to accomplish the lofty goal of rebalancing worker power, the clean slate for worker power agenda is designed to increase the types of activities organized labor can engage in and expand collective bargaining coverage for workers. The current labor movement relies on establishment-level bargaining, where unions oversee collective bargaining between workers and their immediate workplace if the union has won exclusive representation rights through support of a majority of the workforce in each workplace. This model is ill-equipped to track corporate power in a fissured workplace.

The clean slate agenda proposes graduated representation, which ranges from workplace monitors to partial union representation to exclusive representation. The agenda also establishes a path toward sectoral bargaining based on expanding prevailing wage laws, where the government establishes a floor for wages and benefits in a sector where a set threshold of collective bargaining coverage density is reached. This model would expand both coverage and equity, with easier representation within workplaces and more equity between workplaces.

The clean slate agenda also includes platforms to address the exclusion of certain types of workers from representation, such as incarcerated workers and workers with disabilities who have limited protections under current labor law, and the expansion of the labor movement tool box to include a broader range of union organizing and collective action such as strikes. The agenda also calls for the support of workers to engage in our democracy such as mandating paid time off for civic duties, including voting.

These new proposals in the clean slate agenda would shape the economic forces that determine individual and collective well-being so that the concerns of today’s economy, such as rising monopsony power and persistent racial inequity, are addressed through a rebalancing of power toward the workers who contribute to economic growth. The best evidence-based economic and other social science research underpins the importance of this initiative.

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Why Americans need to know more about the Federal Reserve

Posted on by Maria Monroe
The facade of the Marriner S. Eccles Federal Reserve Board Building, Washington, D.C.

What is the most important policy decision about the U.S. economy this week?

Arguably, it won’t be made in Congress or by the Trump administration. It’s the vote at the Federal Reserve tomorrow.

Tucked away quietly near the Lincoln Memorial, three women and seven men on the Federal Open Market Committee will decide whether to change interest rates. Chances are they will not, leaving the federal funds rate between 1.5 percent and 1.75 percent—a decision that should be good for people and businesses across the country. Supporting the economic expansion could lead to more jobs, higher wages, and broader economic well-being. The connection between this vote by a small group of unelected officials and workers’ paychecks may be surprising and even disconcerting.

To set the stage for why tomorrow’s decision at the Federal Reserve is important for you, let’s start with some facts. Output, income, and jobs overall have increased for 10 years since the end of the Great Recession in mid-2009. That milestone is not as good as it sounds. The recession was very severe—with the unemployment rate reaching 10 percent in 2009. (See Figure 1.)

Figure 1

Furthermore, the recovery was slow and painful. Not until 2015 did the national unemployment rate return to its level at the start of the recession in 2007. More than 8 years to recover was extraordinarily long and destructive. The Federal Reserve does not deserve all the blame, but it did contribute to the policies’ failures. Most of you know the damage personally, even if you had not thought much about this source.

If in the Great Recession, you, a family member, or a friend lost their job, home, or business, I don’t need to tell you how damaging the recession and slow recovery were. Research backs you up. Losing a job creates immense strain on workers and their families at the time and has negative effects for years thereafter. Even if you were spared such losses, the widespread hit to the economy likely had negative effects for you too. Average raises have been meager, wealth remains below its pre-recession level for many households, and, with less financial support from their families, students often took out more college loans.

Now, let’s talk about policy. The Federal Reserve did act swiftly during the Great Recession, pushing the federal funds rate to zero. It acted as lender of last resort to keep financial markets going. It created new tools to support the economy. One can make the case that since the recession, it has done more than any other policymakers. One can also make the case that it missed the signs of the coming financial crisis in the early to mid-2000s and that it used the political capital it had to save Wall Street. Everyone in the country needs banks and financial institutions. Most Americans need jobs too. Here, the Federal Reserve fell short. It did not react with the same commitment to Main Street as Wall Street.

The harm from policymakers not doing everything they could did not affect everyone in the same way. Experiences of Americans, on average, mask the greater distress among some of their fellow citizens. Many groups of people and specific communities were hit harder in the recession and were slower to recover. One glaring example is among many people of color. The unemployment rate among black workers peaked at almost 17 percent, nearly twice the rate of white workers. (See Figure 2.)

Figure 2

Moreover, these disparate outcomes have existed for decades, in good times and bad.

The Federal Reserve has had a dual mandate from Congress since 1977 to pursue stable prices and maximum employment. Its mandate applies to the entire country. But policymakers know—mainly due to the efforts by community groups—that some Americans are less likely to have a job when they want a job. Black and Hispanic workers are among those people who often are not fully employed. Here again, the Federal Reserve could do better. It was not until September 2010 that “maximum employment” was in a statement after its vote. That mention came three decades after Congress set that mandate.

In contrast, every statement mentions inflation. For years, in its policy meetings, there was hardly any discussion about worse outcomes among some groups of workers. Narayana Kocherlakota, a former Federal Reserve official, called attention to this failure. More discussion of the unequal effects of monetary policy has occurred in recent years—both on the committee and in the economics profession. It is hard to point to any actions at the Federal Reserve.

Fast forward to today. The national unemployment rate was 3.5 percent in December 2019. For black workers, it was down to about 6 percent. By the unemployment rate alone, the labor market looks its best in 50 years. Of course, the economy today is not the economy of the 1960s. Too many workers remain on the sidelines. Even so, with inflation stable and low, the Federal Reserve can allow the economy to push forward. The unemployment rate is less today than it thinks it will be over the longer run.

The typical forecast among Federal Reserve officials is for it to move gradually back to 4.1 percent. That’s their best guess; they could be wrong. They have consistently underestimated how low unemployment can go over this expansion. They could be wrong now. No one has a crystal ball, but they should think harder about their systematic mistakes.

I will close on a positive note. They are thinking harder. The Federal Reserve is reviewing its approach to monetary policy. It began the efforts last year. As part of the introspection, it held Fed Listens events across the country. It brought in people from community groups, businesses, colleges, and academia. Federal Reserve officials are still in discussions. They plan to release the findings in June. Tomorrow at the press conference, we might get some glimpses from Fed Chair Jerome Powell as to where they are currently.

The Federal Reserve has a history of halfheartedly pursuing maximum employment. Even so, it is thinking now and will tell us where that thinking may lead. This is progress. Most importantly for all of us, it believes it may need to change how it does monetary policy. It can do better.

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“Taxing Wealth”

Posted on by Maria Monroe

In “Taxing Wealth,” Equitable Growth’s Director of Tax Policy and chief economist Greg Leiserson outlines the case for major reforms to the taxation of wealth in the United States, details four specific approaches to reform, and discusses the economic effects of these approaches and their relative advantages and disadvantages. “Taxing Wealth” is a chapter in Tackling the Tax Code: Efficient and Equitable Ways to Raise Revenue, published by the Hamilton Project and The Brookings Institution. The full chapter can be read on their website. The abstract is included below.

Equitable Growth previously published several resources for policymakers and the public about new ideas for taxing wealth and investment income, including an explainer on wealth taxes (also known as net worth taxes), a detailed report on wealth taxes, and an explainer on mark-to-market taxation.

Abstract

The U.S. income tax does a poor job of taxing the income from wealth. This chapter details four approaches to reforming the taxation of wealth, each of which is calibrated to raise approximately $3 trillion over the next decade. Approach 1 is a 2 percent annual wealth tax above $25 million ($12.5 million for individual filers). Approach 2 is a 2 percent annual wealth tax with realization-based taxation of non-traded assets for taxpayers with more than $25 million ($12.5 million for individual filers). Approach 3 is accrual taxation of investment income at ordinary tax rates for taxpayers with more than $16.5 million in gross assets ($8.25 million for individual filers). And Approach 4 is accrual taxation at ordinary tax rates with realization-based taxation of non-traded assets for those with more than $16.5 million in gross assets ($8.25 million for individual filers). Under both the realization-based wealth tax and the realization-based accrual tax, the tax paid upon realization would be computed in a manner designed to eliminate the benefits of deferral. As a result, all four approaches would address the fundamental weakness of the existing income tax when it comes to taxing investment income: allowing taxpayers to defer paying tax on investment gains until assets are sold at no cost.

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What does the research say about the FAMILY Act?

Posted on by Maria Monroe

In the most recent sign of growing interest in a federal paid leave policy, tomorrow at 10:00 a.m., the Committee on Ways and Means will hold a Hearing on Legislative Proposals for Paid Family and Medical Leave. A number of bills from both sides of the aisle will be considered, including the Family and Medical Insurance Leave, or FAMILY Act, H.R. 1185/S. 463, which proposes a comprehensive earned paid family and medical leave policy. The FAMILY Act is the most universal and ambitious of the pending proposals.

Five states have implemented paid leave programs similar to the FAMILY Act: California (2004), New Jersey (2009), Rhode Island (2014), New York (2018), and Washington state (2020), while Massachusetts, the District of Columbia, Connecticut, and Oregon are all in the process of implementing their own paid leave programs. A growing body of research based on these state policies provides helpful insights into the various provisions of the FAMILY Act, which the Washington Center for Equitable Growth has summarized in this fact sheet.

As policymakers continue to debate the appropriate role of government in helping working families balance their caregiving and labor market demands, we hope that resources like these help ground that conversation in the evidence.

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