Labor Markets Work When They Are Free

Last month, business pundits were stoking fears that rising wages would lead to inflation. It was classic fake economics. Contrary to crude Keynesian hydraulics, inflation is a monetary problem, not a cost-push problem. In the world of financial punditry, the news cycle changes fast, so we wake up today to find yet another and seemingly contradictory concern.

This month, the concern is different and perhaps more justified. There’s growing frustration that despite low unemployment and high corporate profits, wages still aren’t rising as one might expect them to. The theory here is that the monopsony power of corporations is suppressing labor competition. Workers can’t seem to get their wages bid up.

Alan Krueger and Eric Posner make the argument:

It turns out that many corporations possess bargaining power over their workers, not just over their consumers. Their workers accept low wages and substandard working conditions because few alternative job opportunities exist for them or because switching jobs is costly. In other words, in the labor market, effectively a small number of employers are competing for their labor.

There’s nothing particularly wrong with the claim as such. It’s true that it makes absolutely no sense at all why 70% of Americans should hate their jobs. Why not bail and get one you like? We do this with products constantly, changing apps, restaurants, and consumer products constantly. Why don’t we do this with jobs?

Where these economists go wrong (fake economics) is in the assignment of blame. For them, it is about the absence of effective antitrust regulations, the presence of noncompete clauses, and certain failing features inherent in the labor market itself. All of this, say our authors, can be fixed by more government regulation and management of both corporations and labor. Only government, in their view, can give us the competition we need.

Think of their theory as an extension of the Marxian canard that markets give inordinate power to capital over labor, because of the tendency of corporations to extract surplus value from the labor contract. Theirs is a softer version that assigns blame in slightly different ways but the conclusion is the same: outside-the-means that rely on coercion are necessary to balance out the power between capital and labor.

Job Lock

This entire theory is strangely detached from the on-the-ground reality of people’s working lives today. Non-compete clauses can be annoying but workers can also push back on them, so long as they are willing to walk away from a new position. I’ve done this several times; such clauses are easily removed. In the panoply of concerns that keep workers locked into jobs in which they are unhappy or underpaid, these are a trivial concern.

The real question is why so many workers feel locked into their positions and are unable to make their talents in a way that bids up their market value. In other words, the question is: what is it that makes the market seem to fail? The best place to look is to discover non-market considerations in work, hiring, and firing that grant employers disproportionate power in the wage negotiation process.

The leading cause of job lock is unbearably obvious: health care. In the decades following World War II, its provision came to be attached to the workplace, through a series of tax changes, mandates, and corporate expectations. Every change in health care regulation (until very recently) has tended to cement this relationship. Obamacare did terrible damage by making affordable independent health care (that actually functions in real life) far more difficult to get. What this means for workers is that many hold on to jobs solely to stay on their health plans.

Yes, all this was done in the name of worker rights. The result has been the opposite. It has not empowered workers; it has employed employers. It has tied workers to jobs they do not like at wages that are beneath their market worth. This criticism of company-provided health care is widely recognized by economists of all stripes. In fact, part of the purpose of Obamacare was to break this pattern by creating a large marketplace in which workers could actually shop. But the system was so over regulated, packed with mandates, and disabling the capacity for insurers to administer economic rational systems, it made the problem of health-care job-lock far worse.

And it’s not only about the job a worker currently has. It’s about the time, cost, and frustration about getting a new job. You need quite of lot of savings to tell the boss goodbye. You need to have two months of living expenses. It is quite difficult to get another full-time position with the full benefits you have left. If you are holding out for that kind of job, you could be waiting many months, simply because employers are extremely reluctant to hire because it is so costly and so difficult to fire. As a result, people decided to stay and suffer.

I’m sure you know a dozen people in this situation. Maybe you are. What this really amounts to are millions of small tragedies, all due to factors that have nothing to do with the market as such. It is possible that employers in a free market would offer health care but the history shows that the practice only began as a workaround during wartime. It was a way to pay people without violating wage controls.

Besides health care, take a look at the pay stubs. The very high payroll tax is costly to administer and tends to rope workers into their position. With that tax, you have social security, unemployment insurance, and funding for Medicare. Most Americans pay more in payroll taxes than in income taxes. This entire system ties people to their existing jobs, and all the pre-committed wages that go to various tax strategies for retirement all worsen the situation. No longer do people think of their workplace as a way to get paid in exchange for adding value; thanks to endless government interventions, a workplace has become a kind of safe harbor from the wiles of life itself, providing health, legal protection, and end-of-life care. Why would anyone voluntarily leave? Once you are in, you stay. It feels like security. 

It’s the same with firing. Employers have to worry about endless concerns over legal liabilities, and take out insurance packages as protections against lawsuits. Maybe that sounds pro-worker. It is not. Remember that the harder it is to fire people, the more reluctant to hire people a firm becomes. It hurts everyone in the long run. And the expense of new hires can be overwhelming, sometimes as much as one third of the total package going to non-wage benefits. And speaking of benefits, the incredible cruft of regulations concerning working hours, vacation time, maternity leave, protection against discrimination, and all the rest, contribute even more to the problem.

But here is what is remarkable. In the entire article by Posner and Krueger, there was not one mention of any of these real-world factors that actually do cause capital to have more power over labor than would otherwise be the case in a real free market. Not one mention of any of these very obvious points. Instead, they take us the exact opposite direction of suggesting even more control over the workplace.

Yes, I’m suggesting a series of dramatic changes to the way employment works. No more payroll tax. No more withholding. No more health-care mandates. No more mandates of any kind. And no more policing of either hiring or firing by the state. In other words, free the market. Economic exchange is about equal power between negotiators, which only means that the same rules should apply to everyone. The more we mess with the freedom of contract, the more we privilege one party over another, with sometimes unpredictable results.

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Jeffrey A. Tucker

Jeffrey A. Tucker is Editorial Director for the American Institute for Economic Research. He is the author of many thousands of articles in the scholarly and popular press and eight books in 5 languages. He speaks widely on topics of economics, technology, social philosophy, and culture. He is available for speaking and interviews via his emailTw | FB | LinkedIn