Uncompahgre

Uncompahgre

Monday, April 6, 2020

Why Are Essential Workers Paid So Little and Non-essential Workers Paid So Much? An Appraisal of Labor Income Inequality in Light of COVID-19


[I drafted the following in response to a question posed by Chris Ingraham, a reporter at the Washington Post. My response is quoted, along with those of other economists, in a piece that appeared in that publication on April 6, 2020. My full answer appears below.]

The coronavirus has underscored how many of the workers we deem essential in a society -- sanitary workers, grocery clerks and warehouse workers, to name a few -- are also some of the lowest paid. From an economic standpoint, why do these essential workers get paid so little while people in arguably less useful jobs, like entertainers and hedge fund managers, get paid so much more?


The standard economist’s answer to this question is that the reason for pay inequality in the labor market is skill inequality: different workers have more or fewer skills, these skills have a certain value in terms of what they can produce, and the workers who have the more valuable skills get paid more. The trend in labor economics research, well before COVID-19, was in the direction of questioning that basic understanding. Variation in individual worker characteristics (“skills” or otherwise) cannot explain observed phenomena in the labor market, especially wage inequality. We can learn from some of those newer insights in answering the question of why workers who’ve proven to be so essential in this crisis are poorly-paid and many of the highest-earning workers in the economy are evidently quite dispensable.

The mechanism by which wages are supposed to equal skills (or, alternatively put, “labor productivity” or the “marginal product of labor”) is that workers who are paid less than what they’re worth present a profitable opportunity to alternative employers. They can be lured away from their existing job with the offer of slightly higher pay—enough to make the move worth their while, but leaving some of the gap between pay and productivity intact for the alternative “outside” employer to make a profit on the deal. In a competitive equilibrium, that gap gets competed away to zero and all workers with the same skills make the same salary, regardless of where they work.

I point to three separate pieces of evidence that labor markets are not competitive, and consequently, that workers’ skills don’t determine what they earn:

So if skills don’t explain why “essential” workers in the COVID-19 crisis get paid so little and those sitting at home diddling on Excel spreadsheets get paid so much, what does? I think a big part of the explanation is the erosion of the institutions that once improved workers’ standing and bargaining power vis a vis employers, while employers have commensurately gained power. Retail and service workers have been notoriously hard to unionize, and sectors where unions have historically lacked power have gained overall employment share. It’s hard to outsource service-sector labor overseas, but it’s not hard to threaten workers with domestic outsourcing: their replacement by less experienced, lower-paid workers should they make significant wage demands on their own.

Meanwhile sectors like grocery stores, hospitals, and nursing homes have undergone massive consolidation on the grounds that they would be more efficient if they were larger, and they’d therefore be able to charge consumers lower prices—workers be damned. That’s arguably the case in grocery stores—supply chains have been squeezed, while prices are low and workers and producers gain a miniscule fraction of every dollar spent by grocery shoppers. That reflects a tradeoff that prefers consumers over workers, at least in the short term. In healthcare, on the other hand, there’s no arguing with the reality that this country has the most inefficient healthcare system in the world. By far the highest expenditures, and terrible health outcomes to go with those. It’s impossible to say the status quo serves consumers at the expense of workers. Instead, the stakeholders who’ve benefited from the current system are the owners of powerful healthcare providers, the privileged executives who’ve figured out how to profit massively from an opaque system, and the employers on whom most of us are dependent for access to healthcare. That last element is seldom foregrounded in the health policy debate, but it should be central: American workers are paying through the nose for health insurance, in the form of lower wages and higher premiums for employer-provided health insurance. Does that mean they’re benefiting in the form of better care and better health? Absolutely not.

The United States isn’t unique in having terrible labor standards for low-wage workers. Germany lifted labor regulations in many sectors in the early 2000s, creating a dual-track labor market where precariously employed low-wage workers have no job stability and few entitlements to social insurance. The result is a large pool of dead-end jobs lacking traditional benefits, such that they recently enacted a statutory minimum wage for the first time in the country’s history. Previously, there had been de facto higher, collectively-bargained minimum wages by industry, when all workers were statutorily covered by collectively-bargained contracts. Brazil moved in the other direction under its previous Workers Party government: an increasingly regulated labor market, wherein workers are entitled to certain pay levels on the basis of their job title and experience. The result has been a reduction in earnings inequality as well as a significant reduction in poverty. Labor market regulations and collective bargaining tend to be egalitarian, because they remove the discretion to set pay (and conditions of work) from bosses and transfer them, in some degree, to workers. This, and not skills, is the reason for earnings inequality between workers, and the enormous discretion American bosses have to dictate take-it-or-leave-it terms to dependent workers is the core reason why our “essential” workforce is in such dire straits.


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