[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:
- Earnings are very different between similar workers working at different firms. Again, in the competitive model outlined above, the lower-paid worker “should” move to the higher-paying firm and these differences should disappear.
- When firms become more profitable, they share the incremental profits with their workers in the form of higher wages, rather than hiring new ones to expand as a competitive model would predict. But workers only get a fraction of the windfall, and some workers make out much better than others. The ones who are most likely to leave do best—they have to be paid in order to get them to stay.
- Individual firms are increasingly stratified as to who works there. Rather than employing workers at all levels of the wage distribution, they specialize, by contracting out service work and making contractors big against one another and cut corners in order to get the business. This they do by under-paying their own workforce.
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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