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:

•         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.

Charles Murray at the University of Chicago, Kent Hall, May 9th, 2012

On May 9th., 2012, I attended a talk Charles Murray gave at the University of Chicago, part of the speaking tour for his book Coming Apart. I wrote up this account of the talk immediately afterward, and posted it to Facebook. Since I've deleted my account there, and Murray has an(other) book out rehashing the same risible themes, though with heavier emphasis on the race science given where elite politically-adjacent "social science" has gone since early in the 2010s, I'm re-posting this here now (February 10th, 2020).

______________________________________________________________

Perhaps what everyone wants is my account of last night's speech by Charles Murray.

The gist of Murray's presentation is that in the past, and up until around 1960, there was a unitary "civic culture" in America, that unity is what distinguished America from Western Europe, that starting in 1960 that civic culture began to stratify, and that now there is an elite that doesn't know or care about the cultural mainstream, which has gotten much worse off since 1960 not because people in the mainstream have become poorer but because they have lost access to the four things that make life worth living:

-industriousness

-honesty

-marital morality

-religiosity

These four values were upheld unanimously by the founding fathers and by the unified culture that prevailed from the American origin to 1960. They are still enjoyed by the elite but not by the mainstream.

Where to begin?

First of all, we're only talking about white people. Murray said that doing so is "a way to concentrate the mind," that if he included the entire population he would confound the story, and that stipulating we're only talking about white people has allowed the commentary to be more frank. He said the left would be "walking on eggshells" were non-whites to be involved in the discussion.

Second, throughout the presentation he declared that he was not going to offer a causal story; he was merely going to address "facts." Nonetheless, he concluded in part by saying that although the trend he describes was initiated by "economic causes" in the 1960s, it cannot be reversed through "merely" economic policies because what he's talking about are changes in social mores. My interpretation of this pablum is that Murray believes the Great Society caused the trends he's talking about, but that he won't be tied down to policy recommendations because, at base, he simply doesn't know what he's talking about and would be utterly destroyed were he to enter that arena rather than dealing in unsupported and cliched narratives.

Third, as he went through his narrative of moral-religious decline and disattachment from the labor force by working class white men that he believes results therefrom, it became obvious that he doesn't think women entering the workforce and thus having bargaining power within relationships/marriage is a Good Thing. He stated outright that young men are emasculated by the decline in the expectation that they will get a job that supports a wife and children, though he said elsewhere, incoherently, that the idea of a working class wage that supported single-earning households has always been a myth. Presumably this latter point is a swipe at the presumed union-originating argument that a unionized unskilled manufacturing wage was once sufficient for stability and now isn't. But his point was that young men are sitting around doing drugs and playing video games and not getting jobs because they are unmanned by competing with women rather than dominating them.

(As an aside, he made the preposterous claim that women have always "chosen their husbands" in America by way of contrast with Western European society, which was oppressive. Yet he clearly is deeply uncomfortable with the decline in patriarchy. I would say that his very clear, specific anti-feminism was the most surprising aspect of the talk for me, though in retrospect it shouldn't have been. After all, the point of the Bell Curve is that we screwed up when we started treating black people as people; in the book about white people, it's not surprising his main point is that we screwed up when we started treating women as people.)

Fourth, the largest portion of his talk was a portrait of the "new elite," which consists of older, stable married couples, both with degrees and living in homogeneous neighborhoods, with a healthy but culturally foreign diet and exercise regimen and admirable pre-natal healthcare and habits. This contrasts with the socio-economic elite of the 1960s, which shared its origin in the mainstream (as it was then). He offered essentially no evidence for this characterization of the ex-ante elite, except that among married couples in wealthy zipcodes in 1960 and before, both partners tended not to have college degrees, which made them similar to the non-higher-educated mainstream. The fact that this particular contrast is quite obviously the result of widespread higher education among women--and the marriage competition that it is both caused by and causes--went unmentioned. He also said that among the ex-ante elite, corporate executives chose to drive Buicks rather than Cadillacs (as the latter was perceived as unacceptable flaunting of wealth), whereas now there is no such compunction about conspicuous consumption among the ex-post elite.

Fifth, his prognosis for America is bad. He says that the likely (with probability=0.7) outcome is that the US becomes indistinguishable from Western Europe (whereas, recall, American exceptionalism as-was took the form of a unitary society rather than the European class-stratified one). With P=0.3, America will be warned off the European fate by the utter failure of that model in the near future, as well as by the growing body of social-scientific research that he says vindicates traditional morality on utilitarian lines, and thus promptly reverse the trends he identifies. As a final minor aside, one way he specifically mentions of avoiding the European fate is for the contemporary elite to get comfortable judging the immoral behavior of the poor: out-of-wedlock births, irreligiosity, disattachment from the labor market, etc.

My conclusion:

The whole idea is obviously incoherent. On the one hand we have an elite that's reprehensible for being culturally distinct, and on the other an elite with morally (and thus economically) superior lifestyle choices. Furthermore, he stated outright that the increase in income inequality was due to "crony capitalism"--the belief on the part of the elite that they "don't have to play by the rules that other people play by"--his words, not mine. Yet because they get divorced less and never have children out of wedlock, they are (and should see themselves and be seen by others as) the moral beacons for society.

Moreover, this strikes me as a contraption cobbled together to explain the class-stratification and inequality in a way that carefully avoids assigning responsibility where it  belongs. The whole point of his lengthy shtick castigating the elite is to locate the self-criticism where it will, in fact, be harmless to the interests of the incumbent wealthy and powerful. He wants the elite to feel self-conscious eating sushi and organic cereal and visiting a personal trainer; he doesn't want them to feel self-conscious when they pass laws mandating that their investment portfolio will not decline below a certain value and that food stamps and unions must be eliminated as part of any responsible macroeconomic policy. A key tell here was that in the question period, he rejected the notion of mandatory national service as a possibly unifying policy proposal on the ground that since it will most certainly not involve the Uniform Code of Military Justice, it will be more like the Peace Corps than the draft. Apparently actually requiring the elite to do anything just wouldn't work due to slacking off, whereas a society that doesn't expect or require non-elite men to work is destined for failure.

He closed by saying "every successful civilization had confidence in the rightness of what it was doing." Ignoring the oddness of anthropomorphizing a "civilization," that surely doesn't actually mean that "what it was doing" was right, does it??

My Intellectual History of Monopsony

In honor of the release of the second paper I've cowritten with Jose Azar and Iona Marinescu [writeup here], and the growing academic and political interest in labor market monopsony, I recently did a tweetstorm on how I got interested in antitrust, and specifically labor market monopsony as a potential violation of the antitrust laws. This post is meant to store all the links from that tweetstorm, and the basic narrative, in one place.

1. A blog post I did about the search-and-matching labor market models in which I was trained in graduate school--which are valuable mostly because they at least leave room for the possibility that the labor market is monopsonized, unlike most mathematical representations of the labor market.

2. My 2016 paper with Mike Konczal about declining labor market mobility, business dynamism, and entrepreneurship--which we propose is a demand-side phenomenon reflecting market power on the part of employers, thanks in part to the shareholder revolution in corporate governance.

3. My articles with Bernard Weisberger about the intellectual history of progressive economics.

• Richard Ely and the founding of the American Economic Association.
• A first treatment of the criticism of Ely and progressive economists found in the book Illiberal Reformers by Thomas Leonard.
• A longer review of Illiberal Reformers in the Journal of Economic Literature.
• A response on this blog to the "review of a review" written by Nicola Giocoli.

4. A 2016 article I wrote in the American Prospect about an antitrust suit against Uber for fixing wages and prices among its drivers--my first public writing on antitrust. Following an adverse ruling by the 2nd Circuit Court of Appeals, the district court recently sent the case to arbitration, likely ending it. In addition to the regulatory black hole into which Uber drivers have fallen, the perversion of the arbitration process has deprived them of any and all recourse to enforce the law against their non-employer employer. The whole saga makes it quite clear that when it comes to worker protections, we're back to the early 1890s--including because the federal government cares more about enforcing the Sherman Act against Uber drivers bargaining collectively than it does about enforcing it against the actual monopolist involved: Uber.

5. My second foray on antitrust and first on the website ProMarket: an entry in the debate about whether antitrust has a role to play in the "inequality debate," building on the Uber piece. The crucial issue is the "consumer welfare standard."

6. Later in 2016, the Council of Economic Advisors released a paper on monopsony, and I wrote a response to it on ProMarket. At the FTC Microeconomics conference in the fall of 2016, a panelk discussion addressed the matter but glossed over employer power to dwell on the non--issue of occupational licensing.

7. In the spring of 2017, I appeared on a congressional panel on antitrust and the labor market. Here are my prepared remarks.

8. I wrote yet *another* ProMarket article on how to enforce antitrust laws in the labor market, and spoke on the same theme at a Roosevelt Institute public event in September 2017.

9. In December 2017, my first paper on Labor Market Concentration with Ioana and Jose was released. Here's a blog post discussing the paper on Roosevelt's website. That paper received a good deal of coverage in the popular press: in the New York Times, Slate, the Economist, Bloomberg View, the Nation, and elsewhere. It was also cited in several other papers about antitrust enforcement in the labor market, as well as an op/ed by Alan Krueger and Eric Posner. Since we released ours, Benmelech, Bergman, and Kim released their paper documenting labor market concentration in manufacturing over a much longer time horizon.

In short, it's heartening to see so much interest in monopsony, including in Congress, in the press, among academics, and the general zeitgeist. It's a big problem. And recognizing that implicates even larger issues about how the economy works that tend to make it quite difficult to adhere to conventional economic wisdom, at least as it's existed for the last several decades.