The “New” Monopsony Argument and the Suppression of Wages

A recent issue of The Economist had an article on monopsony and the “non-compete“ agreements that some lower-paid fast-food chain workers have had to sign as a condition of employment. On the whole, The Economist doesn’t like this because it supposedly holds down wages. The Economist is not alone in thinking this. Even noted economists Jason Furman and Alan Krueger have said in The Wall Street Journal: “There is no reason why employers would require fast-food workers and retail salespeople to sign a noncompete clause—other than to restrict competition and weaken worker bargaining power.” What Furman and Krueger are thinking is that these employees have no “trade secrets” to reveal to other firms.

Does this make sense?

The fast-food low wage case has little to do with trade secrets. In this situation the usual argument in favor of such agreements turns on the provision of general human capital. When a firm provides, at a cost, a skill highly specific to its own operations it need not worry that employees will leave and use that skill elsewhere. It cannot be so used. On the other hand, if the firm provides general training that can be used elsewhere it faces a problem. It incurred a cost to provide the skill but then, having acquired it, the employee offers his services elsewhere at a premium. She can do so because she is better equipped to hold the job than others who need costly training.

Is this then evidence that a non-compete agreement holds wages down? Hardly. If this becomes the usual case, the employer will not have the incentive to train the worker or, if he did train the worker, he would have an incentive to reduce the wage by the expected lost of value due to the employee leaving. There would then be lower wages than otherwise for the job.  What if the minimum wage prevents this? In that case fewer employees would be hired at the minimum wage. What if the employers really “need” these workers? Then they might hire them at a loss for a while until they can reduce their need for such workers through computerization of the ordering process and other forms of mechanization. This is currently happening in response to rising minimum wages and the reducing costs of labor-substitution.

If fast-food and other such firms were truly monopsonies, then some of these adverse effects would not occur because wages would have been held down in the first place. But are they monopsonies?  I find it difficult to see that. In the first place, the skills the employers are providing are general which means that they can be used in many places. If there weren’t many places to use these skills then the employers would not worry enough to have a non-compete requirement. Secondly, let’s take a closer look at what is being taught. For many teenage and young workers it is simply skills most of us take for granted:  showing up on time, not staying up late the night before drinking or doing drugs, the proverbial learning the value of a dollar and so forth.  Other skills may be related to fast-food preparation, operating equipment and even making sure that the purposes are added up correctly. (We are not dealing, by and large, with rich prep school kids.) There is no monopsony buyer of these basic skills.  The case for employers holding down wages through non-compete agreements has not been made.

Postscript: (1) If schools were doing a better job of inculcating basic life skills perhaps there would be less need for non-compete clauses. (2) The monoposony argument is an old one. I remember this being discussed seriously in the 1960s and in articles dating back to the thirties and forties. At the time is was mainly to buttress pro-labor union positions. The only thing liberal about that was how “liberally” people used that tenuous argument.

Rigidity and Flexibility: Unions in the On-Demand Economy?

by Liya Palagashvili

A couple months ago, a judge ruled in favor of Seattle’s ordinance that will allow ridesharing drivers to engage in collective bargaining agreements. The ordinance has granted the labor union, Teamsters, the right to represent drivers for companies such as Uber and Lyft. Under current U.S. labor laws, the National Labor Relations Board (NLRA) gives employees the right to unionize, but ridesharing drivers are legally classified as independent contractors, and thus outside of the purview of this legislation. The U.S. Chamber of Commerce has initiated litigation to challenge the validity of this ordinance on several grounds (e.g., preemption by NLRA, antitrust violations), though while in the appeals process, the city has begun to move forward to implement this first-in-the-nation law.

Discussion of Israel Kirzner’s Work on Entrepreneurship

Check this out at Liberty Matters.

Lead Essay: Peter J. Boettke, “Israel M. Kirzner on Competitive Behavior, Industrial Structure, and the Entrepreneurial Market Process” [Posted: March 1, 2017]

Responses and Critiques

Mario J. Rizzo, “Kirzner’s Theory of the Market Process” [Posted: March 6, 2017]
Peter G. Klein, “Entrepreneurial Discovery: Who Needs It?” [Posted: March 8, 2017]
Frederic Sautet, “Purposeful Human Action and Entrepreneurship: Kirzner’s Misesian Contribution” [Posted: March 9, 2017]

The Unfairness of Taxi Fares

TAXI MEDALLION PRICES RISE “WITHOUT LIMIT”

by Mario Rizzo

Some time ago I was accused by the noted economist and psychiatrist Professor Bradford DeLong of being a “psychopath” and “clinically crazy” because I suggested that people should not tip cab drivers in New York City. I do not intend to revisit that particular issue here.

This time I would like to take on the Taxi and Limousine Commission’s approval of a 17% fare increase for cab rides beginning in September.

Krugman Mangles Smith

by Gene Callahan

Here’s Paul Krugman, explaining the meaning of Adam Smith’s pin factory, and why it opposes Smith’s invisible hand metaphor:

“What may not be obvious is the way these two concepts [pin factory and invisible hand] stand in opposition to each other. The parable of the pin factory says that there are increasing returns to scale — the bigger the pin factory, the more specialized its workers can be, and therefore the more pins the factory can produce per worker. But increasing returns create a natural tendency toward monopoly, because a large business can achieve larger scale and hence lower costs than a small business. So in a world of increasing returns, bigger firms tend to drive smaller firms out of business, until each industry is dominated by just a few players.”

And, of course, this monopolistic competition wrecks the operation of the invisible hand, per Krugman.

Arizona law a blow to liberty

by Roger Koppl

Kris Kobach defends Arizona’s new immigration law, SB 1070, in today’s New York Times.  He says, “Presumably, the government lawyers . . . will actually read the law, something its critics don’t seem to have done.”  Well, I read the law and I do not like it.

Whenever a  law enforcement officer makes a “lawful contact” with a person, the officer must attempt to determine that person’s immigration status if he or she has “reasonable suspicion” the person is an illegal immigrant.  It is a “lawful contact” if the cops ask for a statement at the scene of an accident, for example.  Illegals now have an incentive to flee even as mere witnesses.  The local police or sheriff’s office cannot have a policy to counter this incentive lest they be sued.  The law provides that “a person” may bring suit against any “official or agency” that has a policy that “limits or restricts the enforcement of federal immigration laws to less than the full extent permitted by federal law.”  The central provision of SB 1070 threatens to reduce the ordinary protections of the law for illegal aliens, which threatens order and security for them and everyone else.

Frank and Stein

by Thomas McQuade  

In a recent opinion piece in The New York Times (“The Invisible Hand, Trumped by Darwin?”), Robert H. Frank proposes that Charles Darwin, not Adam Smith, should be seen as the real intellectual founder of the discipline of economics.  He claims that Smith’s most famous idea – that the competitive pursuit of individual self-interest can redound to social good – is but a special case of Darwin’s more general picture of competition in which individual benefit sometimes does, but often does not, benefit the larger group.  The sort of competition for which the invisible hand does not work well is, he says, where the competition is for relative gain, i.e., when the rewards depend on relative performance, and people gain by bettering each other rather than by bettering nature.  

The problem with Frank’s argument is his careless deployment of the analogy between human beings interacting in a highly structured social environment and animals in general interacting in an environment of considerably less social complexity.