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.

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Two Cheers for Placebo-Regulation

by Andreas Hoffmann and Sebastian Müller

The financial crisis of 2007 eroded the public confidence in financial markets. Many people have come to believe that only the government can guarantee the stability of financial markets. Responding to increased public demand, politicians from across the political spectrum support additional “macroprudential regulation”. However, little is known about the consequences of the newly proposed regulatory efforts. When politicians fear unforeseen consequences of regulation, they might turn to Placebo-regulation, which is some regulation that merely provides a warm glow for the general public. Given the widespread belief in the need for government regulation, we suggest that such Placebo-regulation may be a good option. Market distortions are avoided. But confidence in financial markets might be restored.

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A Critical Appraisal of Network Unbundling

High-speed broadband networks are key to the growth of digital markets as well as most modern forms of communication, and have been subject to far-reaching regulation in many countries. In this piece, we’ll review the rationale behind a cornerstone of the prevailing regulatory paradigm: forced access to incumbent operators’ network infrastructure by alternative operators on regulated terms, so-called “unbundling”.

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Calculating the police against citizen homicide rate

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by Edward Stringham

We hear of high profile cases of police killings, but few look at the larger picture of how often American citizens are killed by police. What is the rate at which police kill citizens and how does that compare to other homicide rates? Although official statistics have historically been scant, we now know that police killed 1,100 Americans in 2014 and 476 Americans in the first five months of 2015. Given that America has roughly 765,000 sworn police officers, that means the police-against-citizen kill rate is more than 145 per 100,000.

Let us put that into perspective. In most countries in Europe the national homicide rate is 1 per 100,000, so that means American police kill at 145 times the rate of the average European citizen. The two most violent countries in the world are Venezuela and Honduras with national homicide rates of 54 and 90 per 100,000. The U.S. government issues travel warnings stating: “The Department of State continues to warn U.S. citizens that the level of crime and violence in Honduras remains critically high” and “violent crime in Venezuela is pervasive.” If you are not comfortable vacationing in those countries, it is little wonder why so many Americans are uncomfortable with police who kill at more than 1.5 and 2.5 times the homicide rates of the two most violent countries.

Continue reading in my latest OpEd in the New York Daily News here.

The Blanchard Danger

by Roger Koppl

Oliver Blanchard tells us “Where Danger Lurks”  in the macro-finance world.

The big theme is nonlinearity, which is a profoundly conservative move: DSGE modeling is just fine and we don’t need to rethink it at all. We just need to add in some nonlinearities. Blanchard does not tell how to calibrate a model with extreme sensitivity to initial conditions. But if the system is chaotic, it is also unpredictable, so how can you pretend to merely add nonlinearities to DSGE models?  It seems like a pretty direct contradiction to me. I mean, you can have the model in a trivial sense, of course. But calibration is an empty exercise that will not let you look around corners.

Blanchard’s second main message is alarming: We do need theoretical innovation, however, in measuring systemic risk. In the modern network literature on financial markets and cascades, one key point is risk externality. My portfolio choice makes your portfolio riskier. We need two things to fix this market failure. First, we need Pigou taxes, which cannot be calculated unless everyone tells the regulator his portfolio so that it can measure systemic risk and calculate a separate Pigou tax for each financial institution. Second, we need to reduce systemic risk. (“[S]teps must be taken to reduce risk and increase distance” from the “dark corners” of the macro-finance system.) In the network literature I suspect Blanchard is alluding to, this is to be done (at least in some of the articles) by having the regulator directly control the portfolios of financial institutions. (Names include: Acharya 2009; Beale et al. 2011; Caccioli et al. 2011; Gai, Haldane,and Kapadia 2011; Haldane and May 2011; and Yellen 2009, 2011)

I take a rather different view of both economic theory and the crisis in my recent IEA Hobart paper From Crisis to Confidence: Macroeconomics after the Crash.

Overall, Blanchard’s message is meant to be reassuring: We the smart macro-finance experts have now got the message on nonlinearities. So no further need to worry, we’ve got the situation in hand. To keep the system out of the “dark corners,” however, we will need more discretionary authority. You don’t mind trading off a bit of financial freedom for greater financial safety do you?

Instead of the Fed

by Jerry O’Driscoll

 

For the month of November, Cato Unbound features an essay by me on “The Fed at 100.” Over the course of a week, there will be comments by Larry White, Scott Sumner and Jerry Jordan. I will respond to these as appropriate.

“End the Fed” has become a political slogan. Long before that, however, there was a serious academic literature on the prospects for competitive banking. I examine that literature in my posting. One interesting aspect of that literature is that important papers on free banking came out of Federal Reserve banks in the 1980s.

I argue that “the literature on free banking demonstrates the viability of private, competitive banking without a central bank.” But we now have a system of central banking almost everywhere. The fact that the road not taken would have been a viable path does not mean that we can retrace our steps and take that path now.

I devote roughly half the posting to consideration of what it would take to end the Fed. It would be a formidable but not impossible task. It is generally acknowledged that to be viable, a system of competing currencies would need convertibility into something that is in inelastic supply. Historically that has been a commodity, and I suggest gold is as good as any (though many disagree about that). What are the prospects for a return to a commodity standard?

Central banking is historically linked to governments running deficits and needing them to be financed. That is equally true today. Central banks cannot be abolished until permanent deficits are abolished, and governments are shrunk down in size. What are the prospects for that?

I have just returned from a very important conference at the Mercatus Institute at George Mason University on “Instead of the Fed: Past and Present Alternatives to the Federal Reserve System.” As the title suggests, alternatives to central banking in the past and the future were discussed. All three discussants of my posting also participated in important roles at that conference. I was a discussant of three papers, including one by Scott Sumner. So I imagine we will be continuing our dialog at Cato Unbound.

One of the most interesting discussions was among advocates of Fed abolishment and of Fed reform. All agreed that we need better monetary policy now and into the future, regardless of our differences on the issue of free banking versus central banking. I will observe that it was encouraging that people as diverse as George Selgin, Scott Sumner, Ben McCallum and I were able to arrive at a consensus.

I invite everyone to visit Cato Unbound this month and follow the conversation.

 

Income Inequality Matters

by Roger Koppl

Income inequality matters. Let me say that again so you know I meant it: Income inequality matters. This statement may be surprising coming from a self-described “Austrian” economist and a “liberal” in the good old-fashioned pro-market sense. It shouldn’t be. It should be one of our issues. The surprise should be that we pro-market types have not spoken up more on this central issue, thereby letting it become associated almost exclusively with more or less “progressive” opinion.

This indifference to income distribution is all the more mysterious because pro-market thinkers generally support a theory of politics that tells us to watch out for ways the state can be used to create unjust privileges for some at the expense of others. We should expect the distribution of income to be skewed toward the politically powerful and away from the poor and politically weak. In a representative democracy “special interests” engage in “rent seeking” to get special favors. Those special favors enrich some at the expense of others. That’s what they are meant to do! Continue reading

Wisconsin Policy Lab

by Chidem Kurdas

Paul Ryan is said to be influenced by Milton Friedman, Friedrich von Hayek and Ayn Rand. One might add that as the representative for Wisconsin’s first congressional district, he is from a state that has often been in the vanguard of policy thinking. Continue reading

Regulation Czar’s Net Effect

by Chidem Kurdas

Cass Sunstein, the White House regulatory affairs chief, is going back to academia.  It is not clear why he chose this particular time to return to Harvard Law School, leaving behind what looked like an experiment to implement the notions he advocated.

Has he made a difference as federal overseer of rulemaking? The record is at best mixed, at worst a prime example of how academic ideas can enable political hypocrisy. Continue reading

Top Young Economists Consider Their Future

by Roger Koppl

Ali Wyne of the big think  blog “Power Games”  recently posted an interesting set of comments on the theme “Empirics and Psychology: Eight of the World’s Top Young Economists Discuss Where Their Field Is Going.”  George Mason’s own Peter Leeson  was among the eight “top young economists” sharing their views.

Over at New APPS, the philosopher Eric Schliesser  summarizes the eight comments. “Bottom line: due to low cost computing and a data rich environment the future of economics is data-mining (this was clear from at least four of the comments). This is especially so because the young stars have lost faith in homo economicus (due to behavioral work and the crisis).”

Eric’s summary seems about right to me. There were eight fine minds sharing eight different visions, but two related themes dominated the comments. 1) The old rationality assumption is in trouble and we don’t quite know what to do about it. 2) Economics should be more data-driven now that we have what William Brock has labeled “dirt-cheap computing.” Continue reading

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. Continue reading

Hundred Years of Bailouts

by Chidem Kurdas

After all that’s been said and written about financial crises, it is rare to come across useful insights.  Financing Failure. A Century of Bailouts by Vern McKinley documents a major continuity with past policy making. He shows that policies intended to prop up failing companies are nothing new—the same basic pattern has recurred time and again.

But there is one notable change: the bailouts grew ever larger and the agencies concerned with them ever more numerous. Anyone thinking about recent crises and future prospects would do well to keep these points in mind.  Continue reading

Is Justice Roberts a Big Player?

by Roger Koppl

The Supreme Court upheld “Obamacare” because Chief Justice Roberts changed his mind. (It seems that “Obamacare” is no longer a pejorative.)  In this curious situation, a stalwart of the Federalist Society  has become a Big Player in healthcare markets.

A Big Player is a powerful actor who uses discretion to influence a market. In the long run, Big Players are government entities or the creations thereof. They are discretionary actors whose personal discretionary choices supplant known and simple rules. In other words, Big Players substitute the rule of men for the rule of law. The great theorist of the rule of law, A.V. Dicey, said in an important remark that the rule of law “means, in the first place, the absolute supremacy or predominance of regular law as opposed to the influence of arbitrary power, and excludes the existence of arbitrariness, of prerogative, or even of wide discretionary authority on the part of the government.”

Roberts has become a Big Player, and yet the Federalist Society is against that sort of thing. It is committed to the rule of law. Its attitude to the role of the courts is expressed in a passage from Federalist 78: “It can be of no weight to say that the courts, on the pretense of a repugnancy, may substitute their own pleasure to the constitutional intentions of the legislature…. The courts must declare the sense of the law; and if they should be disposed to exercise WILL instead of JUDGMENT, the consequence would equally be the substitution of their pleasure to that of the legislative body.” But the “judgment” of Justice Roberts in this case seems to be very much an “exercise” of his “will.”

Should we therefore castigate Roberts as a hypocrite or ideologue? I don’t think so.

The problem is not that Roberts secretly wishes to impose his personal will on the law. Indeed, the decision seems to be the most restrained possible. It was hardly an instance of “judicial activism” or “legislating from the bench” given Robert’s presumptive political opposition to Obamacare. The problem arises when sweeping measures such as the Affordable Care Act come before the Court. Such laws are ambiguous. Continue reading

Remember Those Oil Speculators?

by Chidem Kurdas

Less than two months ago, President Obama claimed that speculators were (or at least might be) artificially driving up the price of oil—a notion that some politician or pundit  brings up every time gasoline looks expensive. The idea fades when the market changes direction. Thus in recent weeks, economies worldwide took a turn for the worse and the price of oil came down a notch. Continue reading

Krugman on Banks and Romney

by Chidem Kurdas

Regulation advocates seem to regard the JP Morgan loss as the best thing since sliced bread. Thus Paul Krugman gleefully bawls out Mitt Romney for refusing to see it as a sign for greater government intervention.

Krugman repeats the by now well-known argument on banks, as a riff on “It’s a Wonderful Life.” The Jimmy Stewart character makes “a risky bet on some complex financial instrument,” loses the money and causes his bank to collapse. The moral: banks should not be allowed to take on much risk because “they put the whole economy in jeopardy” and “shouldn’t be allowed to run wild, since they are in effect gambling with taxpayers’ money.”

The fact is, banks make money by taking risk. That’s always been the business model. Even Bailey Building and Loan in “It’s a Wonderful Life” makes risky home loans—one might think of them as subprime. Continue reading

Should Banks Just Buy Treasuries?

by Chidem Kurdas

There’s a widespread impression that the $2 billion-plus trading loss JP Morgan Chase announced a few days ago strengthens the case for more regulation of banks.  Below  Jerry O’ Driscoll makes this argument more thoughtfully than I’ve seen any where else.

Two basic facts are worth remembering.

Fact number one is that in 2010 Congress passed the gigantic Dodd-Frank financial regulation law, which is being translated to thousands of specific rules by coteries of government bureaucrats. The Volcker rule against bank proprietary trading is the least of it. There are numerous new rules. None of these could have prevented the JP Morgan loss or even moderated it, as best I can tell. Continue reading

DeLong, Friedman and Maximal Government

by Chidem Kurdas

The case made for minimal government by Milton and Rose Friedman in their 1979 book, Free to Choose, has been debunked,  according to Berkeley professor Brad DeLong.  Basically, he avers that the Friedman program has been tried and failed. As a commentary on Friedman, this is outrageously misleading. But Mr. DeLong  provides a revealing glimpse of the left-liberal mindset. Continue reading

The Passions and the Interests in Forensic Science

by Roger Koppl

A front-page article  in yesterday’s Washington Post underlines the importance of establishing a substantive defense right to expertise in the US.

The article says, “Justice Department officials have known for years that flawed forensic work might have led to the convictions of potentially innocent people, but prosecutors failed to notify defendants or their attorneys even in many cases they knew were troubled.” The DoJ begin investigating in the 1990s “after reports that sloppy work by examiners at the FBI lab was producing unreliable forensic evidence in court trials.” As the Post article chronicles, the investigation was very narrowly drawn in spite of evidence that problems were likely more widespread. Continue reading

Big Bank Breakup or Tea Party?

by Chidem Kurdas

We’ve been going back and forth on the economics of too-big-to-fail banks but paying less attention to the politics. The most recent ThinkMarkets broadside on banks is Jerry O’Driscoll’s post on the Federal Reserve Bank of Dallas annual report.

In part of the report, the Dallas Fed’s director of research Harvey Rosenblum argues that the new Dodd-Frank regulations are insufficient to deal with the threat posed by too-big-to-fail banks and therefore these need to be broken into smaller entities. He and the bank’s president, Richard Fisher, made a similar point in a Wall Street Journal column.  Some other Fed officials have espoused the position as well.  Continue reading

Oil Price Politics Implication

by Chidem Kurdas

My previous post about government restrictions on oil and gasoline transportation drew comments saying prices are set in a world  market and the effect of United States policy is negligible. Numerous economic and geopolitical forces influence the price of oil, no question. That does not Continue reading

Politics of Oil Prices

by Chidem Kurdas

Oil from North Dakota is selling at a record discount, according to a March 1st news item in the local paper, the Bismarck Tribune.   By contrast, here in New York gasoline prices are near record highs. Between North Dakota and New York are thousands of miles but more crucially standing between us is a gigantic entity, the federal government.

With North Dakota’s Bakken and Three Forks shale formations producing at a rip roaring rate, the issue is getting the oil to refineries and from refineries to population centers. The Bismarck Tribune article quotes the State Mineral Resources Director, who said: “prices for North Dakota sweet crude generally mirrored West Texas Intermediate prices last year but began widening in January when President Barack Obama temporarily halted the $7 billion Canada-to-Texas Keystone XL pipeline, which would have carried 100,000 barrels of crude daily from North Dakota and Montana.”

Presidential obstruction of Keystone XL is one factor. The producers are getting around the lack of pipeline by transporting some of the crude to Louisiana via rail. But that doesn’t much help northeasters like me. There’s this federal law called the Jones Act, which was in the news in 2010 after the BP oil rig disaster in the Gulf of MexicoContinue reading

Big Bank Obesity Conundrum

by Chidem Kurdas

Is the Federal Reserve a hotbed of trustbusters? Fed officials (as well as some academics) have been calling for forcible downsizing of big banks . “I am of the belief personally that the power of the five largest banks is too concentrated,” Dallas Federal Reserve Bank president Richard Fisher said a few days ago during a visit to Mexico, according to news reports. He’s expressed similar views before, as has Thomas Hoenig, former president of the Kansas City Fed.

Here on ThinkMarkets Jerry O’Driscoll, a Federal Reserve veteran, wrote: “There is no conceivable efficiency gain that justifies the risk these gigantic, risky institutions impose on all of us,” Continue reading

Russian Lesson on Term Limits

by Chidem Kurdas

The point of term limits is to prevent the buildup of political power by one person or group. In Russia’s ersatz version, Vladimir Putin merrily plays revolving door with his protégé Dmitry Medvedev. Mr. Putin may win the election on March 4th despite the persistent protests sparked by his latest round of musical chairs with Mr. Medvedev.

That means Mr.Putin could potentially be Russia’s president again for two terms lasting through 2024, bringing his overall reign at the top as either prime minister or president to almost 25 years.

I would like to know what Mikhail Khodorkovsky, one-time-Putin-crony-turned-arch-critic, thinks about this. But the Siberian prison camp where he is held is not welcoming visitors.  A documentary about him, starting to make the rounds of some US cities, is as close as we get to understanding what’s happened to Mr. Khodorkovsky, Continue reading

M. Friedman Goes to Washington

by Chidem Kurdas

Early in his career, long before he became a Nobel prizewinner and the household name for free market economist, Milton Friedman worked for the US Treasury. The following anecdote is from his 1998 memoir with his wife Rose, Two Lucky People.  This revealing example of how public officials operate illustrates, in Friedman’s words, “the interaction between bureaucratic self-seeking and supposedly objective analysis.”  It complements my previous post on whether politicians pursue the public good.

World War II had started. For Friedman and others at the Treasury, the main mission was to figure out how to finance the war effort while avoiding inflation.  Continue reading