From https://www.aeaweb.org/articles?id=10.1257/jep.33.3.185
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Tag: search and matching
The strength of alternatives to no agreement drives wage bargaining as Alchian and Allen explain:
An important truth is that employers compete against other employers, and employees against other employees-not employees against employers, as folklore says. It is the availability of higher-valued alternatives, not the ability to bargain collectively, that increases bargaining power (Alchian and Allen 1967, p. 328).
The side with more outside options and a stronger ability to credibly commit to a specific wage offer wins the larger share of the split (Manning 2005; Cahuc and Zylberberg 2004; Lazear 1998).
Those searching for new jobs while on-the-job play a better hand than the unemployed (Manning 2005). Concerns about workers not holding their own in this wage bargaining date back to Adam Smith:
… in the long run the workman may be as necessary to his master as his master is to him; but the necessity is not so immediate (The Wealth of Nations).
Calls for a minimum wage arise partly out of concerns over who has the upper hand in bargaining:
… labour is often sold under special disadvantages arising from the closely connected group of facts that labour power is ‘perishable’, that the sellers of it are commonly poor and have no reserve fund… The want of reserve funds and of the power of long withholding their labour from the market is common to nearly all grades of those whose work is chiefly with their hands.
But it is especially true of unskilled labourers, partly because their wages leave very little margin for saving, partly because when any group of them suspends work, there are large numbers who are capable of filling their places (Marshall 1920).
Take-it-or-leave-it wage offers are more common for lower paid vacancies (Cahuc, Postel-Vinay and Robin 2006). Employers who post the going rate for lower-paid vacancies saves transaction costs for both sides of a more routine job match (Alchian and Allen 1967; Boeri and van Ours 2013).
The take-it-or-leave-it offer for a standard vacancy to be filled by similarly qualified job applicants may reflect where bargaining would have gone in any case and so saves that predictable journey. The market discipline on employers is posting an offer below the going rate attracts an inferior job applicant pool (Mortenson 2003; Boeri and van Ours 2013; Cahuc, Postel-Vinay and Robin 2006).
A well-matched recruit is a valuable find and the better paid is the job, the more it is worth haggling over the spilt (Alchian 1969; Lazear 1998). One-third of workers bargain over the wage paid in a new job; only about 5% for blue collar workers haggle but 86% for knowledge workers make counter-offers (Krueger and Hall 2012; Brenzel, Gartner and Schnabel 2014; Brenčič 2012). The less skilled job seeker finds new jobs faster because they have less specialised human capital to match up with prospective vacancies than say a knowledge worker (Alchian 1969; Oi 1983, 1987: Lazear 1998).
Lower paid jobs entail less search and bargaining because there is less to haggle over; there is more variance in applicant quality and goodness of fit for higher paid vacancies so both sides search for longer and haggle more (Lazear 1998; Alchian 1969; Oi 1987).
The going rate for low skilled vacancies is common knowledge. Employers that post an inferior offer risks lowering the quality of their recruitment pools. It saves search costs for both sides to post the going rate (Alchian and Allen 1967; Lazear 1998). The rub is less skilled employees are laid-off sooner in downturns because less firm-specific human capital is lost for both sides of the job match (Oi 1962, 1983; Becker 1993).
What would you do if you could cut your prices by 25% and still make a profit? Suppose you could pay your workers 25% more, recruit the best and brightest, still make a profit and greatly expand your business and bottom line?
A survey on monopsony power of employers by the Council of Economic Advisors at the White House suggests that this is so. Employers are paying up to 25% below the competitive wage.
Don Bordeaux has repeatedly pointed out that monopsony power is a marvellous business opportunity:
whenever I encounter the assertion that minimum-wage legislation is justified because employers of low-skilled workers allegedly possess monopsony power, I point out to those who assert the existence in reality of monopsony power as a reason to impose a minimum wage that their assertion implies the existence of profit opportunities for anyone who enters the market to hire away these allegedly underpaid workers.
So I ask those who assert that monopsony power is real and relevant to start their own businesses to give solid evidence of the strength of their belief.
The best and brightest in many occupational labour markets underpaid by a 25% according to the literature survey by the Council of Economic Advisors. This means a budding entrepreneur could recruit a top-quality labour force and still make a big profit by paying a bit more than the current wage in his industry
Just in case you are a novice at starting a business, Bordeaux was good enough to identify a consultant willing to provide advice on how you can seize this resistant, no but untapped opportunity for long run super-normal profits:
I know a very successful and savvy businessman in California, Mike Long – a man of enormous integrity and experience – who stands ready to share with you his time, expertise, and counsel in order to guide you in starting and operating your own businesses. All you need do is to supply some of your own seed capital – say, a minimum of $25,000 – and Mike will help guide you to launch and run your business in order to take advantage of the profit opportunity that your identification of monopsony power implies is available for the taking.
Mike can even share with you his knowledge of how to get from the capital markets any additional financing you might need.
Almost every market failure is a business opportunity including market power of employers over workers as Bordeaux explains
In short, monopsony power in labor markets keep workers underpaid. With all those underpaid workers out there – and because there are no government-enforced prohibitions on starting companies that employ low-skilled workers – a true believer that monopsony power is a prevalent reality can profit by exploiting this pool of underpaid workers. Yet they do not. They remain in their faculty offices writing papers and issuing commentary. I continue to insist that this inaction is sufficient evidence against the proposition that monopsony power prevails in the market for low-skilled workers – and, hence, conclusive evidence that the higher the minimum wage, the worse are the job prospects of low-skilled workers.
If an academic tells you that his research finds that the price of Acme Corp. stock – a stock traded, say, on the NYSE – is too low, what would be the first question you ask this scholar? The first question I would ask him is “How much of that stock are you buying?” If the scholar tells me “none,” or looks at me befuddled as he explains that he’s an academic and not an investor, I would dismiss his research on this front. That person, as I see him here, offers proof as good as it gets that he does not believe what he asserts.
Just as identifying systematically undervalued shares as an opportunity for critics of the efficient markets hypothesis to profit, those who believe the competition in the labour market is less than it should jump in and exploit those walkers for themselves.
They can assuage their consciousness by knowing that they are exploiting these workers by paying them more than the other exploiting employers currently do.This is no more than a variation of the argument that if workers are underpaid, they can establish a workers co-operative to buy out their employer, pay themselves more and still profit.
One of the curios of the monopsony argument is it was originally based on company towns exploiting the captive labour market in the old mining days.
Trouble is that modern research showed the company towns where the employer owned the houses and rented them to employees was a way of showing would-be recruits that they would not exploit them. Because the worker did not have to buy a house or sign a lease to go to the company town, he could quit at any time and not be trapped in a lease or mortgage that locked him into his current job. Tabarrok explains
On the one hand, this did mean that during a lengthy strike the firm could evict the workers from their housing. On the other hand, would you want to buy a house in an isolated town dependent on a single industry? Would you want to own a major asset that was likely to fall in price at the same time that you were likely to lose your job? Probably not.
Rental housing meant that workers had the freedom to leave town easily when better work opportunities were available elsewhere – i.e., it meant that the workers were less isolated from the national labor market than they would be if they owned their homes and were tied down to a single place and a single employer
What brought company towns to their knees were something as simple as the widespread ownership of an automobile. These days, employers have to offer large inducements to get workers to move to isolated places to work. That includes accommodation and various other premiums over the going rate in the industry.
Labour economics is falling to the same trap industrial organisation fell into in the mid-20th century when it encounters phenomena which it has trouble explaining as Coase said at the time:
One important result of this preoccupation with the monopoly problem is that if an economist finds something—a business practice of one sort or other—that he does not understand, he looks for a monopoly explanation. And as in this field we are very ignorant, the number of ununderstandable practices tends to be rather large, and the reliance on a monopoly explanation, frequent.
Economists’ understanding of industrial organisation improved greatly when it started studying contracting in greater detail, especially long-term contracting. Labour economists are doing the same when they consider search and matching as a better explanation of how the labour market works. The monopsony argument is fragile when closely examined as Kuhn said:
… as Manning himself acknowledges, if matching is balanced (which effectively amounts to constant returns to scale in the technology for recruiting new workers), all elements of monopsony disappear from the model and the neoclassical equilibrium again prevails: in the long run firms can expand without limit without needing to raise their wages.
Thus it is absolutely critical to the search-based monopsony model at the core of this book that there be diminishing returns to scale in the technology for recruiting new workers. In other words, for the theory to apply, firms must find it harder to recruit a single new worker the larger the absolute number of workers they currently employ.
Alan Manning wrote a great book called Monopsony in Motion: Imperfect Competition in Labor Markets but in a great review of it, Peter Kuhn said
The key point seems to be that the title Search Models with Ex-Ante Posted Wages in Motion, while considerably more accurate than Manning’s, is certainly less catchy.
Robert Lucas in a famous 1978 paper argued that all unemployment was voluntary because involuntary unemployment was a meaningless concept:
“The worker who loses a good job in prosperous time does not volunteer to be in this situation: he has suffered a capital loss. Similarly, the firm which loses an experienced employee in depressed times suffers an undesirable capital loss.
Nevertheless the unemployed worker at any time can always find some job at once, and a firm can always fill a vacancy instantaneously. That neither typically does so by choice is not difficult to understand given the quality of the jobs and the employees which are easiest to find.
Thus there is an involuntary element in all unemployment, in the sense that no one chooses bad luck over good; there is also a voluntary element in all unemployment, in the sense that however miserable one’s current work options, one can always choose to accept them.”
I agree that we all make choices subject to constraints. To say that a choice is involuntary because it is constrained by a scarcity of job-opportunities information is to say that choices are involuntary because there is scarcity. Alchian said there are always plenty of jobs because to suppose the contrary suggests that scarcity has been abolished.
Lucas elaborated further in 1987 in Models of Business Cycles:
A theory that does deal successfully with unemployment needs to address two quite distinct problems. One is the fact that job separations tend to take the form of unilateral decisions – a worker quits, or is laid off or fired – in which negotiations over wage rates play no explicit role.
The second is that workers who lose jobs, for whatever reason, typically pass through a period of unemployment instead of taking temporary work on the ‘spot’ labour market jobs that are readily available in any economy.
Of these, the second seems to me much the more important: it does not ‘explain’ why someone is unemployed to explain why he does not have a job with company X. After all, most employed people do not have jobs with company X either. To explain why people allocate time to a particular activity – like unemployment – we need to know why they prefer it to all other available activities: to say that I am allergic to strawberries does not ‘explain’ why I drink coffee.
Neither of these puzzles is easy to understand within a Walrasian framework, and it would be good to understand both of them better, but I suggest we begin by focusing on the second of the two.
“The researchers looked at different variables to understand why divorces tend to be filed by women. They suggest three main explanations:
- Over-exploited wives who do the majority of housework and parenting may feel that they have nothing to lose by leaving.
- Wives may have already benefited from financial investments made by a husband (for example, paying for education) and no longer require his support.
- Wives expect to get, and subsequently keep, custody of their children — if they didn’t, they probably wouldn’t file for divorce. (This is by far the most statistically significant explanation.)”
Source: Are Women More Likely Than Men To End A Relationship? | FiveThirtyEight
