What the coronavirus crisis tells us about our labor market
The bottom line: our labor market has failed
I can already hear the wailing and the gnashing of teeth.
As reported in the Wall Street Journal, three University of Chicago economists have released a working paper describing how two-thirds of American workers eligible for unemployment insurance can receive benefits which exceed lost earnings and one-fifth can receive benefits at least double lost earnings.
The paper goes on to describe how such an allocation of benefits can disincentivize work and make it harder for the United States to recover from this recession.
The response from the right has been telling. In Montana, Oklahoma, Tennessee and South Carolina, the state is threatening to take away unemployment benefits from people who refuse to return to work after being laid off. This policy has even taken hold in workers’ paradise Vermont.
It makes sense, so the argument goes. If people won’t work because they are earning too much money in unemployment, take away those benefits.
The response on the left has been somewhat different. So what if people are earning more money through unemployment than from work. We should just throw more money at people in the form of “universal basic income” payments.
Both sides are missing the point. The right is correct in that we want to create incentives for people to work and work hard. Without such incentives, our economy grinds to a halt. If nobody works, who will produce the wealth that grows our economy?
The left is correct in that people cannot survive on what they earn. My daughter is thrilled with her job at a major retailer, as she should be. She is a department lead, an extremely responsible position at which she works very hard. She works full time, and in that position she cannot take a second job since her hours change from week to week.
She earns $11 per hour. After deductions for taxes and health insurance, that puts her and her son just above the poverty line.
Hooray. She works hard and is just above the poverty line. But then factor in the cost of daycare, which she needs to work, and there is barely enough money left over for her to pay her bills. And because she is successful enough to rise above the poverty line, she is ineligible for most support programs.
My daughter is lucky. She is smart, hard-working and has a good job. But in addition to that, she is a widow and thus gets Social Security survivor benefits. She also has parents who help her out whenever we can both financially and with childcare. She also has only one child.
Most single mothers don’t have all those advantages. What can they do? Unfortunately, there is no good answer to that question.
But the good news is that Jeff Bezos, founder of Amazon.com, is worth nearly $150 billion. According to Forbes, he was the first centi-billionaire. Hooray! Capitalism is working. Don’t you feel richer now?
I don’t want to diminish Bezos’s accomplishments. He is one of the good guys, who actually built an impressive business from scratch. He deserves to be compensated commensurately. But to the tune of $150 billion? While many of his workers earn wages keeping them below the poverty line? Something is wrong here.
The problem starts with our conception of the labor market. Economists envision a market in which two sides bargain for wages in exchange for work. In theory, the market should settle at some equilibrium at which supply meets demand, where employers find workers at a wage they are willing to pay, at a wage where workers are willing to work.
But, like so much of classical economics, the theory ignores certain realities. The first is that the bargaining power of the two parties is unequal. For the employees, it is literally a matter of life and death that they remain employed, especially in the United States with our pathetic safety net. Employers, however, for the most part, view employees as commodities, essentially an expense that needs to be controlled.
Second, employees do not have high mobility. If my daughter wanted to really play off the employers against each other, she would have to be willing to move wherever the jobs were located. How could she do that, however, when she relies so much on her family for childcare and other assistance? That’s setting aside the emotional ties employees have to their homes. Employers have no such restrictions.
Finally, for most people, the labor market is a monopsony. In monopolies, the supplier in a market is able to control the terms of the deal since the buyers have no other options. In a monopsony, the buyers are able to control the terms of the deal since the sellers have no other options. In the labor market, employees are the sellers and employers are the buyers.
For most people, especially given the consolidation of smaller companies into larger ones, the options of who they can work for are limited based upon their skills and their location. Employers face no such restrictions. So who gets to control the terms of the deal? The employers.
In a prior post, I pointed out that a minimum wage of $15 per hour would allow a two earner family to reach the median household income for a family. Employers have fought against such a wage increase because it would reduce their competitiveness, and it is a burden on the free labor market. Well first, as we have established here, the labor market is hardly free.
Secondly, a minimum wage does not decrease competitiveness because it sets a floor that all employers must meet. In other words, as an employer, your costs cannot be undercut by your competitor because your competitor must pay the same wages as you. That is why regulation works. Thus, all that a higher minimum wage results in is less return to the shareholders, who are doing fine by the way.
But even if we buy the argument that a minimum wage imposed on employers by the government is anti-free market, there are at least two free market-based solutions to this problem that have earned the scorn of the right wing and have been forgotten by the left.
The first is labor unions. Labor unions allow employees to bargain on an equal basis with the employer. The corporate entity essentially allows capital to bargain collectively. Why can’t labor have the same advantage? Unfortunately, the right has declared war against unions and has basically made them illegal in this country.
The second approach is for the government to compete in the market. This is what happens in the higher education market, for example, and the result has been the best university system in the world. Consider how the University of Michigan competes against Harvard. The result is that Harvard must be better.
We can do the same in the labor market. During the New Deal, when people didn’t have work, the federal government employed them. The result is that private employers had to pay them more to lure them away from the federal government.
Both these options are available now to address the gross inequities in our labor market. But instead of addressing these structural issues, we have further tilted the labor market to advantage employers over employees. Thus the punitive actions on the part of the states when employees refuse to return to work for less pay in a dangerous environment. At the same time, the federal government is looking to limit employer liability when employees get sick because they were forced back to work. How is that fair?
The truth is that it’s not fair. And this is the lesson from the coronavirus. The problem with people earning more from unemployment than they do from working is not that we need to end unemployment insurance, or that we need to give them free money. What we need to do is make it so that when people work they earn a decent living wage.
Anybody who is working full time like my daughter is should be able to support a family without assistance from the government or her family. The extent that the government has stepped in to help employers reduce their labor costs has resulted in the failure of the labor market. The solution is not to take money away from people, or to simply give it to them.
The solution is to give employees some bargaining power that lets them negotiate fair wages with their employers.