A Last Stand for Labor ?

Source: The Rise and Fall of American Growth (Robert Gordon)

A dominant economic narrative of the last decade has been the parable of capital’s triumph over labor.

Two main points summarize this story:

1) Returns on capital have outstripped gains in labor productivity. Stagnant population and labor productivity growth in the west has led to capital taking a larger share of national income. Technological growth can improve labor productivity but conversely can just enhance capitals’s ability to substitute labor which leads to the second point.

2) Automation is hollowing out the middle : Automation will likely create more jobs than it destroys. Indeed many forecast a Cambrian explosion of sorts in service industries like education and healthcare. Unfortunately, these jobs do not pay as much as the manufacturing jobs that are being replaced. Jobs will exist, but with depressed wages and those who own the means of automation will capture the workers’ lost surplus. (Note: This is a nutshell Andrew Yang’s argument for UBI)

Is Labor then destined for a Hobbesian future of fewer work opportunities, diminished wages and brutish competition?

Even our most progressive politicians seemed resigned to this fate. The solutions they propose are centered around massive redistributions of wealth from those who hold capital to those who supply labor, either in the form of a universal basic income or in the form additional taxes for the wealthy.

There is merit to these solutions. (Personally I am in favor of them to an extent and am not here to bash them in any way). But, I believe these solutions may be bandaids for the problem. We should be generating solutions to reinvigorate the labor markets so that they can once again generate capture a larger share of national income. Below are some of my thoughts on how can we can address structural weaknesses of the US Labor Market.

Unshackle Labor

A huge engine of American growth has been the relative liquidity of our capital markets. It is relatively easy to reallocate capital from one sector of the economy to the other.

Labor on the other hand remains shackled. As a nation we should be able to quickly redeploy labor to the places it is needed most. But here there are two main impediments that are hindering the mobility of our labor force:

I thought Manhattan was expensive… then I moved to SF for the summer

1. Poor Housing Policy has made it extremely expensive to live in major cradles of industry, places like New York or San Francisco for example. In essence it is difficult for workers to relocate to places where they may command a wage premium.
2. Non Compete Agreements have proliferated to almost a quarter of the labor force (Even Jimmy John’s sandwiches had their employees sign one). This is especially corrosive because job switching is one of the largest drivers of individuals’ wage growth. Indeed the ability to quickly poach top talent at every level has been instrumental for the ascendance of Silicon Valley (California has banned non compete agreements).

Break Up Capital (Especially Outside Major Cities)

There has been a dramatic rise of concentration across several industries. This leads to the usual concerns of concentrated industry: diseconomies of scale, inflated pricing, and hampered innovation . But perhaps most worrying is that there is significant evidence to suggest that firms are using their market power to exert downward pressure on the wages of local labor markets.

Graph of Industry Concentration in US (Measured by herfindahl index)

Source: Revfin.org

The effect of these labor monopsonies are greatest outside of our major cities because this is where it is hardest for workers to change jobs, in part for the reasons mentioned above.

I want to stress this last point clearly. The giants of Wall Street and Silicon Valley are problematic and it is not clear to me that their mantras of network effects or too big too fail are warrants for their awesome size. But in these large metropolitan areas, such Goliath's exert less downward wage pressure because there is lots of competition. Our concern should be especially geared for labor markets outside of major cities.

We need to seriously rethink our anti trust frameworks given the winner take all dynamics of several industries.

I Could Be Totally Wrong

It is entirely possible that the solutions I am proposing will make only a dent in the problem. It is entirely possible that the modern economy is only capable of creating fantastic riches for the most technically skilled worker. In this case labor’s only hope is if the nation is able to

1. Retrain people so that they can take the technically demanding jobs that automation does not capture. I don’t know if the US education system is robust enough to handle this. Also, I am not convinced that the truck driver to software engineer trope espoused by politicians is truly pragmatic (It ignores cultural expectations and the limits of educational resources).
2. Leverage tools like UBI : This does not have to be viewed as labor’s final surrender. Indeed perhaps we could leverage this tool to temporarily alleviate inequalities while we rework our education system.

Like I said, I could be totally wrong. But the workers of this nation and the spirit of the American Dream demand that we try everything in our power to give labor a last stand.

Sources

1. http://revfin.org/are-us-industries-becoming-more-concentrated/
2. https://www.bloomberg.com/opinion/articles/2018-12-05/noncompete-agreements-are-bad-for-employees-and-the-economy
3. https://www.forbes.com/sites/adammillsap/2019/10/04/the-us-labor-market-is-still-growing-but-these-areas-are-struggling/#37fadf9f46ac