Monday, September 30, 2019

Maybe corporations don't have enough power.

I think I have expressed skepticism previously that corporate or monopsonist power can explain the apparent growth in income inequality.  First, a careful look at changing income proportions shows that a decent portion of the drag on real incomes is due to housing expenses. Relatively little is due to rising corporate or interest income. Most of the relative difference between high and low incomes is more variance between different laborers or between wage earners and professionals who are frequently proprietors.  In fact, if corporate income or power was rising, monopsony power in labor markets should lead to less variance in wages.  High wages come from skill development and specialization. Frequently these are tied to specific institutional contexts. Specialization would make high earners more vulnerable to being captured by a few or one corporate buyer of their labor.

In a context of monopsony power, wages at the top of the spectrum would be held lower. Corporations wouldn't then voluntarily distribute them to workers with lower wages. But if firms lacked monopoly power, they wouldn't be able to retain the gains from that. The gains would be captured as consumer surplus by the firms' customers. In order to be competitive in the market for their goods and services, firms would have to assert their monopsonist power just to remain competitive by transferring those gains to the consumer.

Here, I am reminded of the conventional wisdom that asserts that mid 20th century corporations were more loyal to their workers and that a corporate job was more of a lifetime gig because corporations took care of their workers.  That doesn't really match very well with income data which doesn't show much variation in corporate operating income as a portion of total domestic income over long periods of time. But it does match with a context where more skilled workers were captured by powerful firms and less skilled workers benefit indirectly as consumers.  Maybe labor incomes had less variance because firms back then were more powerful.

Sometimes an IPO comes up for a company that markets itself as a tech startup, and people joke that it's just a dog food distributor with an app attached to it, or something.  But, maybe we have that backwards.  Maybe every company today is a tech start up.  Maybe, what pushed your wages up in the past was, say, being a machinist in a specific sector, where a few firms were interested in your skills.  But, today, a key path to higher wages is a job with a title like "systems administrator" or "data manager", and your skills are applicable in some way to 80% of the economy.

I suspect that generally there is too much focus on corporate power. Rather than debate whether they have too much or too little, I think attention is better focused on other structural issues. Rising costs of housing, education, health care, and public infrastructure, together with barriers to migration, are more important factors holding down real incomes below their potential. A problem with the corporate power issue may be that the argument about its effect have the sign of the factor wrong.  In the financial crisis, I think the focus on enforcing losses rather than maintaining broader stability presents a similar example where determined policy programs that have the sign wrong (more housing was needed in 2005, not less, for instance) are much, much worse than benevolent indifference.

There is an intersection between these issues. Because of the housing shortage, there is a lack of market access and mobility. Y combinator must be located in Silicon Valley. Being in Silicon Valley is essentially a 40% tax on business development.  The lack of access to that location simultaneously makes certain actors wealthier while reducing overall creative destruction.

The way to progress is to have more y combinators. Adding to the already high costs and barriers with new taxes and mandates hardly seems like a helpful response.

What if the problem is that corporate power is too low? Then lowering their power will worsen inequality even more. Things like codetermination might create even more obstacles to mobility and migration. Maybe the internal politics would serve to further increase the bargaining power of specialized high wage workers.

But, most importantly, over long stretches of time, labor and capital income grow at nearly a 1:1 correlation.  In so many ways our relationships are symbiotic more than they are in conflict. Maybe the focus on relative power is itself a problem. When the economy is growing, the rate of quits increases, and as the Atlanta Fed shows, wages for job switchers increase faster in a growing economy than the wages of other workers. It isn't the relative status of workers compared to employers that is the engine of that shift, it is the relative status of new, more productive firms over old, less productive firms. Surely the way to shared prosperity lies there.  An economy where a restaurant owner is bringing in customers like crazy, but she can't serve them because the potential waiters have found more productive things to do.  That seems like a problem to the restaurant owner.  The response shouldn't be to force them to pay waiters more.  The response should be indifference, which means the restaurant still feels pinched while some other firm somewhere produces high wage opportunities for workers because a growing economy is imbuing those firms with power.

10 comments:

  1. As usual, top blogging.

    I think attention is better focused on other structural issues. Rising costs of housing, education, health care, and public infrastructure, together with barriers to migration, are more important factors holding down real incomes below their potential---KE

    I would add in the tax code, and especially rising payroll taxes.

    I wonder about immigration. Repeatedly, we hear that we need migration to solve labor scarcity issues. But surely, labor scarcity should result in rising wages. I hope for several generations of "labor shortages" in America.

    The employee class in developed nations no longer reproduces itself. In Hong Kong the average woman has 1.2 babies. We are told the solution to this problem of declining birth rates is not to improve labor conditions or improve the lot of families but to import workers.


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    1. Why are you always so anti-immigration? From a moral point of view, helping a migrant is just as important as helping someone who happens to be born on the right side of the border.

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    2. No, it’s not. That’s peak midwit.

      By your logic a spouse or children are just “humans” and should be treated the same as everyone else.

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  2. Would pro sports be an example of this. It looks to me like once the owners held all the power and the athletes did not earn so much but the tickets were cheaper.

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    1. I think you may be right. Although, I am not sure I have a good explanation for the fundamental changes in the markets for pro-athlete labor over time that caused this shift. But, I think you're correct that it is a good example of the idea.

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    2. Any analysis of pro-sports should probably compare eg American and European pro-sports labour markets.

      It's really weird that the Americans have salary caps and losing teams staying in the league etc; and the supposedly more socialist Europeans freely trade players who can be paid arbitrary amounts of money and there's a constant churn of creative destruction in relegations and promotions.

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  3. "In a context of monopsony power, wages at the top of the spectrum would be held lower. [...] But if firms lacked monopoly power, they wouldn't be able to retain the gains from that."

    Incorrect. The firms do not need monopoly power, what they need is monopsony power.

    Consider the stereotypical coal mine operator who has monopsony power over their company town. They drive the wages down and profit from that. Yet they are a competitive seller of coal.

    As long as no other employer can come in and offer higher wages (or the employees cannot easily move away for better jobs and higher wages), the coal company can profit from those low wages indefinitely, despite having no monopoly power in the market for coal.

    That's what monopsony is: monopsony power, not monopoly power.

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    1. The difference is that Kevin is talking about economy wide, not localized. If all the coal firms have monopsony power, and are competing against each other, all of them will reduce prices until the point that the profits on at least some extraction is zero. There will still be profits, as the least marginal will still have profits, but the overall wage decreases will mostly be realized as lower prices. If it happens to bring marginal difference to a flatter slope, the widespread monopsony power plausibly can even reduce overall profits.

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  4. I've yet to hear the concern over inequality expressed as a concern that highly specialized workers, for example tech workers, are too highly paid. Rather, the concern generally focuses on a class above them, the 1%, 0.5%, 0.1% or 0.01%. 1% starts at $420,000/year, and 0.5% at $1,800,000/year.

    Looking at the composition of the 1% [1] gives a good reason to focus on structural issues (lawyers and physicians being highly represented), but the real concern starts at 0.5%. These incomes are mostly made through stock performance, either on accumulated capital or performance plans. It's the increases in this area, which are of most concern, and it's hard to see them being driven by much other than generally increased corporate power.

    It's long been clear to me that a significant, if not the significant driver of that increase in corporate power is the increased globalization of corporations that has gone unchecked by any matching increase in global regulation. Globalization without more international agreement to standardize regulation such as tax levels allows corporations to pit countries against each other, forcing competition into anti-social areas (leading to reduction in social services and worker wage stagnation).

    [1] https://archive.nytimes.com/www.nytimes.com/packages/html/newsgraphics/2012/0115-one-percent-occupations/index.html?ref=business

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    1. If it was an increase in corporate power, then those gains would be to executives holding shares of Sears, JC Penny, GE, Kodak, etc.

      Windfall gains to founders of Google, Amazon, Facebook, etc., are evidence of a lack of corporate power.

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