Labor Market Research

by Don Boudreaux on December 13, 2013

in History, Myths and Fallacies, Reality Is Not Optional, Work

This morning I heard this report on NPR.  So much of what we know just ain’t so.  Not only is this fact true about medical conditions; it’s true also about economics and history.  Speaking of which…

My friend Frank Stephenson, Professor of Economics at Berry College, sent me today this pdf of a 1997 paper, “Operations of ‘Unfettered’ Labor Markets: Exit and Voice in American Labor Markets at the Turn of the Century,” by the economic historian Price Fishback.  It’s a paper that I recall hearing about, but have not read until now.  Price’s paper should be especially enlightening to those who worry that the economy is infected with such quanta of monopsony power as to justify minimum-wage legislation.  In addition, this paper puts the company town in better historical perspective.  Here’s a slice from the paper’s conclusion:

How did “unfettered” labor markets operate in America at the turn of the century?  An extensive amount of scholarship by economic historians shows that they functioned well enough that workers typically had multiple opportunities and were able to move to take advantage of them to improve their situation.  This ability to exit in addition to active use of collective action in some settings served as a check against employer exploitation of their workers.  Institutions like the company town, company unions, and share tenancy contained features that helped resolve problems with transaction costs.

Price goes on to point out that early 20th-century labor markets were, of course, not ideal – but they worked surprisingly well.  Later in the “Conclusions” Price writes:

Here is one interpretation of what the scholarship in economic history implies for the present.  The markets today, if unregulated, probably would work better than in the early 1900s because information costs and mobility costs are lower and the average person has more general human capital.

Makes good sense.  And yet it remains a popular refrain among those who seek justification for minimum-wage legislation to insist that the market for low-skilled labor is infected by monopsony power.

Frequent Cafe commenter John Dewey does a splendid job supplying evidence and arguments from the real world to cast great doubt on the descriptiveness of the monopsony model.  In addition to evidence of the sort gathered by scholars such as Price Fishback and thoughtful business people such as John Dewey, it’s important to keep in mind a fact that academic economists too often overlook – namely: competition in reality takes place on many margins, and therefore (say) a worker’s successful bargaining for better benefits on margin A might result in that worker’s willingness to take fewer benefits on margins or M.  An observed worsening of a worker’s compensation-package along margin W or M - accompanied by the observation of that worker not immediately jumping to a new job – might be evidence of the employer’s monopsony power.  But it might also be evidence of improvements, along one or several other real-world margins, in the specific details of the worker’s package of total compensation.

One more point: even if an observed downward adjustment on margin W is in fact an adjustment that is not off-set by any upward adjustment for that worker on some other margins, the fact that the worker does not immediately jump to a new job is insufficient evidence from which to draw a conclusion of monopsony power.  Real-world frictions and unavoidable realities – including the fact that time is typically required to scout out and to plan adjustments from worse to better situations – should not be labeled “monopsony power” or any other species of “market imperfection.”  As many wise scholars, most famously Harold Demsetz, have argued, comparisons of actual reality to unobtainable ‘ideal’ states of imagined reality have no relevance for policy-making.  The inability of a worker to quickly switch jobs if his employer, say, cuts his hourly wage by $1.00 is at least as likely to be evidence of the unavoidable realities of markets – uncertainties, risks, the costliness of information, the greater time required to carry out thoughtful actions as opposed to rash actions – as it is of any situation deserving the label “market imperfection.”

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