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Krugman Flunks Basic Labor Economics

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Paul Krugman, very sadly, no longer even pretends to reason like an economist.  He instead reasons as if he’s a 19-year-old cultural-studies major.  Here’s a letter to the New York Times – a letter in which I grant, only for purposes of this letter, Krugman’s (and the Department of Labor’s) assumption that U.S. labor markets are uncompetitive.

Paul Krugman argues that the Obama administration’s new overtime-pay regulations for many salaried workers are part of a policy of “strengthening the bargaining power of lower-paid workers” (“Obama’s War on Inequality [2],” May 20).  Mr. Krugman is mistaken.  These regulations do not even pretend to affect workers’ ability to collectively bargain, and they neither intensify employers’ competition for workers nor ease workers’ abilities to quit jobs in order to search for better ones.

Indeed, far from strengthening workers’ bargaining power, these regulations decrease it by stripping them of a valuable bargaining chip – namely, the right to agree to work overtime for no extra pay in exchange for higher salaries and the greater flexibility afforded by salaried work (as opposed to hourly work).  The only way that governmental obliteration of this bargaining chip would help workers is if, first, employers do indeed possess excessive bargaining power (a proposition that the Department of Labor simply assumes and does nothing to prove) and, second, the lone possible effect of this excessive bargaining power is to enable employers to force salaried workers to work overtime for no extra pay.

Even if we grant, however, that employers have excessive bargaining power, forcing workers to work overtime for no extra pay is hardly the only way that this power can be used against workers.  Such employers will respond to these regulations by instead cutting some workers’ base salaries, by reducing other workers’ fringe benefits, and by converting yet other workers from the status of higher-paid salaried workers with flexible schedules and flexible working arrangements to that of lower-paid hourly workers with inflexible schedules and inflexible working arrangements.  In short, employers with excessive bargaining power will easily find ways around these regulations to continue to exploit workers.  But now workers – allegedly already suffering from too little bargaining power – are stripped also of the ability to bargain for higher salaries and more flexible working arrangements by agreeing to work overtime for no extra pay.

Donald J. Boudreaux
Professor of Economics
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA  22030

Here are three further points:

First, typical cultural-studies majors and other non-economists, unlike competent economists, understand that ‘excessive bargaining power’ is not ‘unlimited bargaining power.’  If employers had unlimited bargaining power, all workers would work for virtually zero wages.  But they obviously don’t.  Employees retain, even in the face of excessive employer bargain power, some ability to bargain for benefit A, B, or C by agreeing to work-condition X, Y, or Z.  This fact is why stripping salaried workers of the right to agree to work overtime for no extra pay harms these workers by reducing their bargaining power against even employers with monopsony power.

Put differently, even when employers have monopsony power, precisely because they ‘exploit’ that monopsony power fully, at the margin the monopsony power is spent.  At the margin workers have some real ability to bargain for benefit A, B, or C by agreeing to work-condition X, Y, or Z.

Second, in part because of the first point just above, many of the adjustments in competitive labor markets to overtime-pay mandates and other such government diktats will closely resemble the adjustments to such diktats in monopsonized labor markets.  For example, in both a monopsonized labor marked and in a competitive labor market, many salaried workers will find their base salaries reduced in response to overtime-pay regulations such as those imposed by the D.o.L.

Third, it’s empirically absurd to think that U.S. labor markets are generally uncompetitive.