## Incomplete Picture ## Source details **Canonical URL:** [Incomplete Picture](https://www.imf.org/-/media/files/publications/fandd/article/2024/03/naidu.pdf) ## Other formats - [Markdown version](/-/media/files/publications/fandd/article/2024/03/naidu.pdf.md) - [Structured JSON version](/-/media/files/publications/fandd/article/2024/03/naidu.pdf.json) --- ### Shortcomings of the standard labor-market model - The standard competitive model treats labor like other commodities, applying the law of one price and viewing employer-employee relations as equivalent to market transactions in goods. - The model presumes supply of human capital and technology-induced demand are the main levers for labor market outcomes, treating institutions and norms as obstacles to efficiency. - Under the model, firms have no scope for wage setting; for example, a company reducing wages by 10 percent would, in theory, lose all workers to competitors. - The model fails to predict involuntary unemployment and underplays the roles of firms, market power, cultural norms, unions, and governments. ### Empirical evidence contradicting the textbook view - Experimental and quasi-experimental estimates in relatively unregulated settings show that a wage cut leads to far smaller quit responses than predicted by perfect competition: - In many cases, only 20 to 30 percent of workers leave after a wage cut; in developing economies the fraction is lower. - Matched employer-employee data and transparent quasi-experiments reveal: - A significant share of wages is explained by employer behavior. - Firm-specific wages reflect employer productivity and profitability, conflicting with the law of one price. - It is remarkably difficult to find negative effects of a minimum wage on employment in the empirical literature. - Labor market concentration is negatively correlated with wages; mergers of large employers lower wages. - Unions and minimum wages mitigate the negative effect of concentration on wages. - Quasi-experimental changes in wages across workers lead to only moderate changes in quits and recruits. - Collectively, these findings point toward pervasive monopsony: firms set wages for groups of workers, losing those with better outside options but profiting from those without. ### Causes of monopsony and search frictions - Employers have wide latitude to set wages because job search is costly and many job opportunities are communicated informally via social networks. - Evidence shows workers have relatively little credible information on jobs outside their firms (Jäger and others 2022). - Jobs deliver more than income—social experiences, status, identity, relationships, commute time, task fit, scheduling, and hours—so workers value nonwage amenities. - Heterogeneity in tastes and knowledge about outside jobs gives firms scope to reduce wages, retaining workers for whom the job is the best available. ### Antitrust, contractual restraints, and intrinsic monopsony - Antitrust policy has increasingly focused on employer market power: - Recent horizontal merger guidelines suggest screening mergers for harm to workers. - Antitrust authorities have pursued restrictions on noncompete clauses and no-poaching agreements. - Naidu and Posner (2022) argue antitrust is only part of the solution because much monopsony power is intrinsic to labor as a commodity and not solely the product of artificial constraints or undue concentration. ### Wage-setting behavior, firm incentives, and misoptimization - Monopsony is only one component of firms’ wage-setting calculus; countervailing constraints include: - Internal constraints: need to motivate effort, management preferences, norms of fairness and reciprocity. - External constraints: patterned wage setting, minimum wages, and unions. - Efficiency-wage concepts emphasize in-work behavior; firms that desire worker effort must restrain some wage-setting power. - Evidence of employer misoptimization: - Dube, Manning, and Naidu (2018) document pervasive round-number bunching in administrative data, with the most common nominal hourly wage being $10.00 over a long period. - Bunching arises because employers fail to set wages precisely to maximize profits; national and multinational employers often set uniform minimum wages irrespective of local conditions. - When managers focus on profit maximization, wages are lower and turnover higher (Acemoglu, He, and le Maire 2022). ### Trade-offs and limits of policy instruments - Minimum wage: - A popular antidote to monopsony but a blunt instrument that targets only bottom-of-distribution wages. - Theoretical effects on employment are indeterminate: low-productivity jobs may shrink while high-productivity jobs may expand. - Labor market standards set remotely by regulators risk being too high or too low and may fail to account for valued nonwage amenities or firm-specific monopsony. - Recent evidence suggests that, in the United States, on balance, minimum wages have not been set too high. - Worker representation and collective bargaining: - Collective and sectoral wage bargaining and democratic unions can improve efficiency, fairness, and the balance of power. - Workplace unions and worker representatives possess private information about employer constraints and nonwage amenities. - When backed by a larger union federation or government mandate, worker representation can offset employer power in ways attuned to local conditions. - Recent research suggests that in Europe increased worker representation has few observable adverse consequences. - Worker representation can impose governance structures on workplaces—childcare, parental leave, remote work, scheduling, promotions, health and safety—reallocating power between employers and workers. - The outcomes depend on the inclusiveness and accountability of union governance; increased representation opens the possibility of more democratic and efficient workplaces compared with laissez-faire, employer-dominated alternatives. *Suresh Naidu, Feature, MARCH 2024.* --- _Source: https://www.imf.org/-/media/files/publications/fandd/article/2024/03/naidu.pdf_