Essays on Power in Labor Markets

Abstract

Workers’ pay and working conditions are determined not just by the productivity of their labor, but also by power and institutions. Factors affecting pay and working conditions may include the availability of good outside job options for workers; the presence of formal and informal labor market institutions which govern the distribution of rents between workers and other stakeholders; and the scale and scope of labor market regulation. In this dissertation, I examine three aspects of power and institutions in labor markets. In Chapter 1, “Employer Concentration and Outside Options” (co-written with Gregor Schubert and Bledi Taska), we ask the question “To what extent does employer concentration matter for workers' wages across the US, and for whom does it matter most?". Employer concentration – a scarcity of employers that a given worker can work for in their local labor market – can reduce the degree of effective competition for workers, increasing employers' wage-setting power (relative to a more competitive labor market). Using US-wide data over 2013-2016, we estimate the effect of employer concentration on wages, making two primary new contributions. First, we develop an instrument for employer concentration, based on differential local exposure to national firm-level trends. We use the instrument to estimate the effect of plausibly exogenous variation in employer concentration on wages across the large majority of U.S. occupations and metropolitan areas. Second, we adopt a flexible “probabilistic” approach to labor market definition, identifying relevant job options outside a worker’s own occupation using new occupational mobility data constructed from 16 million resumes. We use this data to develop an index of the value of these outside-occupation job options and estimate the effect of this index of outside-occupation option value on wages. We find that moving from the median to the 95th percentile of employer concentration reduces wages by 3%. But we also reveal substantial heterogeneity: the effect of employer concentration is at least four times higher for occupations with low outward mobility (like registered nurses or security guards) than for those with high outward mobility. While the majority of U.S. workers are not in highly concentrated labor markets, these estimates suggest that a material subset of workers do experience meaningful negative wage effects from employer labor market power. Our findings imply that labor market regulatory agencies and antitrust authorities should take employer concentration seriously. Policy responses may be most effective if targeted toward the local occupational labor markets characterized by both high employer concentration and few outside-occupation job options for workers. In Chapter 2, “The Declining Worker Power Hypothesis" (co-written with Lawrence H. Summers), we argue that the decline of workers' power to share in the rents generated by firms over the last forty years in the US has substantial explanatory power for major macroeconomic trends: specifically, the decline in the labor share of income, the rise in measures of profitability like Tobin’s Q, firm valuations, average profitability, and firm-level markups, and the decline in average unemployment even while inflation stayed low and stable (which can be interpreted as a decline in the Non-Accelerating Inflation Rate of Unemployment, or NAIRU). Roughly quantifying the degree of worker rent-sharing using estimates of union, industry, and firm size wage premia, we show that the decline in labor rents corresponds closely in magnitude to the decline in the aggregate labor share over 1982-2016, that industries and states with bigger declines in labor rents saw bigger declines in their labor shares and average unemployment rates, and that industries with bigger declines in labor rents saw bigger increases in measures of Tobin’s Q and average profitability. Together, our results suggest that the decline of worker power should be considered a major contributor to the defining macroeconomic trends of the last four decades in the US economy. In Chapter 3, “Incentives To Comply With the Minimum Wage in the US and UK" (partially co-written with Lindsay Judge), we investigate the compliance incentives created by the minimum wage penalty and enforcement regimes in the US and UK. Using data on penalties levied on firms for violations of the Fair Labor Standards Act’s minimum wage and overtime provisions in the US, and data on penalties levied on firms for violations of the National Minimum Wage in the UK, we estimate the average cost firms may expect to pay if they are caught violating the minimum wage. From a cost-benefit analysis standpoint, our estimates suggest that most firms must expect to face a probability of detection of at least 47-88% in the US, and at least 44-56% in the UK, to have an incentive to comply with the minimum wage. The level of government resources available for inspection, and the cost and difficulty for employees of bringing court action against non-paying employers, makes it likely that the true probability of detection is substantially lower than this for many firms. That is, the penalty and enforcement regimes in both the US and UK seem unlikely to give many firms an incentive to comply with the minimum wage. These limited incentives to comply with the minimum wage may help explain the substantial prevalence of minimum wage underpayment in both countries. Overall, the three chapters indicate the importance of labor market power and labor market institutions in the determination of wages – particularly for low- and middle-income workers. If society wishes to raise pay for low- and middle-income workers and to reduce income inequality, the essays in this dissertation suggest a number of possible policy responses: responding to employer concentration in a targeted manner through antitrust, wage floors, and other labor market regulations, increasing workers’ power to share in the rents produced by their firms by strengthening unions and promoting a role for workers in corporate governance – and ensuring that the enforcement regimes for these worker protections provide sufficient incentives for employers to comply.