(Bloomberg Opinion) -- Alan Krueger, the Princeton economist, gave a luncheon talk last week at the Kansas City Federal Reserve’s Jackson Hole conference about slow wage growth in the otherwise hot U.S. economy. Economists used to assume that when unemployment is as low as it is now — 3.9 percent — the law of supply and demand would kick in, and force wages up as companies competed for workers.
But that hasn’t happened, so economists have been left to come up with new theories. One popular thesis is that the rapid concentration of companies — as well as the rise of dominant corporations like Amazon.com Inc. and Apple Inc. — has given rise to monopsony power, meaning that sellers (or employees) have no options other than dealing with one dominant buyer. And companies have used that monopsony power to pay workers less than they might if a true supply-demand dynamic were in place.
In his talk, Krueger, who served as chairman of the Council of Economic Advisers under President Barack Obama, agreed that the rise of monopsony power played an important role in holding down wages, citing one authoritative study that showed that “wages are lower in more highly concentrated labor markets, and the connection between wages and employer concentration increased over time.” He also noted that collusion between companies is more likely to take place if there are only a few of them — and he cites a number of modern examples of collusive behavior.
But Krueger went on to note that, to some degree, monopsony power has always existed in the U.S. economy. What has changed is the ability of workers to push back against the desire of corporate executives to keep wages as low as possible. The vehicle that made that pushback possible, of course, was labor unions. The decline of unions has robbed employees of the thing they most need to wrest wage hikes from companies: leverage.
Timothy Noah, in his 2012 book “The Great Divergence,” wrote that incomes in the U.S. were their least unequal between 1944 and 1977 — which also happened to be the golden age of unions. Steelworkers, autoworkers and manufacturing employees of all sorts made good middle-class incomes, with generous pensions and benefits. They got regular raises. But the main reason is that they were unionized. They negotiated with company executives who always knew that if the negotiations failed, the threat of a strike loomed. That was leverage.
“Collective bargaining,” said Krueger in his talk, “was an effective counterweight to employer monopsony power.” Indeed, some nonunion companies gave raises simply to head off a possible union drive.
According to Krueger, a quarter of the work force in 1980 belonged to unions. The next year, Ronald Reagan fired the 11,359 air-traffic controllers who had gone on strike; in so doing, he ushered in an era in which companies, the government and the courts robbed unions of most of their power.
Government rules and Supreme Court rulings have made it harder to unionize a plant, and easier to fire union organizers. Companies like Toyota Motor Corp. have put factories in the anti-union South instead of Detroit. Other companies have moved manufacturing overseas, leading to job losses for unionized workers in the U.S. Boeing Co. has long had a unionized workforce in Seattle. But since 2011, it has also employed 7,000 nonunion workers in South Carolina. Now, the threat that Boeing might move work to South Carolina, at the expense of Seattle, hangs over every union negotiation. Thus, even at a company that is unionized, workers have less leverage than they once did.
Today, union membership nationwide is down to 10.7 percent; if you subtract the public-sector unions, it’s more like 6.5 percent. And it’s going to keep going down, thanks in part to a pair of recent Supreme Court rulings. In one, unions were barred from collecting fees from non-members to defray the cost of collective bargaining that potentially could win higher wages for all workers. In the other, employers can force employees to take disputes to binding arbitration instead of being able to file a class-action lawsuit.
Noah’s purpose in writing about the decline of labor unions was to show how it played a role in widening income inequality. What we’re seeing with sluggish wage growth is the flip side of the same coin. As Krueger writes, “I would argue that the main effects of the increase in monopsony power and decline in worker bargaining power over the last few decades have been to shrink the slice of the pie going to workers and increase the slice going to employers, not to reduce the size of the pie.”
I don’t doubt that the country would be better served if there were less concentration, and reduced monopsony power. But if we really want to speed up the rate of wage growth — and take a cut at income inequality at the same time — the surest route to success would be to reverse the current anti-union trend, and make it easier for workers to unionize. That’s the leverage they need.
To contact the editor responsible for this story: James Greiff at jgreiff@bloomberg.net
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Joe Nocera is a Bloomberg Opinion columnist covering business. He has written business columns for Esquire, GQ and the New York Times, and is the former editorial director of Fortune. He is co-author of “Indentured: The Inside Story of the Rebellion Against the NCAA.”
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