How to improve firms’ treatment of workers

by on July 13, 2012 at 7:37 am in Economics, Law | Permalink

Say a firm screws over a worker on ten dimensions at once, subject to some constraint of the worker leaving.  With those ten depredations, the firm tries to extract from the worker as efficiently as possible, but again so the worker does not leave or leaves only with some lower probability.

Let’s then say the law alters one of those dimensions to favor the worker, for instance the firm cannot force the worker to consent to a body search.  The firm may then increase one of the other depredations. Perhaps not for individual workers on the spot (there is “depredation stickiness”), but over time firms will fill the niches of new depredations to the maximum degree possible.

The new depredations will be less efficient ways of extracting rents than the old, which may hurt the worker.  At the same time, the firm’s rate of return on enforcing depredations may decrease, which may help the worker.

The net effect is indeterminate.  Note also that the lower efficiency may in the longer run limit firm entry and production, which will hurt workers and consumers (and possibly shareholders).  Again, the net effect still is indeterminate but the more you think about this model the less you will see it as an effective way to help workers.  You might try “regulating all ten depredations” but for that to work you also must fix the wage, and so on.

Maybe some of the model variants here will help the workers, but come on, let’s be realistic.  Is it the case that the commentators have firm beliefs about these models for well-argued reasons?  I don’t think so.  It is more likely the case that there is a core belief something should be done, with not too much concern for the systemic effects nor with the “not totally sound but still better than what the critics are serving up literature on compensating differentials.”  I am worried by the common tendency to first cite a lack of perfect competition and then assume the proverbial pony.

Here is Henry Farrell’s response to Matt Yglesias.

Fortunately there is a rather smooth path forward.  Raise the utility of unemployment to workers.  This could be a guaranteed annual income, better unemployment insurance, more food stamps, whatever.  Call it the welfare state.  Improving the welfare state will improve worker bargaining across virtually all workplace dimensions and in the longer run limit the scope of all the employer depredations.

We’re back to the point that what helps is to give people cash, or something cash-like, including when it comes to the dimensions of workplace quality.  It is also a huge help to institute policies which will raise rather than lower worker productivity.

As I said before, the criticisms haven’t even yet dented the traditional economic point of view on this issue.  Those criticisms are operating within the current frontier of analysis, not on it much less beyond it.

Andrew' July 13, 2012 at 7:43 am

Luckily this cash of which you speak always comes from the meanie employers and malingering employees…

The Anti-Gnostic July 13, 2012 at 8:06 am

Sounds like a plan! Don’t like your job, quit and live off the taxpayers.

Bonus points for not mentioning immigration.

TylerG July 13, 2012 at 8:10 am

Originally, the CT’ers were simply trying to shoot fish in a barrel by discussing the inconsistencies of positive liberty as emphasized by deontological liberatarians – fine, whatever. Not all (if, in fact many) are hardcore ideological adherents. However, they’re entire argument pathetically collapses when it comes to the actual substance of social science and sound public policy. They’re prepared to have a discussion on the philosophical side but not the practical one (which as far as I can see does nothing bu indulge the ‘perfect solution’ fallacy).

Andrew' July 13, 2012 at 8:28 am

“…inconsistencies of positive liberty”
How even that?
“you can’t contract into slavery…voilà!!!”
Says who?
“Even Robert Nozick says so!”
Not exactly, but okay, so he was right about that but wrong about…what?

There is no inconsistency, really. It’s why I’m a Federalist in lieu of panarchy.

Joshua Miller July 13, 2012 at 8:19 am

You wouldn’t accept a similar argument for laws and regulations, would you? (“Suppose a totalitarian country screws over its citizens on ten dimensions at once….”)

I think the argument would go a lot more smoothly if you’d directly address the assymmetry you see between state-level depradations and employment-level depradations. Is the net effect of single-axis depradation-reduction in China really indeterminate?

One obvious difference is that states have exit controls, so “voice” and various rights-regimes may be the second-best substitute. But why then fight for any property rights other than the right to free movement? Let Chinese workers enter the US and Europe at will, and competition among states for citizens will produce utility-maximizing results.

Right Wing-nut July 13, 2012 at 10:10 am

Umm. That’s actually pretty close to what he does say. Tyler is a huge fan of open borders, and dumps on those of us who disagree quite regularly when the subject arises.

Joshua A. Miller July 13, 2012 at 10:40 am

Actually, he’s mentioned that he avoids immigration issues because he doesn’t like how commenters respond to it. (But I *think* you’re right that he does generally prefer open borders.)

But my point was just: he wouldn’t be satisfied to ONLY comment on immigration (i.e. exit) rather than particular rights-regimes and policies, i.e. “voice.” Yet in the workplace, he seems to see this as adequate.

Ricardo July 13, 2012 at 11:34 am
Joshua A. Miller July 13, 2012 at 12:35 pm

That is helpful, thank you. I’m surprised to learn that, but it makes sense of his claim that he doesn’t like how immigration discussions go.

However, this just emphasizes my question: if Tyler doesn’t think exit is better than voice for states, why does he think exit is better than voice for firms?

Doc Merlin July 13, 2012 at 3:50 pm

Doesn’t the recent book by Acemoglu show that exit > voice?
The examples he gives wrt to North America seem to imply that strongly.

Bob Dobalina July 13, 2012 at 5:09 pm

In that thread, Barkley Rosser writes “(and, heck, we all know what an economic disaster Ireland is these days!)”. Which is funny because he was being sarcastic and the comment was from 2007.

Joshua A. Miller July 14, 2012 at 11:56 am

Doc Merlin: It looks to me like _Why Nations Fail_ supports voice over exit for nation states, because nations without inclusive institutions nations fail.

Floccina July 13, 2012 at 12:08 pm

Good reason to push Government actions down to the lowest level possible.

John Schilling July 13, 2012 at 4:48 pm

Even with open borders, there is a very large transaction cost to changing states. And states have native populations, so potential victims of state abuse don’t have the option of due diligence before making their choice. If the only check against abuse is that people can move away, states can and mostly will abuse their power at levels only not far below that which would cause a mass exodus – and part of that abuse will be to try and increase the transaction costs for prospective emigrants. So there is a need for other safeguards against abuse of state power.

The transaction costs of changing jobs are also not trivial, and those who would argue the case for or against regulation of employers would do well to keep that in mind. But the cost of taking a new job is vastly less than the cost of moving to a new country, so there won’t be a one-for-one correspondence with the sort of safeguards we demand against abuse of state power and the regulations we impose on corporate employers.

And for that matter, corporations generally do not have native-born employees, which is another point of divergence. Given complete information, potential employees can reasonably be expected to steer clear of jobs that offer unsafe or abusive working conditions without appropriately compensatory wages, and having accepted the job can be assumed to have found the wages sufficient compensation for the risk or abuse. Complete information is not of course a given – employers can and frequently do decieve employees about what they can expect on the job. That would be fraud, and wrong, and ought to be illegal. It is also an avenue by which the problem of corporate malfeasance can be addressed, that is not nearly so effective against state malfeasance.

So, yeah, we might “accept a similar argument for laws and regulations”, but only vaguely similar and not nearly to the same degree. I don’t see it as a terribly useful analogy.

Joshua A. Miller July 14, 2012 at 12:00 pm

Thanks for the thoughtful response.

I wonder, though: doesn’t this argue for lowering transaction costs to change states (I.e. upsides of eurozone) as much as firms? If we take transaction cost issues seriously, we shouldn’t care about “native-born” issues if we can reduce transactions costs to Coasean friction-less ones, right?

Tyler’s argument from political culture against open borders would equally well apply to the corporate culture of Microsoft or Google or Valve, wouldn’t it? (And wouldn’t Microsoft be better off if it were more like Valve?)

Morgan Warstler July 13, 2012 at 8:25 am

Tyler has never been more wrong…. it must be a fluke. Don’t worry Tyler, I am here to help.

We do need a Guaranteed Income, but we then need to AUCTION the 30M recipients every week to the highest bidder in private market (via Ebay) , see here:

http://pegobry.tumblr.com/post/21427545322/morgan-warstler-via-steve-randy-waldman

Workers will be FORCED to work every week, but they have the ability to choose more readily amongst the indignities they will withstand for their filthy lucre.

John Peer July 13, 2012 at 8:32 am

This discussion prompts me to cite a very insightful and sensible quote of Mises’: “You’re all a bunch of socialists!”.
Seriously, I think everybody seems to underestimate the barriers to entry for businesses. Tear down these walls and you will have a lot more employers competing for workers. Problems solved (for the most part and in the long run).

Corey July 13, 2012 at 10:06 am

You seriously think barriers to new business formation are the primary reason for the unemployment crisis (and subsequent lack of exit)?

Emil July 13, 2012 at 11:22 am

I for one do

kebko July 13, 2012 at 12:49 pm

Corey, what’s not to understand? If you make it harder to be an employer, you get less employment. How are you thinking about this?

byomtov July 13, 2012 at 6:22 pm

No. You get fewer employers. Not the same thing at all.

John Peer July 13, 2012 at 1:39 pm

My model says it’s nominal 71.54 % of the aggregated causality.

eu July 13, 2012 at 8:33 am

Or perhaps the firms could just voluntarily stop the “depredations” and then be able to pay their employees less without them leaving, or find better quality employees for the same price.

In other words, the problem is there only if the labor market has been distorted, resulting in “depredation” being needed to inefficiently work around the distortions: hence, just remove the distortion.

Pete July 13, 2012 at 8:35 am

This is very silly. It overlooks the extent to which the “depredations” are not the _shareholders_ extracting value from the employees but some managers (who are themselves employees) screwing over their subordinates. If Bob sexually harasses his secretary then he’s not creating shareholder value (and arguably diminishing it).

Harassment isn’t usually economically efficient to start with.

Alex Godofsky July 13, 2012 at 9:56 am

But in that case, Depraved Bob might start looking for a new channel for his depravity if the old is forbidden.

Scoop July 13, 2012 at 9:59 am

+1

Any model that holds “the firm” as a singular and rational actor is weaker than your earlier critiques of CT. In fact, this model is going to strike most people who have ever had a job as silly.

For any given worker, “the firm” is at least three different entities — my boss, senior management, ownership — with related but differing goals. My boss doesn’t have to try to optimize efficiency. If he is “good enough” he can indulge his own tastes, inflict depredations with no aim toward efficiency, and retain his job. The same with senior management. Even ownership may be willing to sacrifice profits to indulge its tastes.

Some bosses are just dicks. And they keep their jobs, for years and years, even when their bosses know they are dicks. Some depredations that are implemented with the sincere hope of increasing efficiency do not increase it, but they stay in place for years because most firms don’t test much of anything. (And some things are hard to test. We still don’t really know if forcing employees to wear suits hurts or helps productivity.)

This is not to say that CT’s ideas wouldn’t make things way worse. The depredations any firm implements are at least reasonably likely to enhance efficiency, whereas most government regulations decrease them, and if they decrease efficiency they will tend to depress wages. Also, the depredations inflicted by my firm and my individual boss are reasonably easy to reverse (even if they often are not reversed). Not so government regulation. Thirdly, the interests of my boss and senior management, while nothing like perfectly aligned with those of shareholders, are reasonably well aligned. They may not have have to act as perfect agents to keep they jobs but they do have make some effort. The incentives of regulators have nothing to do with efficiency. Nor do the incentives of unions, though they do have the incentive not to make things so inefficient that the firm goes under.

I’m sure the full version of the model Tyler is proposing accounts for some of this, but the post doesn’t mention it. Thus, he comes off as saying that the argument against CT relies on the absurd notion that people are rational and there are no principal-agent problems. Fortunately, it doesn’t. Unless I have failed a reading test.

Corey July 13, 2012 at 10:08 am

Cannot +1 this enough. There is no such thing as “the firm” and economists would do well to learn from the business literature on this.

asdf July 13, 2012 at 10:18 am

I disagree with Tyler’s entire premise, but I don’t want the government involved for the most part.

Sounds like half of what could be said on this blog.

Stuart July 13, 2012 at 11:38 am
Sean P. July 13, 2012 at 2:21 pm

Sexual harassment itself is unlikely to benefit “the firm”, but the anti-harassment policies enacted by most companies are clearly designed to benefit the shareholders (by reducing the risk of lawsuits) at the expense of non-harassing employees.

OGT July 14, 2012 at 10:10 am

Nonsense.

If Bob is a more valuable employee to the employers they may grant Bob license to exploit the secretary pool as a part of his compensation.  The employer is arbitraging Bob’s depravity into overall lower labor costs.  Call this the Mad Men Model.  It is not rare.

Or it could be the owner himself, simply because he values the utility from the exercise of power or sexual exploitation or whatever more than any financial loss. Call this the Roger Sterling corollary to the Mad Men Model.  

John Mansfield July 13, 2012 at 8:54 am

Is this some entry in a “prove it really is the dismal science” contest?

tt July 13, 2012 at 9:22 am

+2

Jan July 13, 2012 at 9:58 am

You can’t just go giving +2′s!! Come on, only a single “+1″ per comment is the unspoken rule. You keep doing this, tt, and people will be throwing around +1000′s like it’s their job.

-2.

Andrew' July 13, 2012 at 10:02 am

How dare you negate his franchise!

+1

tt July 13, 2012 at 3:01 pm

+3.14159…

MD July 13, 2012 at 11:49 am

+1 Winner winner chicken dinner

A Berman July 13, 2012 at 9:06 am

Isn’t a more precise formulation: ‘raise the utility of not choosing a particular job’? That way you’re not pre-preferencing unemployment benefits over- as an example – supplemental income for minimum wage workers.’

Ryan V July 13, 2012 at 9:23 am

There are interesting parallels between unions and social programs like a guaranteed annual income or unemployment insurance. Suppose for simplicity that all taxes fall on workers. Then a guaranteed annual income is just a credible pre-commitment by workers to support any fired or unemployed workers by giving them money. Unions are a somewhat credible pre-commitment to support fired or wronged employees by striking.

Of course, there differences: unions don’t help unemployed people, for instance. And unions remove an individual worker’s bargaining position, whereas a guaranteed annual income improves it.

karl July 13, 2012 at 10:38 am

At one time, unions had “strike funds” from which to compensate striking workers. The bad old days, of course.

RPLong July 13, 2012 at 10:24 am

I don’t understand all this discussion going on about poor treatment of workers. Employees need to man-up (or woman-up) and put their market behavior where their mouthes are. The whole issue boils down to this: “How can employees improve their benefits without risk?”

Yes, everyone wants a risk-free ability to increase their wages, benefits, and treatment in the workplace. Problem: Risk-free options in situations involving uncertainty don’t exist. It’s a fantasy. A wish. You can’t just wish yourself into a better life.

The solution, then, involves an uncomfortable truth. I speak from personal experience – I was harassed at work and so I quit, took a pay cut, and found another job. By the end of the year, I had earned my way back to my previous salary and was treated at work the way I expect to be.

Yes, it was risky. Yes, it involved reducing my consumption spending and sitting at my desk at home, unshaven, scouring websites for jobs and sending out hundreds of resumes. No, I was not looking forward to that.

But how worthless does a person have to feel to engage in collective bargaining, government welfare, and whining to HR departments? The more you do that, the less attractive you look to your next employer, the less control you have over your situation, and the more you start to hate yourself.

Man-up and take a risk. Do what you have to do. It might work or it might not, but it beats sitting around and whining about how your company doesn’t treat you right. Ask yourself: 30 years from now will the golden handcuffs have been worth it?

MD July 13, 2012 at 11:57 am

Better than that, I suggest a counter-harassment campaign. Yes, you may get fired, or even arrested, but your boss will think twice about harassing the next person after you slash his tires.

RPLong July 13, 2012 at 11:59 am

I lol’d.

MD July 13, 2012 at 12:54 pm

I’m glad you read it in the spirit in which it was intended.

The Original D July 13, 2012 at 12:10 pm

“But how worthless does a person have to feel to engage in collective bargaining”

Why don’t you ask them? I bet there is a high correlation with lack of education, lack of options, dependents at home. You could argue that it’s there own damn fault for dropping out of school or what have you, but all you’re really saying is they took a risk on something at a younger age and it backfired.

“Man-up and take a risk.”

Risk is a relative thing and everyone has a different threshold. What if I said “man up, take out a second mortgage and go try to double it in the stock market?”

RPLong July 13, 2012 at 1:46 pm

I probably expressed myself poorly, because you might be getting the wrong idea.

The point is not that it’s a worker’s own fault for accepting poor working conditions. The point is that quitting is only the signal that will impact a firm’s behavior. If you can’t put your wants on the line, then you don’t deserve to have them satisfied.

Put another way, you shouldn’t be allowed to have food without paying for it; it takes a particular kind of psychology for someone to actually be okay with accepting charity. Most people find it very uncomfortable, for perfectly normal reasons of human psychology.

There is no such thing as a free lunch. If you’re complaining about something you’re not willing to change, then your complaints are in vain. Only a desire that causes you to act is one that you truly believe is worth acting on. That might be a tautology, but it’s one that people seem to forget.

So, in answer to your question, I’d answer that if my complaint was that my broker wasn’t giving my margin account enough leverage, then I should man-up and seek my leverage elsewhere. Otherwise, why complain? You can’t just complain and complain, and then expect your broker to give you more leverage. You have to do something that merits the additional leverage. You have to take a risk.

The Original D July 13, 2012 at 3:48 pm

“The point is that quitting is only the signal that will impact a firm’s behavior”

Lawsuits work too. Not just from employees. Most lawsuits are companies suing other companies.

Complaining can have a lot of impact. You’ve never gotten favorable treatment from a service provider after complaining? My god man, speak up! :-)

Obviously, it’s not an either/or situation — complaining *and* quitting may impact future hiring practices more than just doing one or the other alone — but the false precision of numbers is seductive and spirals towards reductionist arguments.

collin July 13, 2012 at 10:42 am

Actually, the world’s population is developing the long term solution, lowering the birth rate. I am guessing without Africa (more developed areas are falling) and India (which is fallen quite a bit), the world’s birth rate would be below replacement level. Since 2000, the labor supply has had a 2B shock form India & China, so employers have the stronger position with the relationship. Long term the worker supply will level off and even fall, then employees will have a much stronger negiotiating position.

Admittingly, this is 20 years or so off.

CR

q July 13, 2012 at 7:01 pm

Except employers are also human, too. And you’ll find the lowest birth rates amongst those educated enough to become employers.

The Anti-Gnostic July 13, 2012 at 10:59 am

Long term the worker supply will level off and even fall, then employees will have a much stronger negiotiating position.

Tyler’s way ahead of you on this. We’ll just move them here and pay them to breed.

King Cynic July 13, 2012 at 11:16 am

Tyler is either trolling us or has completely divorced his moral sense. I give 50/50 odds to either.

The Original D July 13, 2012 at 12:04 pm

Two thoughts:

“The firm” does not usually try to screw people over. People at the firm do. It’s often hard to untangle systematic abuse from personal, sexual harassment being a good example.

The welfare state as a source of bargaining power works better in an environment without illegal immigration.

Greg G July 13, 2012 at 12:40 pm

Yes there seems to be an assumption in this post that it is normally in a firm”s interest to treat its employees badly. I’m sure there are some managers that feel that way and employees deserve some level of protection against them.

Even so, I doubt they get results as good as the firms and managers that are able to win their employees genuine loyalty with better treatment.

David C July 13, 2012 at 12:24 pm

I’m all for improving the safety net. I also think that prolonged periods of full employment also help workers attain enough market power to deal more successfully with employers. We can do both!

John B. Chilton July 13, 2012 at 1:24 pm

Government imposed restrictions on labor contracts can harm all parties. What might appear to be an obvious benefit to workers can, if mandated, make them worse off. I’m sure there is research that makes the point better, but one example of this result can be found in my work with John Addison on advance notice of layoffs.

http://scholarcommons.sc.edu/cgi/viewcontent.cgi?article=1007&context=econ_facpub

Wonks Anonymous July 13, 2012 at 2:40 pm

Henry Farrell promises this will be his last, but if Tyler responds again, who can be sure?
http://crookedtimber.org/2012/07/13/perfect-competition-and-a-pony

Adam July 13, 2012 at 3:45 pm

I think you’re ignoring the role of the government as a shaper of social progress. In the very short run, it may have harmed market efficiency and even harmed blacks to mandate that they be bussed to white schools and that white-owned businesses serve them, but in the long run, children grew up together and learned they weren’t the subhuman boogeymen their parents had taught them. The sole role of the law isn’t just to promote the efficiency of markets. I’d wager that since sexual harassment was first banned in the workplace, at least some men really have come to see the women they work with as peers and not just objects of lust there to do whatever the heck they’re told to do, no matter how degrading and disagreeable. And that, prior to these laws, more male employers than today really did see their female employees in that way.

You may not like the government or its ability to regulate commercial transactions, but it’s also the maker of laws, and as long as we have laws, one of the things they ought to do is promote human dignity, even now and again elevating it above commerce as a be-all, end-all concern. It’s not legal to bully and harass people outside of the workplace, either. You can’t just corner random women and demand sex from them. What the hell kind of law would we have if it was legal to do that in the workplace? You can’t just throw money and unequal power relations into the mix and then say ‘well hey, now the woman is rationally maximizing her utility, not just getting assaulted.’

derek July 14, 2012 at 12:58 am

Agreed. When the chief executive screws the help it sets a pattern.

John B. Chilton July 13, 2012 at 4:25 pm

Someone else who supports Tyler’s position,

http://www.slate.com/articles/business/the_dismal_science/1997/03/in_praise_of_cheap_labor.2.html

“In short, my correspondents are not entitled to their self-righteousness. They have not thought the matter through. And when the hopes of hundreds of millions are at stake, thinking things through is not just good intellectual practice. It is a moral duty.”

OGT July 14, 2012 at 10:08 am

I liked Yglesias better when he pretended to be a foreign policy expert. (Except, of course, when he was advocating for the Iraq War, moral duty to think things through indeed).

mw July 13, 2012 at 4:58 pm

has anyone who has suggested ‘money’ as an alternative to a job on the basis of its economic value equivalence ever been unemployed? inquiring minds want to know.

in any case, definitely no danger of overstatement by saying that giving people money and choice is *always* the best option (see “401k, millions of americans’ empty”)

ohwilleke July 13, 2012 at 7:12 pm

“Raise the utility of unemployment to workers. This could be a guaranteed annual income, better unemployment insurance, more food stamps, whatever. Call it the welfare state. Improving the welfare state will improve worker bargaining across virtually all workplace dimensions and in the longer run limit the scope of all the employer depredations.”

Unlike some of the other posts in this series, this point has real merit and a very solid piece of empirical evidence to support it from India. In India there is a government program in which there is a literal right to be hired to work as a day laborer at a particular set wage for a certain number of days per year at whatever job the local foreman can come up with, and this is quite widely utilized. It has had a dramatic impact in wiping out employers who violate labors laws in a manner that leaves workers with compensation and conditions inferior to the job that every Indian adult has a right to obtain through the program with essentially no direct enforcement resources directed towards the labor law violating employers.

A critical insight of this program, however, is that you don’t actually need to raise the utility of unemployment, per se, at all. For the incentives to do their trick, all you have to make sure that the people who are exploited with below minimum wage wages, or other poor working conditions have access to a viable alternative job offered by someone. Allowing people to receive anything simply for being unemployed isn’t actually necessary. And, while India’s program involves public works programs, any time anyone who is willing to work can receive a minimum threshold of compensation and working conditions at some job in either the public or private sector, competiting private sector employers will be forced to match that in the absence of slavery or indentured servitude. Assuming that some workers have not just ZMP net of their pay, but ZMP period, this kind of program takes some amount of subsidy. But, when unemployment rates are high, a lot of the unemployed people are not gross ZMP employees, a program like this generally pays minimum wage so the workers don’t have to be very productive to add value equal to a substantial part of the cost of the program (especially in places where private sector government contractor alternatives to them are corrupt thereby diluting the productivity of these workers), and the program will recover much or all of its expenditure from the collective value of the labor of the people it employs. Moreover, requiring people to actually show up and work to get paid (and paying them on the spot) provides an effective filter against corruption in the right to work program itself that wouldn’t be available in a typically structured welfare state program that just writes checks to people and then tries to monitor theiir eligiblity bureaucratically.

To a great extent, this program improves working conditions as a result of the real world reality that poor working conditions and substandard pay almost always go hand in hand, rather than being traded off against each other.

“Say a firm screws over a worker on ten dimensions at once, subject to some constraint of the worker leaving. With those ten depredations, the firm tries to extract from the worker as efficiently as possible, but again so the worker does not leave or leaves only with some lower probability.”

In this context, and also in tax policy, one of the important macroeconomic and welfare economics considerations is that the firms that are just on the brink of collapse in the event of a modest government burden be it a regulation, or a tax, or a mandate, is by definition a just barely profitable one, yet it is often a firm that has managed during previous more optimistic periods to lock in considerable investment capital (or make better use of economic rents such as prime locations or patents held by the marginal firms) that it can hold onto so long as it remains a going concern.

Empirically, firms that have the worst working conditions and lowest pay (which go hand in hand in real life), tend to be marginally profitable firms in general. For example, so called “sweat shops” in the Third World, while offering inferior wages and working conditions to employers in the place where the work was outsourced from, usually pay better and have better working conditions than the vast majority of their local competitors. Similarly, Ford didn’t become an economic power house by paying bottom of the labor market wages with inferior working conditions. While reducing worker compensation packages directly puts dollars into worker’s pockets, the relationship of working conditions, productivity and employer workplace costs is profoundly less direct. Good working conditions usually improve productivity, and while some improvements in working conditions are expensive, others are free or even cost less than poor working conditions. The assumption that the subset of employers with the worst possible working conditions are acting in a way that is economically rational is unsound. The market itself certainly doesn’t enforce a condition that firms must be maximallly efficient, merely that they break even in circumstances where there is an uneven playing field, particularly when there are well honored property rights that protect economic rents.

Also, historically some of the worst working conditions arise in circumstances when the employer is not only an employer but has additional economic relationships with an employer, for example, as a monopoly owner of housing and a monopoly seller of consumer goods in a company town situation (consider in recent history, the case of the female government contractor employee in Iraq who was raped on the job and then denied a day in court due to an arbitration clause in her employment agreement, and historically, miners in remote mining towns, sailors on freight or fishing ships, and household servants and apprentices who received room, board and clothing as a large part of their pay), often accompanied by “natural” barriers to immediate exit from a job due to the physical isolation of the work environment (workers with employer specific work visas face similar exit limitation challenges). In these situations, consequences of exploitive consumer side economic transactions, or an inability to make an immediate exit from the job, can force workers to stay at jobs that they were only considering the employment situation in isolation. In these industries, there is a good case to be made that regulating working conditions is simply a component of antitrust regulation of monopolies, rather than labor regulation in the conventional sense.

Government policies that have the effect of being the straw on the camel’s back that cause marginal firms all across the economy to collapse often increase economic growth by freeing up investment capital and economic rents used in a marginal enterprise for use in a new enterprise that provides a much higher ROI.

A policy that squeezes employers that are marginal even in moderate to good economic conditions also has a countercyclic effect – instead of having a lot of marginal firms collapse all at once during a recession, many of them will already have shut down and the more profitable firms that remain will be better able to weather a recession since they will merely go from being quite profitable to marginally profitable or break even or temporarily experiencing a loss that investors tolerate for the prospect of future gains when the recession is over.

Bottom line: A regulatory policy that maximizes the number of businesses that can continue to operate as going concerns by minimally burdening those businesses is likely to reduce rather than to improve economic growth and the robustness of the economy during recessions.

Alan July 14, 2012 at 1:41 am

Item 1.
My company …
– pays my workers slightly over the median pay rate (as best as I can figure out what that is)
– pays a generous (typically around 10% of annual salary) profit share bonus every year.
– has very flexible working hours
– provides 4 weeks paid holiday per year plus another 10 days per year on full pay to care for sick family members
– pays a minimum of 9% of annual salary into a retirement fund
– encourages existing staff to participate in choosing new staff (including a right of veto)

Item 2.
My company is very, very profitable.

If you have to screw over your staff to make money, go and find a better way to make money. And don’t expect to be one of my suppliers.

derek July 14, 2012 at 3:17 am

I agree. Many of my clients treat their people very well and there is almost a correlation between that and their longevity/profitability. Good productive workers are very hard to find and keep.

I suppose the question is whether what you do should be mandated by an adversarial process for everyone. I would prefer that you be able to find a competitive advantage over others.

terminalX July 14, 2012 at 12:37 pm

A guaranteed income would save my life, as I’m absolutely incapable of getting a minimum wage job without benefits, within walking distance of a few miles. I would be willing to get sterilized if that was what it took. At this moment the future looks incredibly hopeless.

Steve Roth July 14, 2012 at 3:58 pm

Four words:

E. I. T. C.

Vastly expanded (and simplified, and delivered on weekly paychecks).

Misaki July 14, 2012 at 5:23 pm

Job creation without higher government spending, inflation, bubbles, or trade barriers:
/ɯoɔ˙ʇodsƃolq˙uɐlduoıʇɐǝɹɔqoɾ//:dʇʇɥ

But regardless of that, maybe President Clinton shouldn’t have abolished the welfare state in the 1990′s after all! …is what this blog post seems to be saying.

Casey July 15, 2012 at 4:22 am

Its interesting with the UBI that if we used it to replace the welfare state as we currently know it we could probably end poverty in America. But the left would prefer not to talk about that.

Eric H July 15, 2012 at 10:17 am

“But the left would prefer not to talk about that.”

What the heck are you talking about? The original CrookedTimberGang post that touched this off (leaving aside the BHL posts that preceded) went on at length about it. They calculated that you would have to set tax rates as if you needed to provide UBI for everyone in the country. That’s equivalent to calculating health care costs as if all of us would need a triple bypass, cancer treatment, kidney transplant, and dialysis every year and then declaring that it is too expensive, but they did talk about it.

Casey July 15, 2012 at 4:24 pm

Well like you say they give it a very uncharitable hearing. They fail to take into account the savings that would result from ending the current welfare state to pay for it and fail to consider the effect of making it means tested.

They also treat it solely as a replacement for work income rather than what its much more likely to be in most cases- as a supplement that will allow the poor to save and invest and grow independent sources of wealth.

I suppose its progress if they at least give it a nod in a series of blot posts but the issue is far from being in the mainstream of American political conversation.

When I explain the idea to my ‘liberal’ friends its like something short circuits and they can’t even process it into their narrative.

This is a real thing. We can end poverty now. But its not discussed.

GiT July 16, 2012 at 1:34 am

Plenty of those on the left, including those at Crooked Timber, support a UBI…

Comments on this entry are closed.

Previous post:

Next post: