Stansbury and Summers on the declining bargaining power of labor

In one of the best papers of the year, Anna Stansbury and Larry Summers present what is to me the best non-“Great Stagnation” story of what has gone wrong, and I have read many such accounts.  Here is their abstract:

Rising profitability and market valuations of US businesses, sluggish wage growth and a declining labor share of income, and reduced unemployment and inflation, have defined the macroeconomic environment of the last generation. This paper offers a unified explanation for these phenomena based on reduced worker power. Using individual, industry, and state-level data, we demonstrate that measures of reduced worker power are associated with lower wage levels, higher profit shares, and reductions in measures of the NAIRU. We argue that the declining worker power hypothesis is more compelling as an explanation for observed changes than increases in firms’ market power, both because it can simultaneously explain a falling labor share and a reduced NAIRU, and because it is more directly supported by the data.

There is a good deal of critical thinking about how different macroeconomic trends fit together, and a willingness to consider disconfirming evidence, so I do recommend you read through this one.

I have five main worries about the argument:

1. Rather than labor losing bargaining power, I think of the key development as “management measuring the marginal product of labor more precisely.”  Admittedly that does lower the bargaining power of the majority of workers, given the 20/80 rule, or whatever you think the proper proportions are (Stansbury and Summers themselves presumably are underpaid, but in general wage dispersion has been going up in high-skilled sectors).

A minority of highly productive workers have much more bargaining power than they did before, which doesn’t quite fit the “lower bargaining power per se” hypothesis.  And under my interpretation, easier unionization may not be much of a solution, since the problem here is the actual reality of who produces what.  Consistent with my view, labor’s share is not really down if you consider the super-talented labor/owners/capitalists who start their own companies.  That is a return to labor as well.

2. It is a noted advantage of the Stansbury and Summers approach that is explains the now-lower natural rate of unemployment.  The puzzle, I think, is to explain both lower NAIRU and the slower labor market matching observed over the post-2009 labor market recovery.  Their hypothesis seems to predict a higher degree of worker desperation, and thus quicker matches, than what we actually observed.

If you think, as I do, that employers are now better aware of the diversity of worker quality, and that only ex post do they learn that quality, employers will be more careful upfront, which probably does slow down matching speeds, thus fitting the data better.

3. If you play down market power, and postulate a fall in the share of labor, you might expect investment to be robust, but measured investment clocks in as mediocre.  The authors discuss this point at length on pp.45-46 and offer multiple rebuttals, but I suppose I still think the first-order effect here ought to be stronger than what we (seem to) observe.

4. If corporate profits are so high, how is this consistent with the persistently low demand postulated by Summers’s “secular stagnation” hypothesis?  The paper does consider this question very directly on p.56, but I genuinely (just as a matter of grammar) do not understand the answer the authors are suggesting.  Here goes:

A fair question about the labor rents hypothesis regards what it says about the secular stagnation hypothesis that one of us has put forward (Summers 2013). We believe that the shift towards more corporate income,that occurs as labor rents decline,operates to raise saving and reduce demand. The impact on investment of reduced labor power seems to us ambiguous, with lower labor costs on the one hand encouraging expanded output and on the other encouraging more labor-intensive production, as discussed in Section V.So,decreases in labor power may operate to promote the reductions in demand and rising gap between private saving and investment that are defining features of secular stagnation.

I suppose I had thought of low rates of profit as a (though not the?) defining feature of secular stagnation, but again I may not have understood this passage correctly.

5. Matt Rognlie found that the decline in labor’s share went to housing and land ownership, not capital.

In any case, here is a whole paper full of economics, go and enjoy it.

Comments

Reduced worker power? Those dumb capitalists, having waited until late in this generation to exercise their power, and grab a larger share of national income!

For those of us who do not have access to the NBER paper: what are the measures of worker power?

I read Robin Hanson's reaction prior to yours:

Says firm market power [MP] wrt customers & workers not changed, but worker MP wrt firms declined. As each MP cuts efficiency, this trend increases efficiency. Yet authors recommend "institutional changes that enhance workers’ countervailing" MP.
So authors care only to push for transfers, not efficiency.

https://twitter.com/robinhanson/status/1264951469138235396

isn't the idea that corporate income tends to go to richer people who save more of their income than poorer people do ('raise savings and reduce demand', ie consumption and therefore expected demand driven investment). then lower labour costs increase AS but discourage substituting capital for labour, decreasing investment ('reductions in demand') but increasing output ('rising gap between savings and investment')?
admittedly the second part seems a bit tenuous/short-term
isn't secular stagnation a bit of a catch-all for summers that includes any idea that leads to slower growth? slower technological progress/all the big welfare improving ideas already discovered, increasing wealth concentration and higher MPS for rich people, i thought were supposed to be the two main ones

Assume you are referring to #4. Here's what it sounds like to me:
1. Lower labor share of income implies more retained earnings to the investor class, which we expect to have a lower marginal propensity to consume. So the effect on the marginal propensity to save is strictly positive and the effect on aggregate demand is strictly negative.
2. The effect of reduced labor share on the marginal propensity to invest is ambiguous, because as you say there are more resources available to invest in capital, but the lower wages make capital relatively more expensive to more labor.
3. They must postulate that the incentive to hire more low income labor dominates (which seems reasonable to me).

The result: an economy with higher profits, higher employment at lower wages, and a boatload of liquidity (which is what we have). At least it seems like a logically consistent narrative.

I didn't read it and I assume Larry is just signed on for his Dem bonafides.

Workers and management bargain over who is paying the cost of government which has been taking liquidity from the economy over the whole period. The data say wealth concentrates when government is overextended and relies on the Fed. The model says that flat earthers will be in denial about this.

The reason the workers get stuck with the excess banking fees is because Larry or a partner always show up in the nick of time to say,"Government can borrow more, interest rates are low"

Essentially Larry is pre-bargaining for the coming partial defaults. I am right on this: Soros wants more debt to hedge, Roggoff wants this time to be different, Krugman is in denial about wealth concentrations. In essence, this is the Keynesian 'Save the public sector" campaign. It will not help, we will execute a partial default anyway.

Flat earth means the economists thinks people, N, the number of agents, will scale properly for expanded government in times of stress.We do not scale. If the flat earther is coloring a beach ball than they discover their color operator is rewriting itself, they fail the Lucas criteria, they fail Coase, they fail Nash and they fail Shannon and Markov.

So, they suddenly come up with a new model to cover up the last failure and tell us, "We will be fine, we can scale in N".

The Chicago school, Caplan, Paul, Brad and Larry pull this stunt. Samuelson in the 70s started the latest version, but it is a repeat performance. And you can bet another bunch of kids will discover 'We can scale in N" after the partial defaults.

Economics is not a place you will find science. The science of economics generally comes from the mathematicians.

"Consistent with my view, labor’s share is not really down if you consider the super-talented labor/owners/capitalists who start their own companies. That is a return to labor as well."

You are going to get huge eye rolls (justifiably I might add) when you lump Zuckerberg and Bezos in the same crowd as chicken slaughterers or Uber drivers. Tech billionaire founders are labor in the technical sense but owner in every sense of the word. Zuckerberg receives a $1 annual salary but the other 99.999% of his compensation comes from ownership.

"Matt Rognlie found that the decline in labor’s share went to housing and land ownership, not capital."

In what sense is housing and land not considered capital? It might not be the most productive form of capital but it is capital nonetheless.

We have to accept that our way of looking at labor through our current lenses is failing them. All the other points mentioned are well-intentioned but will be received by many (most?) as more technocratic rationalizations for technocratic failure or corruption.

housing isn't usually considered capital because it isn't used by a firm to produce goods and services in the next time period, though accounting practices vary between countries, and a house used as a b&b would be capital. land isn't capital because firms don't produce it (increased demand for land doesn't increase GDP)
the definition of 'capital' is a source of endless confusion tho

Makes perfect sense to me, labor share is declining and going to rents.

Housing owners make development illegal and use the government (all levels) to siphon off labor share and convert it into rents.

Renters, who are the majority of San Francisco, make development illegal so they can enjoy the city without crowding in their rent controlled apartments.

Housing is made by man so it's capital.
Land is made by God, so it's not capital, but in input category number three 'natural resources'.

I am reading a galley copy of David Dayen's Monopolized. I can't think of a bigger problem than monopoly power or huge market share and concentration as THE explanation for declining labor power. Dayen is "merely" a journalist but his book needs to be addressed, imo. So does Matt Stoller's work.

Are there really more monopolies today than 60 years ago, when labor had much more power and GM had about 50 percent of the car market?

The problem with labors declining share of income is that it’s not 1945 anymore and the large companies and their labor unions don’t operate within quasi cartels anymore.

It’s a world that can’t be created without a major world war that decimates 75 percent of the worlds major economies.

Also I don’t know why big corporations are being “blamed” in this story. If you think big “monopolies” don’t pay well, you should try small business......

https://consortiumnews.com/2020/05/22/covid-19-richest-americans-added-434-billion-in-wealth-since-pandemic-hit/

COVID-19: Richest Americans Added $434 Billion in Wealth Since Pandemic Hit

---------
Same story as last recession and the one before that. The welathy charge a premium for liquidity which our central government is short. S the wealthy charge a premium, and the other half of the cost gets passed to the middle class via banking fees to support seigniorage.

We all want to believe the flat earth magic, but it never works and the mess collapses into an overnight monetary shock. We should be picking the elders we want in monetary meet up in a year or so. If we are not prepared then Trump and the kleptomaniacs are in charge of engineering a Nixon shock, and it will not be pretty.

I suppose that importing massive numbers of low skilled migrants has nothing to do with it. Surely they don't compete with the native born low skilled.

I didn't read the paper, but if it doesn't go there, it should get an F. I'd say that one should do a text search on any paper to do with the labor market, income inequality... and if you don't find 'immigra' then file it in the round filing cabinet.

Cowen: "you might expect investment to be robust, but measured investment clocks in as mediocre". I'm not sure what he means by "measured investment", but I assume it's investment in productive capital, which indeed has been mediocre. And explains why labor productivity and wages have lagged. For the answer to the puzzle one need look no further than the Fed. Reliance on rising stock prices for prosperity may be good for the investor class, but not the labor class. Dismal Earnings, Bullish Stock Investors and the Fed's Invisible Hand. That's the title of an article in today's NYT. The term "invisible hand" has an entirely new meaning. https://www.nytimes.com/2020/05/27/business/stock-market-coronavirus.html

No. You don’t even have a theoretical causal mechanism for this, it’s just “old man yells at cloud”

Will the combination of the pandemic and the Trump/Pompeo war on China cause a significant shift in investor preference? Are the Fed's actions promoting or thwarting that shift? Will the success of today's SpaceX launch launch the shift, or will its failure sink the shift? Is Elon Musk the savior of American labor or is he the prince of darkness?

1. This is a good point, and in many ways a good thing. When productivity cannot be measured, there is more room for workers to be judged based on nepotism, cronyism, cultural affinity, and other forms of discrimination. Many non-white immigrant families already try to steer their kids into a small number of fields where performance is measured more objectively in order to prevent their kids from being disadvantaged in these ways. It would be good to have better and more objective ways to measure performance be used in more fields in order to further stamp out discrimination.

*ding ding*
Which is why software engineering in the US is dominated by Chinese and Indians.

Even if you don't ultimately go into the field as a career, it's useful because
1. the signaling cachet that comes with a "hard" major
2. more objective grading compared to something like comparative literature

Software development productivity is really not easily measured--not like in medicine, for example, where you can count patients and procedures. Or in academia where you can count published papers and impact factors. With software, you can solve the same problem with a simple, elegant, robust solution or a complex, bloated, fragile one. If you use crude measures, the latter will look like more for the money. But there are no good measures at all for having the vision to choose the right vs wrong approach.

The research tends to suggest mostly due to relatively limited language strengths, and low skills / limited disposable income structure of economic countries of origin.

Not "more fairly measured" leftist poor-me rubbish (though it may be more accurately measured; this likely is not motivation or why).

Groups who are likely to be subject of some form of discrimination but who come from within modernized societies and have typical language abilities and typical post materialist values, don't select "objectively measured" fields (sexual minorities, women, long standing native minority ethnic). These groups often specialize into hard to measure value (which can be a positive).

Relatively weak language skills and materialist values (money, status) tend to support why migrants from poorer countries and their kids make the career choices they do.

Lol, what? He said their kids. Second gen. Born and raised without an accent. Doesn’t have to be from poorer countries either.

Makes sense to me, first gen comes with home country bachelors, maybe American PhD/MD. Second generation goes to Ivy, many kids go engineering or MD.

Which is easier for a second gen kid, MD or networking their way to Partner at MBB?

Patterns persist, dads a doctor, so are you, etc.

But 1.5 gens and 2gen still have relatively reduced verbal. Even with no accent.

Seriously, you can (although you personally probably don't need to) read up on why migrant parents often push kids towards quantitative fields. It's because

a) lot of others in the community are doing them (networking advantage, herd following) and they do them because there's a relative non-verbal advantage,
b) they'll earn a lot of money,
c) doing creative or arts-centered work is relatively low status in the communities of origin

It's not generally because "I'm worried people will be mean to them if they go another route".

There's nothing wrong with pushing kids into quantitative/med/legal fields that make a lot of money, but let's not pretend they really want their kids to be artists and whatnot, but are so worried they'll be discriminated against.

" Many non-white immigrant families already try to steer their kids into a small number of fields where performance is measured more objectively in order to prevent their kids from being disadvantaged in these ways."
Is that why? Or is it fields where they have their own advantages? I know Indian doctors who tend to recommend patients to other Indian doctors, for example.

Stansbury and Summers (2019) from his blog: http://larrysummers.com/2019/05/31/what-marco-rubio-gets-right-and-wrong-about-the-decline-of-american-investment/#more-38287

A good reminder as to why American business supports open borders.

Could the reason for declining power of labor be that the period form the depths of the great depression to 1980 had accelerating inflation and since then decelerating inflation?
Maybe for the young euclidean zoning is a factor also.

Zaua writes:
"When productivity cannot be measured, there is more room for workers to be judged based on nepotism, cronyism, cultural affinity, and other forms of discrimination. Many non-white immigrant families already try to steer their kids into a small number of fields where performance is measured more objectively in order to prevent their kids from being disadvantaged in these ways. It would be good to have better and more objective ways to measure performance be used in more fields in order to further stamp out discrimination."

I'd be interested in input on measures of performance for capital that highlight those aspects of discrimination and their associated costs borne by real-live humans.

Externalities and such can't be hand-waved away forever, as history showed in 1789, 1917 and other times. Sometimes that pesky constant term in the regression bites.

A point on Tyler's first worry: based on my experience researching successful companies where frontline workers are empowered and share the economic fruits of their initiative--e.g. Nucor, Southwest Airlines, WL Gore, Haier, Vinci,Buurtzorg, Handelsbanken--I don't think the issue is that "management is measuring the marginal product of labor more precisely.” Rather it's that management often assumes--wrongly--that front line staff are essentially unable to take initiative, think creatively, and contribute in unique ways that are hard to script by the supervisory and expert cadres sitting at HQ. And of course, stripping most employees of the autonomy required to add more value (and be more productive) would make the job of managers harder and perhaps irrelevant (a lot of the companies mentioned above have very few, and in some cases, no managers). If most large-scale organization on the planet are organized into a a caste system of thinkers and doers, it's not surprising the anointed "thinkers" will fare better. I don't agree with Summers and Stansbury about the need to unionize--but we should seriously re-think the standard (top-down & managerial) organizational model that lets a vast reservoir of human ingenuity to go untapped.

Maybe it's the increase in MBAs?
https://hbr.org/2016/12/mbas-are-more-self-serving-than-other-ceos

Skill levels must play a major role. I'm sure that bargaining power of high school dropouts has decreased, because there was only a brief time that they could contribute to productive manufacturing before automation/outsourcing took over, now they are back to working at 7-11 or driving Uber.

I don't know any skilled software tech person who complains about not getting the salary they want.

I don't understand the "rising profit" issue. Are the most profitable companies really depending on low-skilled labor? Apple, JP Morgan Chase, Alphabet, doesn't sound like it. These are companies that have to work hard to find skilled workers, I know because their recruiters spam me on LinkedIn every day....

Re: I don't know any skilled software tech person who complains about not getting the salary they want.

You must know a bunch of monastics.

One way to give workers more bargaining power is to divorce the home from the plot of land. So we should have truly mobile homes and allow these homes to have free reign on the roads between 1 am and 5 am so people can move their house and all of their belongings closer to their new job. In addition we should have more charter schools and online schools so students don’t have to switch schools every time their home moves. Finally allow corporations to offer free plots to employees just like they offer health insurance paid for with pre-tax revenue. So getting Walmart and Amazon involved gives them incentive to keep housing costs low so their employees have more disposable income to spend on goods and services.

I love the responses overall, but for 1(b), surely as soon as an entrepreneur hires their first employee, it is no longer solely their own labour that they are getting returns on?

That’s true, though there is research out there that purports to show that for companies that are led by founders, when the founders die, profits decline dramatically.

Just a guess here, because I am not a labor economist......but could it be that we are underestimating the influence of good old supply and demand.

In the 1950's, many employers could only choose white male union members. This drove up wages for those who got the jobs.

But since the 1970's roughly, women came along and then immigrants. The pool of jobs also increased, but did it increase faster than the supply of workers? I doubt it.

Unions are monopolists. They have largely been defeated. Whether this is good for America is a very complex question.

How can so many people discuss the weakening of labor's bargaining power without mentioning business's decades-long campaign to undermine labor unions, precisely to weaken the bargaining power of lower-skilled workers?

Exactly! Expect challenging new interventions which, for instance, propose that poor people may have a problem of lack of money or old people may have illnesses which prevent them from working and thus cause declining incomes. Aren’t economists brilliant!

"Stansbury and Summers themselves presumably are underpaid": you are fishing for sneers. So here's one: these bozos wrote a paragraph so opaque that you couldn't understand it. It follows that they, or you, are overpaid.

"4. If corporate profits are so high" (...)

"I suppose I had thought of low rates of profit as a (though not the?) defining feature of secular stagnation"

You can have simultaneously high corporate profits and low rates of profits, if the ratio (production)/(stock of capital) are decreasing

Tyler said he does not understand the explanation of why high corporate profits should cause low demand.

This sentence seems clear to me. “ We believe that the shift towards more corporate income,that occurs as labor rents decline,operates to raise saving and reduce demand.“

Most workers spend most of their income. Saving is done by the rich. If labor share falls then their spending falls and demand falls. This reduction in demand is secular stagnation.

Pettis and Klein explain this clearly in their book “Trade Wars Are Class Wars”, and Hidden Forces podcast #137.

If Cowen says management now measures marginal product of labor more precisely, I've been saying IT enables better surveillance of workers making unnecessary payment of wage premia to discourage shirking: Lower wages, intensification of work, higher employment.

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