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.

An email from Samuel Lee:

…we take the liberty of sending you a link to the working paper:

 NYU Law and Economics Research Paper No. 12-08

In the paper, we build on Edlund and Korn’s model of voluntary prostitution (JPE, 2002) to study the effect of prostitution laws. Our main results are as follows:

– Neither across-the-board legalization nor criminalization unambiguously reduces sex trafficking. The impact of either of these policies crucially depends on the incidence of voluntary prostitution, which in turn depends on other variables, such as the female-male income ratio.

– Even if across-the-board criminalization reduces sex trafficking, it comes at the expense of voluntary prostitutes, who prefer legalization. There is then an inherent conflict between safeguarding (the liberties of) voluntary prostitutes and preventing trafficking. (This conflict is borne out in recent public controversies about prostitution laws in Canada, France, and South Korea.)

– Between different types of criminalization, criminalizing johns is preferable to criminalizing prostitutes. The former is more effective in combating sex trafficking than the latter. The latter is furthermore unjust towards trafficked prostitutes, who’d then be doubly victimized.

Based on our analysis, we propose a different legal approach, which has so far not been tried by any country: criminalization of johns outside of a “safe harbor” for voluntary prostitution. To be more specific:

– Licensed brothels and prostitutes (i.e., regulated brothels) combined with — and this is crucial — criminal penalties for johns who purchase sex outside of these brothels. This (i) discriminates between the two “modes of production” of commercial sex, voluntary sex work and trafficking, and (ii) funnels all demand to the desirable “mode.” Trivial as the idea may sound, this policy has the potential to achieve both objectives, safeguard voluntary sex work and prevent trafficking, and hence to reconcile the two sides of the debate.

– There are implementation issues, but none that couldn’t be addressed. Point (i) requires effective background checks for the licensing procedures. It also requires monitoring of regulated brothels to ensure that only licensed prostitutes are employed there. Point (ii) requires undercover law enforcement (“fake illegal prostitutes”) to deter illegal purchases. And it requires severe penalties for illegal purchases — surveys suggest that the most effective one is public registries (shaming), which in this case is less of a moral statement about prostitution than about trafficking because buyers outside of the “safe harbor” would be aware that they very likely purchase sex from trafficking victims.

– There are clearly costs of licensing and enforcing the laws against illegal purchases. It seems to us, however, that these costs might be lower than for alternative, less effective approaches — which include the costs of enforcing across-the-board criminalization of prostitution and/or law enforcement activities targeted directly at traffickers, who are notoriously hard to catch or convict.

There are other questions regarding prostitution laws that we discuss in the paper, some of them call into question simple interpretations that are often made about empirical associations between domestic prostitution laws and the domestic incidence of trafficked prostitution. We hope that you find the paper interesting.

An improvement in a district’s schools will increase house prices in that district. A burger and fries will cost more than a burger. All else the same, cars that get more miles per gallon will sell for higher prices than cars that get fewer miles per gallon. I trust that most people would not find these statements objectionable.

All else equal, an improvement in workplace conditions will reduce wages. Now that looks slightly different than “A burger and fries costs more than a burger” but it’s really not. Think of the worker as buying better working conditions with a lower wage, thus better working conditions (burger plus fries) cost more (lower wage) than worse working conditions (burger alone).

Conceptually the burger story and the workplace story are very similar but the latter causes Henry Farrell to object:

…where you will find me objecting, and quite vociferously too, is to the suggestion that we ought to employ simple econ 101 style analysis in order to figure out the tradeoffs, and the appropriate solutions. This style of analysis has an awful lot of presuppositions built into it, and these presuppositions are politically loaded.

Let’s take the case of labour relations. If, as Matt argues, you ought to start with a model of firms, each of which has a cost function such that the total compensation they can offer is fixed, and any increase in costly rights (such as not having your body searched to stop you smuggling widgets out between your arse-cheeks) is inevitably associated with a proportionate decline in wages, then, indeed, you will end up concluding that compulsory rules forbidding body searches will lower overall choice without really benefitting anyone. But you only get to that result because of what you are assuming in the first place. You are assuming that there isn’t any real distributional action happening within the firm – and in particular, that the firm’s owners don’t have any surplus (that they are able to extract because e.g. of workers’ weaker bargaining position) that could be reallocated through regulation. In other words, you are only ‘refuting’ the people you disagree with, because you assume away the problem that they are worried about.

(FYI, Henry is responding to a smart and devastating post by Matt Yglesias that no doubt rankled because Matt is a liberal.)

Henry gets the economics wrong (the model does not require perfect competition) but let’s ignore that and look to his larger point:

The lesson here is straightforward. Simple economic models can be quite useful, but they should be employed with very considerable caution. In particular, one should always think carefully about whether the assumptions of your model blind you to factors that are important to the debate that you are applying them to. As a secondary matter, you should also look to the empirical support for your model – intuitively appealing models are frequently wrong.

Now. what are you expecting to follow this paragraph? Surely, some empirical evidence that the model is wrong. None follows. Henry seems to think that economists have never thought about their assumptions or tested their models. Nothing could be further from the truth so let me provide some empirical evidence about the model of compensating differentials:

Here is Jonathan Gruber and Alan Krueger (n.b. both of them have worked for Obama) on workers’ compensation:

This paper empirically examines the incidence of the workers’ compensation program to infer the likely consequences of mandated health insurance proposals. In certain industries, such as trucking and carpentry, workers’ compensation insurance costs are quite large, and vary tremendously within states over time, and across states at a moment in time. This variation is used to identify the incidence of the program. Empirical analysis of two data sets suggest that changes in employers’ costs of workers’ compensation insurance are largely shifted to employees in the form of lower wages.

Here is Gruber on mandated maternity leave:

I consider the labor-market effects of mandates which raise the costs of employing a demographically identifiable group. The efficiency of these policies will be largely dependent on the extent to which their costs are shifted to group-specific wages. I study several state and federal mandates which stipulated that childbirth be covered comprehensively in health insurance plans, raising the relative cost of insuring women of childbearing age. I find substantial shifting of the costs of these mandates to the wages of the targeted group. Correspondingly, I find little effect on total labor input for that group.

And, dare I mention it, here is Joni Hersch in a recent paper in the AER on sexual harrasment:

Workplace sexual harassment is illegal, but many workers report that they have been sexually harassed. Exposure to the risk of sexual harassment may decrease productivity, which would reduce wages. Alternatively, workers may receive a compensating differential for exposure to sexual harassment, which would increase wages. Data on claims of sexual harassment filed with the Equal Employment Opportunity Commission are used to calculate the first measures of sexual harassment risks by industry, age group, and sex. Female workers face far higher sexual harassment risks. On balance, workers receive a compensating wage differential for exposure to the risk of sexual harassment.

Henry goes wrong because he doesn’t want to conclude that sexual harassment is ok but he thinks that the only way to deny that conclusion is to deny that wages are higher so he rejects the model, he rejects the assumptions that he thinks (incorrectly!) are driving the model and he assumes without looking for any evidence that wages are in fact not higher. (Talk about being blinded by assumptions!).

Matt Yglesias, by the way, is much smarter on this point, he doesn’t reject the model but gives several extensions, such as externalities, that may change the conclusion.

Here is another way to think about sexual harassment and the model. What the theory and the empirical results are saying is that people exposed to a higher risk of sexual harassment are paid more, just as people exposed to a higher risk of death are paid more. In the case of risk, however, the firm’s owners (shareholders) are paying higher wages but also getting the benefits of risky work. But in the case of sexual harassment the shareholders are paying higher wages but not getting the benefits of sexual harassment. In other words, from the firm’s point of view sexual harassment is a bit like employee theft – with the stealing being done by the harassers. (I alluded to this point in my original post and Miles Kimball made it as well.) Thus, shareholders may benefit if the government can reduce sexual harassment at low cost, precisely because they would then be able to pay lower wages without losing productive workers.

Now this analysis is not complete or the only way to frame the issue (again see Yglesias for other approaches). It may bother some people that in this version the biggest gainers from sexual harassment law may well be the firm owners rather than the previously harassed (but does it bother you that the among the biggest gainers from better schools may be property owners without children?) Nevertheless, the principle here is clear, the way to think about these issues is not to throw out economic reasoning but to apply the reasoning ever more deeply.