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Worker bargaining power has declined in the US for decades. And despite the seemingly tight labor market right now, it’s not clear that it’s doing much to reverse the trend. So what's behind the decline? And how could labor grab a larger slice of the economy? On this episode of the podcast, we speak with MIT economist Anna Stansbury, whose research delves into these questions. We discuss the drivers of the long-term decline, and the policy choices that could reverse it. Transcripts have been lightly edited for clarity.
Points of interest in the pod:
How do you measure worker bargaining power — 4:34
How important is a “tight” labor market? — 6:46
How corporate norms affect worker power — 11:24
Why union density is declining everywhere — 17:13
The benefits of sectoral bargaining — 21:02
The value of pay transparency — 29:56
The rise of subcontractors — 36:10
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Tracy Alloway: (00:10)
Hello, and welcome to another episode of the Odd Lots podcast. I'm Tracy Alloway.
Joe Weisenthal: (00:14)
And I'm Joe Weisenthal.
Tracy: (00:16)
Joe, I feel like it's been a while since we've talked about the labor market.
Joe: (00:21)
Yeah, that's right. I mean, you know, for years my favorite day of the year each month was always the Non-Farm Payrolls report. It has political significance, it has economic significance. It has market significance. But of course this year, inflation day is the news. You know, that's the day that everyone cares about, when the CPI report comes out. So I think it sort of speaks to how yes, unemployment rate is really low, but the centrality of like certain labor market indicators at least has sort of declined a little bit.
Tracy: (00:54)
But you could make an argument that inflation day is kind of jobs and wages day, right? Because there's all this focus on inflation at the moment. And clearly central banks don't want inflation to become entrenched. And one of the ways it becomes entrenched is when everyone starts asking for a pay rise to offset the higher cost of living, and wages start to go up and then you get that self-reinforcing cycle.
Joe: (01:19)
It's this really strange thing because obviously why do we worry about high inflation? Well, because it like it worsens buying power.
Tracy: (01:28)
But then everyone wants to raise...
Joe: (01:30)
And then also it's like people sometimes express relief at wages not accelerating too much. Or people express relief that maybe the labor market is cooling down a little bit. But it’s like wait, I thought the whole reason we were worried about inflation is because we were worried about what it means for households. It creates all kinds of tricky things, but yes, of course, as you point out inflation is eating into people's incomes.
Tracy: (01:55)
So that's definitely one reason to care about what's going on in the labor market and with wages. The other reason to be talking about it is because after the pandemic, and this is where our previous episodes on this topic came in, there was, I don't want to say an expectation, but there was a thought developing that maybe this would mark some sort of moment. Some sort of change in the relationship between workers and bosses or their corporate employers — the balance of power would swing back to the average wage earner. And we'd finally see salaries start to go up in a way that they hadn't really, for most of the time after the financial crisis.
Joe: (02:36)
So that was the story of the 2010s, the sluggish labor market, poor wage growth, just sort of general seeming like a decline in worker bargaining power, an acceleration of a very long term trend of measures of labor’s share of the national income declining. And then in the middle of 2021 or early 2021, that’s when we started getting all of these stories about companies having trouble hiring and that was like the first real theme that something is different. It's like, wait, are we gonna have a trend change here? Could we have a meaningful reversal of decades of declining labor share? And I think, you know, there was a lot of optimism, right? Summer of 2021. I think we had a lot of like optimistic guests who are like, this is gonna be the start of something different. Of course the market was going up and then with inflation eating into those wage gains. And then the Fed basically saying we were wrong about transitory inflation. We're gonna hike fast. I think a lot of that optimism has gone away. And so the question now is where do we stand?
Tracy: (03:40)
I'm just thinking that what counts for optimism nowadays is someone coming on and saying, ‘this is like the great plague of the middle ages. And we're gonna see a similar shift in the balance of power towards people.’ Okay. Well, all right, this is all good context. We're going to be going back to the labor market question, the wages question, which again, feeds into issues over inflation and things like that. We're gonna be speaking with Anna Stansbury. She's an economist who specializes in labor and macroeconomics and is also an assistant professor at MIT Sloan whose work is basically all about this. Anna, thank you so much for coming on Odd Lots.
Anna Stansbury: (04:18)
Thanks so much for having me.
Tracy: (04:20)
So your research is all about labor market forces and this sort of balance of power between the employee and the employer. How do we actually go about measuring worker power? What do you look at?
Anna: (04:34)
Well it's a bit of an amorphous concept and I think different people define it different ways. What we do to look at worker power is we say, well, the result of worker power is the ability of workers to share in the profits of the firm that they work at above and beyond what would happen in some kind of market where their wages were just determined by the market or their compensation was just determined by the market.
So in my work, when I'm trying to measure worker power, I'm trying to say, ‘What would a given worker be paid in a kind of market situation without that power? And then how do different factors give that worker the ability to share in the profits of the firm?’
So one very obvious, very salient driver of worker power is unions. You know, being a member of a union that bargains over your compensation enables you to share to some extent more in the profits of your firm. But there are other less salient, harder to measure ways that worker power can exist. It can be things like norms around pay bargaining and around fairness. It can be things like how managers are incentivized to divide up the pie that the company creates between shareholders and workers. So there are various different aspects that feed in, but I think that sharing in the profits of the firm above and beyond what would happen without that power is the ultimate indicator.
Joe: (05:46)
So I mentioned that we had a number of, I would say more optimistic sounding conversations last summer, like a year ago, and this hope that, ‘Okay, this could be like a new day for worker bargaining power and strength.’ And crucially it wasn't really based on fundamental change in unionizations or unionization policy. There wasn't any real major policy change. I think the optimism was simply labor market tightness and that after the great financial crisis and then a decade maybe, or close to a decade, of clearly the unemployment rate being over what it could have been — being over something that anyone would call full employment — how much does just sort of like the cycle itself and sustaining a strong economy or a strong labor market, how much of a role does that play potentially in shifting the balance of power?
Anna: (06:46)
So I think it's important. And I was someone that was saying, you know for a long time in the pre-pandemic era, as I was getting into this profession, oh it does look like labor markets aren't tight enough and they should be tighter and they can be tighter. And we saw that by February, 2020, they had got tight. The unemployment rate was down to the lowest level in its post-war period. And even then there wasn't much evidence of inflation. So I think we might have been able to go tighter still. So I think it does matter. It does matter a lot. The question as to whether it, on its own, is a sufficient driver of worker power to reverse some of the trends we've seen in the last 40, 50 years, I'm less a strong believer in that hypothesis. I think tight labor markets are a necessary, but not a sufficient factor.
Joe: (07:34)
So just real quickly in those months, like 2019, when we had sub 4% unemployment, were we seeing evidence, I mean, you say it's necessary, but not sufficient. Were we seeing evidence pre-pandemic of a tilt happening or was it too early to see the effects of those tightening labor markets in other measures of labor bargaining power?
Anna: (07:57)
So in terms of the direct effect on things like wages, you did start to see the tilt of wage growth switch. So when labor markets become tighter, typically that's disproportionately affecting lower income individuals who tend to have higher unemployment rates. Typically that's disproportionately affecting people from racial and ethnic minorities. And you did start to see as the tilt of unemployment became less steep, the tilt of wage growth improved to benefit those groups.
So you saw that effect directly happening already. The question I think you are asking is, is it also feeding into other secondary factors of labor market power? Something like tight labor markets enable more worker activism and more unions because people are less worried about retaliation or losing their jobs in the pre pandemic era. My sense is we didn't see a huge amount of a huge amount of change. There were some waves of organizing in the summer of 2019, we can talk a bit more about what's been happening since the pandemic, but my sense was that the period probably hadn't been long enough and sustained enough at a very tight level for that to have really taken effect.
Tracy: (09:00)
So maybe before we dive into that, could we step back for a second? Because the issue of stagnant wages, I mean, this has been going on for decades, really. So even as productivity increases, workers seem to see less of a share of that, of the benefits of that increased productivity. So based on your research, you know, what's the explanation for that? Why have wages been stagnating for so long?
Anna: (09:26)
So this is one of these questions in economics, which is in some sense, overdetermined. If you added up everyone's different explanations, you'd get more than a hundred percent of this gap. So different people will have different views as to what's important. The big three sets of factors that people think about largely fall into the buckets of technology, globalization and institutions and norms.
And so technology clearly plays a role in determining — an important role in determining labor market outcomes and who's paid what. And a big part of this divergence between pay and productivity has been the fact that the incomes of lower middle income people haven't kept up with the incomes of high income people, right? So there's a question about, did the demand for skills change in a way that education didn't keep up with it? The race between education and technology almost surely that was a part of it. Almost surely for some workers, globalization was a part of it — increased competition from, offshoring and manufacturing. Although the magnitude of that I would put it relatively small.
And then I think the big question is how much did institutions and norms and policies play a role? And this is where some of my work comes in to think about the role of the decline in worker power in my work, including in a paper that I wrote with Larry Summers a couple of years ago. We argued that the role of the decline in worker power was actually quite big in explaining this part of this divergence, that the decline in unions, the decline in informal worker power norms about fairness within firms, the rise in shareholder value maximization ideology and its sort of capital markets practices and corporate structures, that all of these played a role in eroding worker power in a way that actually does explain a large share of that gap alongside your more impersonal, large scale market forces of technology and globalization.
Joe: (11:10)
When you talk about informal sources of worker power within firms and so-called norms, what does that mean? What are we actually talking about?
Anna: (11:24)
So I think it can be a few things, but we know that anyone who's ever talked to HR or been in HR will know that there are lots of factors that determine how pay is set for different people within a company and some of them are to do with obviously what the person would earn elsewhere, whether they're likely to leave, how much you need to offer to make them stay or to hire them. Of course market forces matter. But there's often quite a lot of wiggle room within that. And that's where these norms can play a role. And in particular, it can be things like a norm of how much the top executives and the CEO in particular should be paid relative to frontline workers. You've seen the CEO to worker pay ratio absolutely explode in the last 40 to 50 years.
And if you look back at say the eighties, this was actually quite controversial in many circles in a way that it's not now. And I think things like whether or not it is perceived to be fair and okay to have these big pay differentials within a firm actually does affect people's pay behavior. But more broadly, I think sometimes the norms and the, I guess, what we might call ‘ideology,” but not in a critical way, just as a way of describing a school of thought around ‘how things should be structured’ so that the rise of shareholder value maximization ideology was a school of thought that really, you know, it is in society's best interest for businesses to maximize shareholder value, that led to not only changes in norms, but also changes in the way companies structured themselves.
Things like fissuring of the workplace and outsourcing of employment, things like incentive structures for executives, things like leveraged buyouts, private equity, various capital markets structures that incentivized management to follow shareholders’ interests. So I think there was a role in which these more informal, intangible things like norms and ideology also crystallized into formal physical structures and changes.
Tracy: (13:17)
So this is one of the reasons why your research is so interesting because if you kind of follow it to its logical and extreme conclusion, you seem to be asking a question about whether or not capitalism is working for society, right? Like companies being motivated by short term considerations and basically answering to their shareholders, which is something that is often at odds with the needs and requirements and happiness of their workforce. How are you thinking about that?
Anna: (13:48)
Yeah, that's a big question. Isn't it?
Tracy: (13:50)
Yeah, sorry.
Anna: (13:51)
Easy one for an afternoon. Okay. So yes. I mean, I think you're right. That is at the heart of these questions and I tend to shy away from using the word ‘capitalism’ just because I think it means such different things to different people. To what extent does the current structure of ownership and incentives and the determination of value, including the value of labor, pay? How does that play out? And is this playing out in a socially beneficial way? That's what we're asking. And I think what I tend to believe and what I tend to believe based on the research is that whether you think it's working depends a lot on what you think the baseline workings of an economy are, and in particular, how close you think they would be to approximate the economist perfectly competitive ideal?
So if you just bear with me for a second on that, so perfectly competitive ideal would be in a world of perfect markets, the government would, you know, set the rules of the game. There would be property rights transactions, and contracts would be enforced. Transactions could take place and individual companies and workers would all be competing with each other. And the worst products would be competed out of the market, the best products would survive. Prices would be low. Workers would always be competed for by companies. And so they would be paid the very highest possible value that companies can afford to pay for their skills and talents. And you've got this market working in a very efficient way, and this is the kind of market that you start with in Econ 101. And if that's the world that you think you're in, then a system where ownership of capital is what determines the allocation of economic activity. You know, who's producing what? Who is hired by whom? That system is gonna be efficient. And you might not think it's gonna result in an equitable distribution of income, but then you should redistribute afterwards — this classic separation of ‘let the market do its work’ and then tax and transfer afterwards.
If you think that the underlying market is actually not going to be very close to that perfectly competitive ideal; if you think it's going to be actually very difficult to search for a new job and find a new job. And these labor market frictions mean that once you're at a job, you're kind of at the mercy of your employer and they're not gonna paying you as much as they could. And if you think that actually the tendency in some markets is towards large companies and consolidation, and so there's not going to be this inherent drive towards the survival of the fittest and better products and increased competition. If you think that's the sort of natural state of markets, then I think you're much more predisposed to ask about, well, ‘Is the allocation of economic activity that's created by these markets actually optimal, or is there an imbalance of power that needs to be corrected?’ And that's where this question of lack of power for me comes in.
Joe: (16:48)
So obviously, and you mentioned it, and it's a really important part of your thesis, part of the decline in worker power has been the major decrease over the last several decades in union density. And there are different theories for why that is, but I mean, what is your story? Why has union density gone down and are there policies that could reverse it?
Anna: (17:13)
So the way I like to look at this and a lot of kind of big economic data stories is to just look over time and across countries as the very first pass. And if you do that, I think you can distinguish quite effectively between different stories of union decline straight away. So the big story of union decline across industrialized countries in the last 50 years is basically all countries have seen some decline in union coverage — the share of workers that are covered by a collective bargaining agreement. Basically all countries have seen some decline in union membership, but the US in particular, the UK, which is where I'm from, to a lesser extent have been at the extreme end. They've seen much sharper declines than almost anywhere else. So I think at that first pass, then you say, okay, well, some portion of the decline in unionization is common to all countries.
And maybe that makes it more likely to be some combination of these globalization and technology explanations. It's harder to maintain a unionized manufacturing sector when there's low wage competition from other countries, for example, but the portion that is unique to the US and maybe the UK and a few other countries, that seems much more likely to be specific and therefore much more likely to be a function of policy and a function of norms. And in the US, you can point to a lot of factors that led to a massive shift in the policy environment and in the public attitude towards unionization and people always point to the 1981 firing of their striking air traffic controllers by Reagan, for example, as a sort of watershed moment in setting the tone for what's acceptable in terms of corporate behavior, towards people who are active in unions.
So my view is that a big portion — not all, but a big portion — of the decline in unionization in the US has been a result of active hostility from business and many businesses, obviously not all from many businesses towards union organizing. And that this creates a kind of race to the bottom equilibrium, where if you know that all your competitors are not going to be unionized, it becomes very difficult for you as a business to be unionized because your costs are higher than everyone else’s. And so then you get this race to the bottom dynamic, where even if not all businesses want to be hostile towards union organizing and union activity, there becomes a competitive imperative to have to be. So that's where I think we've got to right.
Now in terms of policies to change that. I think there's a lot that could be done. And you could think about it in two buckets. One bucket is within the current conception of what worker power is and what unions look like in the US, what could be done. And what I mean there is unions typically bargain at the level of an establishment, like a plant or a unit or a firm, and they typically bargain over pay and other job-related attributes. And there there's a lot of reforms that could be done to increase penalties on firms for cracking down on union organizing. There could be ways to make it easier for unions to share information with workers. So a lot of the reforms that were proposing the PRO Act for example, were things that were trying to change how and when the firm versus the union can share information with workers about the union, or persuade people to vote for or against the union.
But in some ways I think the more exciting portion is, and the more promising portion if you want to see a big change, is trying to rethink the structure. And I'm very in favor of, or at least interested by, changing the structure of worker power so that bargaining is done to a larger extent at a broader level, on a sectoral level. Like I said, in much of continental Europe, which sets a kind of baseline wage floor, compensation benefits floor, for a whole sector or occupation in a particular region, as well as with bargaining at the firm level.
Tracy: (20:55)
Wait, could you talk a little bit more about the Europe system versus the US system? Because I'm not familiar with that.
Anna: (21:02)
Yeah, of course. So there's a lot of different variations on themes in different continental European countries. So I'll take Germany as one example. So the German system, they call it co-determination, has worker power at essentially three different levels within companies and industries. One level is bargaining over largely pay. And this bargaining is done between the unions and a confederation of employers at the level of a whole industry in a region. So there'll be a bargain for the whole of the metal working industry in a certain region in Germany. And that will set a wage floor for the different types of workers in metal working, so that that agreement will look quite like an agreement would look like at the level of firm in the US, but instead it will apply to the whole sector.
Then you've got at the level of the firm in Germany, a works council, which is worker representatives who are elected and have different rights over different topics. So they have joint decision making rights with the firm over things like leave hours, to some extent redundancies. And then they have information and consultative rights on various other things that go a lot deeper than a lot of the rights that unions have in the US. So they have information rights and consultative rights on things like what kinds of technologies the firm is going to implement. So it's a lot more into the managerial decisions. And then the third level is at the very top, which is that 50% of large firms, supervisory boards are elected by workers and the other 50% by shareholders. And then the deciding vote is a shareholder-elected director. So in practice, it's slightly less than a majority of the board is worker representatives. So you have these three different tiers, all of which have different types of powers over different questions, essentially.
Joe: (22:51)
Yeah. I mean, it seems to me listening to this, that part of the question or the tension is like, well, you know, and you mentioned this, maybe people have this very sort of strict view of what the market system is — like, the board represents the shareholders and that's the board's job. And then the board negotiates with employees, etc. And the idea of, well, wait, why can't employees have an actual role on the board or be represented on the board? It feels like, you know, it's very foreign to the American way of capitalism, whether we wanna use that term, it’s very foreign to the American way of business. But I guess, you know, sort of like one takeaway for me from you're saying, is why not do it a different way?
Anna: (23:38)
Yeah, exactly. And as you said, it goes down to will this create good, better, or worse incentives? And Milton Friedman would say, well, this is just going to distract from the corporation's most efficient task of maximizing profits. And it's going to let managers off the hook who are inefficient because they'll say, ‘well, I was just trying to meet all of these different competing goals.’ And so you can never really hold them accountable.
So there are arguments to think that adding ever more representatives of different types of stakeholders is going to dilute accountability and is going to dilute incentives and make things work less well. On the other hand, I think if you're gonna add any stakeholders into the mix, workers are the obvious one, in some ways, because their whole lives and fortunes are so tied up with what happens to the company.
So if you're thinking about long-term best interests, obviously the shareholder's interests are for the firm to do well. Obviously the worker's interest in many ways are for the firm to do well. And obviously there are areas in which their interests conflict, which is given that the firm is doing well, how do you split the proceeds? So if you have that kind of a view of the company as a set of different stakeholders who have some aligned interests in some conflicting interests, it becomes a little bit more natural to think about. Well, we should actually give all of them a voice because they are all invested in a long-term way in a very meaningful way in this organization.
Tracy: (24:57)
Just to play devil's advocate — and I wanna make it really, really clear that this is not my personal view...
Anna: (25:04)
I love devil's advocate.
Tracy: (25:07)
But clearly there is some resistance to unions in the States. And I mean, I think there was a Gallup poll recently that said actually overwhelmingly if you ask people what they think about unions, I think it came in at like 68% in favor, something like that. But that said, there is a subset of the American population that think ‘unions’ and they think this is, you know, something akin to communism basically. It it's a way for people to eek as much out of the system by doing as little work as possible in some cases. I think there's a sense that in some way it might be unfair to people who work really hard and it's a way for others to basically get a free ride. How do you deal with those types of criticisms and how much are those criticisms or that sense an impediment to stronger worker power in the US?
Anna: (26:06)
So I think there's a lot of fairness in these critiques, and a reinvigorated worker power system would want to be careful about a number of things. I think one thing we want to be careful about is that concentrations of power tend to breed abuses of power, I think anywhere in society, and a union would be no different than that. And we've seen lots of very good examples in unions in recent years of, you know, the famous Jimmy Hoffa and the teamsters’ alleged association with organized crime. We've seen corruption cases from certain union bosses, you know, convictions of corruption and mismanagement of money. So obviously there are legitimate reasons to be concerned on that front, right? It's like ‘is this organization that is ostensibly representing workers really representing me as a member of this big union?’ And I think the issue there is, as with any concentration of power, there needs to be really serious accountability structures and mechanisms in place. So that's one.
Then I think the point you raised Tracy, which is more about within the union, are there free riders, are some people going to be bouncing off the labor of everyone else essentially. And I think there, there is a real concern of that as well. And one of the biggest worries that often plays out with unions, I think in people's people's lives in the world at the moment, given who is union member at the moment is mostly in the public sector, is are police unions or teachers’ unions preventing society from holding bad police or bad teachers accountable? Because there are a lot of rules about how and when people can be disciplined and how and when they can be fired.
So I think that's another issue where if there are people that have behaved badly, if there are misdemeanors, you know, how do you ensure that the balance of power is such that the right social outcome happens? On the other hand, you've got a lot of situations where in non-union workplaces, people are fired or disciplined for things that they really shouldn't be. And there's no one to fight their side of the case and that's where the union would come in. So I think it's about, what I would say is, these are all thorny issues. It's about figuring out the right balance of power and the right accountability mechanisms. But if you think, and this goes to a broader question than just the economic question, I think, which is the concept of workplace democracy is something that is not central to most workplaces. But I think a lot of people have become more interested in since the pandemic, which is the concept of if I'm spending 40 hours a week or whatever it is for several years of my life, in a given place with a given set of people, why is it run like a dictatorship in some sense? You know, a workplace is run largely from above with no formal rights for anyone else to disagree. You simply leave if you disagree.
And I think another way of organizing workplaces is to have workplaces with some democratic elements where people have a say over what the health and safety policy is, or have a say over what the remote work policy is. And once you start to see that as a good in and of itself, it becomes something that, how do we think about how to structure these organizations such that the accountability mechanisms work rather than, you know, is it a yes or no? Should we have no workplace voice at all because of these risks of abuses of power?
Tracy: (29:19)
So there's another thing that's been talked about quite a lot recently, which is transparency on pay and the idea that maybe you could have a system where you could see how much all of your coworkers are making, and then you could internalize whether or not you think they deserve that, or if you should demand a bigger raise because you know, someone else is getting more money. Is that something that you've considered in your research or something that maybe could be helpful when it comes to raising wages?
Joe: (29:48)
And also I think there's a new law in New York that like job openings have to disclose pay.
Anna: (29:56)
So this is a hot topic, and I think it's an interesting one broadly. I think it's is likely to go in the direction of making pay more equitable between groups of the same job level, roughly speaking. So you know, reducing the gender pay gap for the same type of job, reducing racial pay gaps for the same type of job, because it becomes much more obvious and salient if individuals’ pay is transparent that some people are making less money than others, and that's embarrassing for firms, and it also provides grounds for workers to lobby for higher pay for themselves, if they're on the lower end of that scale. I think that's also true with the New York vacancy pay transparency law in that you can see what other kinds of jobs like yours are being paid.
And then you can use that as a negotiating tool with your own employer. I think on net, it is likely to be a somewhat positive thing. I doubt that it has huge potential for impact. And part of my reason for saying that is also, so for impact more broadly than that, I think closing gender and racial pay gaps within job types is still a very worthy goal and we should do it. But in terms of rectifying the broader increase in income inequality that we've seen. And I think that's because largely people kind of know how different jobs are paid on the grand scale. It's is a software engineer making X or Y? That kind of information will be revealed by this, but a software engineer versus a dishwasher? We all know the difference is astronomical already and, and this transparency isn't going to change that.
So it will affect some types of inequality. The other hesitation I have is there have been certain pay transparency reforms introduced in different countries recently. So for example, the UK mandated a gender pay gap disclosure for companies, which is an average and a median rather than for specific jobs. And what some of the early academic studies have seen is that these do seem to reduce gender pay gaps, but it's not clear if they do so by boosting the pay of the women versus lowering the pay of the men. And so if you don't rectify more broadly the balance of power between workers and shareholders, it's not clear that this is giving all workers more power versus just rectifying power imbalances within the group of workers, between groups.
Joe: (32:26)
I want to go back to the sectoral bargaining question in Germany, because it sort of relates to like big structural changes in the economy. You know, if we're gonna have this ability for workers across multiple firms to negotiate with employers across multiple firms, within an industry, it feels like that kind of thing makes sense in a sort of old industrial style economy where it's like you know, Detroit, you have three big carmakers and literally no other carmakers, or it's like, you know German chemical companies or something like that, or like, you know, journalism, if there were just Bloomberg and the Wall Street Journal and The New York Times, then you could imagine, you know, a sort of journalist pay standard. But many industries are not like that. And in media, there are like startups all the time. And in autos we've seen a proliferation of new car companies. And so I'm curious, is there a minimum level of corporate concentration that needs to exist in order for an arrangement like that to work? And then more broadly, how much of the decline in unionization across rich countries does have to do with the fact that sort of industrial industry or big industry is just a smaller and smaller part of the overall economy?
Anna: (33:49)
Yeah. Great question. So on the overall corporate concentration, I think in some ways it reminds me of Galbraith’s work. You know, the Galbraith vision of an economy was one where there were a handful of very big companies and then very strong unions that were bargaining with those companies. And that was, you know, what he was talking about in his book American Capitalism. And I think, yes, it's certainly going to be easier for that kind of bargaining to work If there are a handful of lead large companies. So even in the US auto industry in the fifties, it was, you know, the big three auto makers and then the other small auto parts manufacturers and other supply chain players would follow what that agreement with the big three and the UAW said, it's not clear to me that this is not, that there's not this critical mass of large companies or large umbrella brands in different industries.
I mean, look at something like fast food, which is very fragmented in terms of lots of franchisees owning individual stores, but there's a handful of brand organizations that own basically all of the brands. So you could imagine different industries have slightly different corporate structures, but in most industries there are a handful of big players that I think you might be able to get around a table. And they do industry bargains in some continental European countries, you have carve outs for smaller employers. You have ways that startups or that small companies wouldn't necessarily be bound by these agreements, or wouldn't be at the table with them. And you would have to strike that kind of a balance.
Joe: (35:21)
You know, something else related to this. And I believe you talk about it specifically in your work is like how in the old days — and maybe it was apocryphal — but in the old days you would hear stories like, ‘oh, someone started in the mail room at X and then 30 years later they became the CEO.’ And these days there's a good chance that the person who works in the mail room at a given company doesn't actually work for the company. They're on premises, but maybe they work for a subcontractor and they have different color badges or something like that. They're not really there. Talk to us about this. And I guess this is part of the shareholder revolution around norms and structure of companies: we're just gonna do our one thing. We're gonna have our search engine business, and then everyone else, all the people who work in the cafeteria etc., don't actually work for our company.
Anna: (36:10)
Yes this is a hugely important trend. And as you say, I think it's a big part of these broader forces that have been happening over the last 50 years. It's very prevalent, as you said, in dining services, in security services, in cleaning services. It’s also increasingly prevalent in warehousing staffing, in transportation and logistics, that people that are doing the work usually mostly or entirely working for one company are not working, are not employees of that company.
And it comes out of this drive to focus on full competencies, but it creates a whole lot of problems, including when we're thinking about bargaining. So if you are a cleaning worker for a bank, say, and you’re keen to unionize, okay, what happens? You unionize your fellow cleaning workers. You are then unionizing the cleaning services company. The bank then simply does not renew the contract and gets a different, cheaper cleaning services company.
So once you are outside the boundaries of the firm, and if we're in a world where unions are organized at the level of the firm, which they are, then the ability to exert where a power disappears because the bank is where the profits are and not the cleaning services company, but you can only organize the cleaning services company. So this is also the kind of thing where I think a sectoral, well, really, I think an occupation level bargaining structure would help because you'd say, well, it doesn't matter. The corporate structure should be irrelevant if we're thinking about setting a minimum wage for cleaners in New England, that minimum wage will be set across corporate structures and whether or not they're employed by the cleaning services company or by the bank.
Tracy: (37:51)
So I want to go back to our framing at the beginning of this conversation, which is ‘what does the labor market mean for inflation?’ And one thing that you see a lot of nowadays is people reaching for the historic parallel of the 1970s. You know, we have high inflation, we have an energy crisis. Are we gonna basically see a repeat of the high inflation that we saw in the 1970s, which didn't really end until the early 1980s either because Reagan busted some of the unions or because Paul Volker came in and raised interest rates massively. How do you view the current labor market versus the 1970s? And what is the broader impact of the structure of what we have now on the rate of inflation?
Anna: (38:36)
It's the million dollar question. And I don't know that there are so many different possibilities that I don't think I would stand by any specific answer I give in the face of fire, because I think we really don't know. And when you look across many very knowledgeable macroeconomists on these topics, there's a very wide divergence of opinions because we don't know. Having said that, I would say there are aspects that look similar to the late sixties, early seventies. You know, we've had a series of unfortunate supply shocks one after the other, which for us has been Covid happening several times as different supply chain are disrupted in different places. And then the war in Ukraine. The early seventies were the oil price shocks. And then we've also had some, to some degree at least, a big demand shock in the US with the pandemic — government spending slash fiscal stimulus packages.
But I don't think we've seen the kind of massive sustained government spending that we saw in the late sixties particularly with the Vietnam War and the Great Society. And so there's an extent to which the demand impetus might have been smaller now, or at least less sustained than it was then. And the big question really is if inflation is coming from a combination of things, right? It's coming from a demand side, a supply side, too much money chasing too few goods, but also then it gets entrenched. If expectations get entrenched, and if it ratchets. The big question is what's happening now with the ratchet effect? Is what's happening now what was happening at the seventies? And that's where, as I think you are getting towards, this worker power question comes in, which is, is a wage price spiral less likely in a world with less worker power?
And I would think almost certainly that answer is yes, just because in a world with union contracts, with cost of living clauses plus X percent built in, that makes a wage price spiral that much more likely. In a world where private sector union membership is 6% in the US and the tight labor market is present right now, but may not last forever as interest rates continue to rise, it doesn't seem that likely to me that we're going to get stuck in one of those ratcheting labor to product market spirals. There are other ways inflation could stick, but I doubt that would be the one that it sticks as a result of.
Joe: (40:55)
I mean, this gets to like the sort of like perversity of what Tracy and I were talking about in the beginning, which is like, okay, why do we care about inflation? Well one of the reasons at least is because it erodes worker bargaining power and leads to declining standard of living, but then there's like this sort of weird thing where people then take relief at lower wages, because I guess that in theory means that inflation won't get entrenched, but lower wages are the thing we wanna avoid in the first place. Because that's another way of declining or sort of like stagnating worker buying power. But it does seem that it's frequently framed — and maybe it's because of, of this memory of the 1970s — it definitely feels like it's often framed implicitly in the conversation that we can't have sustained wage growth because that just means a spiral and workers ultimately running in place.
Anna: (41:49)
Yeah. I agree with you that it feels like a paradox and I guess the easy, but not easy to achieve, answer is we need sustained productivity growth and then you can have sustained wage growth, but you get worried if nominal wage growth is systematically outstripping productivity, because that's gonna mean one of two things. Either, it's going to mean that there's this big redistribution happening from capital to labor. That's one way that nominal wage growth can grow faster than productivity. Or it's because there's inflation and that's gonna generate and stimulate more inflation in prices.
And that means that, as you said, you're running to stand still, which maybe that means no one on net is worse off on average, but some groups are gonna lose out more than others. And inflation is difficult in terms of planning. And there are worries about spirals and getting out of control and all these other sort of second order costs. So I mean, I would say it creates a problem in that if you want to redistribute, you're gonna need nominal wage growth that's faster than productivity growth, but you need to make sure that it's coming from an impetus that is about either productivity growth or redistribution, and not an impetus that seems driven by this cycle.
Joe: (42:57)
So just finally to wrap up and looking forward a little bit more and you sort of make the case why this is not likely to be the 1970s. Nonetheless avoiding the 1970s is a far cry from the sort of hope of a year ago when it's like, ‘oh, maybe we're gonna get a change in trajectory.’ And we have seen maybe a pickup in union activity. And of course I'm thinking about some of the stuff we're seeing at Amazon and Starbucks, which feels very organic. And you know, we still do have tight labor markets, which may contribute somewhat. Do you see a potential for some sort of trajectory change? Are we in a position where we could affect that with the right policy choices or is there still a lot of work to do in order to turn some of these trends around?
Anna: (43:47)
So I'm both optimistic and pessimistic in the sense that, yeah, it's always easy to take refuge in that isn’t it? So optimistic in the sense that this does feel like an inflection point. If you compare this year, last year to some extent, the union activity, with the union activity in the US in, you know, almost all of the last few decades, there's been a lot of energy and there's been a lot of new organizing in places that we don't typically see it successful organizing. As you mentioned, Amazon and Starbucks being prime examples, we're also seeing an upswell of organizing in things like the care sector, which is another sector which is very low paid and has had typically very difficult conditions. So in that sense, I think it feels like there's an inflection point. The ongoing tight labor market creates conditions for that. The, you know, the high quit rates as people move to find better jobs or jobs that suit them better. And I think it shouldn't be underestimated that we have this groundswell of awareness and I think popular support from the pandemic, which really laid bare how appalling conditions are for many people.
You know, when it was seen that people who were making incredibly low wages and providing completely essential services to the economy were essentially being asked to risk death for themselves or their families without even the ability to, you know, have a certain amount of protective equipment or paid leave. I think people seeing that has generated some popular upswell and popular support for a rebalancing of power. So I think this is an unusual moment. This is a unique moment. We're also in a moment where the administration is very supportive of unions and strengthening unions.
But the reason for pessimism is just that there's such a long way to go. If you believe that worker power is an important ingredient of change, private sector unionization in the US is at 6% of its peak. It was one-in-three in the 1950s. And over time there's a natural attrition anyway of unionization. You still, you have to have a certain amount of union organizing activity just to keep the membership rate constant because you know, people retire, firms close. You've got to have that rate of organizing just to keep the rate flat at 6%. So the rate of organizing that would be needed successfully to reach the levels of unionization necessary to actually make a meaningful dent in how pay is set in the economy is astronomically high. And that's where I think a lot more of a change really in the organizing environment, really underscored by policy is necessary or would be necessary if that was the goal to achieve.
Tracy: (46:26)
All right. Well, Anna, I'm glad we could end with some optimism tempered by quite a bit of pessimism. That's all we can hope for nowadays I think. Anna Stansbury, thank you so much for joining us.
Joe: (46:37)
That was great, Anna, thank you so much.
Anna: (46:38)
Thank you so much.
Tracy: (46:55)
So Joe, I think this is a fascinating topic and there's clearly a lot of interest at the moment, but I guess I come away from that conversation thinking about how it feels like almost everything is geared towards like the structure of capitalism — I know Anna didn't want to use that word — but it feels like the structure of capitalism is basically geared towards diverting benefits away from workers, unsurprisingly perhaps.
Joe: (47:22)
And the other thing I would say is like, there is a real effort underway, and I don't mean this in a good or bad way per se, but look, the goal of kind of everyone in power, right, is more or less it's like, ‘let's get back to the 2019 economy.’ I think a lot of people in power, particularly at the Fed, would see that as a pretty huge win to just get back there. And sort of like all these trends, all these things, the sort of the Pandora's box that was opened during the pandemic with ‘could this be an era of Universal Basic Income and checks as a sort of automatic response to every downturn?’ You see the sort of white blood cells of the existing system attacking all the innovations and trying to like go back to the pre-pandemic status quo.
Tracy: (48:11)
Yeah. But also it's weird as you pointed out, this idea that inflation is bad, but wage increases to offset inflation are also bad because in theory, that increases inflation. And so you almost have like a collective action problem I guess.
Joe: (48:25)
Yeah. And I feel like one of the messages is, well, increasing labor share is actually impossible, is the implicit message. That makes no sense because labor share changes. But the implicit message is, ‘oh you can't, if higher wages mean higher inflation, then why achieve higher wages?’ and you just don't get anywhere with workers. There's like this core contradiction in much of the discourse I would say.
Tracy: (48:50)
Yeah, I think that's right. Should we leave it there?
Joe: (48:52)
Let's leave it there.
You can follow Anna Stansbury on Twitter at @annastansbury.