Category Archives: Labor Markets

Missouri Prop B: the Unintended Consequences of Wishful Thinking

04 Sunday Nov 2018

Posted by in Labor Markets, Living Wage, Minimum Wage, Uncategorized

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Proposition B sounds really good to many Missouri voters: all we have to do to help low-wage workers is declare that they must be paid a higher wage. That’s the pitch, of course. But voters should hear the cruel truth about the unintended consequences of this well-intentioned and ill-considered proposition on the ballot this week:

  1. Businesses are likely to increase prices to compensate for a higher mandated wage, which hurts all consumers, but especially the poor.
  2. Some low-skilled job losses or lost hours are assured, and they will hit the very least-skilled the hardest. No matter the legal minimum, the real minimum wage is always zero.
  3. Such job losses have long-term consequences: lost job experience that the least-skilled desperately need to get ahead.
  4. The harms will have a disparate impact on minorities.
  5. Large employers can substitute capital for low-skilled labor: automated kiosks to take orders and increasingly sophisticated robots to perform tasks. Again, the real minimum wage is always zero. As I’ve said before on this blog, automate no job before its time. But that’s what Prop B will encourage.
  6. Employers can make other compensatory changes. That includes reduced fringe benefits and break times, increased production quotas, and less desirable shifts for minimum wage workers.
  7. A large share of the presumed beneficiaries of a higher minimum wage are not impoverished. Many are teenagers or young adults living with their parents.
  8. All of the preceding points argue that an increase in the minimum wage is not an effective method of targeting poverty reduction. In fact, the harm it inflicts is targeted at the most needy. 
  9. Small employers have less flexibility than large employers, and Prop B would place them at a competitive disadvantage. To that extent, a higher wage floor is most damaging to “mom & pop”, locally-owned businesses, and their employees. Again, the real minimum wage is always zero.

At least 24 earlier posts appear on this blog covering the topic of minimum wages. You can see most of them here. The points above are explored in more detail in those posts.

William Evan and David MacPherson of the Show-Me Institute have estimated the magnitude of the harms that are likely to result if Prop B is approved by voters on November 6, and they are significant. The voters of Missouri should not be seeking ways to make the state’s business environment less competitive.

Voters should keep in mind that wages in an unfettered market reflect the realities of labor demand and labor supply. Wages and other forms of compensation reflect the actual quantity, quality and productivity of available labor supplies. And for unskilled labor, which is often supplied by those who lack experience, a wage that matches their marginal productivity is one that provides that valuable experience. The last thing they need is for tasks requiring little skill to be performed by more experienced employees, or by machines. We cannot wish away these realities, and we cannot declare them suspended by law. Such efforts will have winners and losers, of course, though the former might not ever recognize the ephemeral nature of their gains. And as long as there is freedom of private decision-making, the consequences of such legal efforts will cause harm to those least able to withstand it.

BS Bernie Blames Bezos

12 Wednesday Sep 2018

Posted by in Labor Markets, Living Wage, Price Mechanism, Welfare State

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Bernie Sanders keeps probing for ways to create a backdoor minimum income, and he’s eager to loot successful job creators and their customers in the process. Last month I wrote about the folly of his proposed legislation that would offer federal job guarantees to all. A new Sanders bill, introduced jointly with Rep. Ro Khanna (D – CA), is an equally bad idea called the Stop BEZOS Act, or the “Stop Bad Employers by Zeroing Out Subsidies Act”. It’s pretty obvious that the selection of the acronym preceded the naming of the bill. Imagine the fun his Senate staffers had with that! The logical flaws embedded in the title of the act are bad enough. The effort to garner attention by using the title to smear the name of a famous technology entrepreneur is sickening.

Jeff Bezos, of course, is the founder and CEO of Amazon, the online retailer, as well as the owner of the Washington Post. Amazon has been rewarded by consumers for its excellent service and aggressive pricing, and it is now valued at about $1 trillion. That makes Bezos a very wealthy man, and it is no coincidence that Sanders has chosen to make an example of him in an effort to inflame envy and classist passions.

While some details of the bill remain sketchy, firms with more than 500 workers would face a 100% tax on every dollar of federal benefits received by those employees. But the tax would apply only to “low-wage” employees, however that is defined, and not simply any employee receiving federal benefits. If the bill became law (and it won’t any time soon), it would require a costly federal administrative apparatus to coordinate between several agencies, including the IRS. Beyond the tax itself, the compliance costs for firms won’t be cheap, and it will create terrible incentives: if you own a business, you would have a strong incentive to avoid hiring workers with little experience or weak skills, or anyone you might deem likely to be a recipient of federal aid. If you have 499 employees, you’ll probably think hard about how to execute future growth plans. Nothing could do more to improve the return to investment in automation.

Is Amazon really a “bad” employer? That’s what the title of the Sanders bill says. In fact, the company has been accused of harsh labor practices in its fulfillment centers. Life for corporate managers is said to be no picnic, and labor turnover at Amazon is high. Nonetheless, the wages it pays attract plenty of applicants. Unskilled labor does not command a high wage, and that is no fault of an employer willing to provide them with work and experience. Yet the bill would punish those employers, as well as employers having part-time workers drawing federal aid.

An absence of punishment can hardly be described as a “subsidy”, as the bill’s title suggests. But that is exactly how leftists think, at least when they do the punishing. In this respect, the bill’s title is an assault on logic and a misuse of language. It would also represent a violation of constitutional principles like property rights and freedom of contract.

The idea of taxing employers to recoup any public aid received by their workers is intended to affect a de facto “living wage”. However, one benefit of an independent social safety net, as opposed to a living wage tied to that net, is that the former largely preserves the operation of labor markets, despite creating some nasty labor-supply incentives. Wage rates that approximate the value of worker productivity allow efficient matching of jobs with workers having the requisite skills, even if the skills are relatively low-grade. Those wages also minimize distortions in the economics of production within firms and across different industries. Furthermore, prices faced by buyers should reflect the real resource costs associated with demands for various goods. They should not be inflated by political decisions about the level of federal welfare benefits. Quite simply, preserving labor market efficiency enhances the ability of the economy to allocate resources to the uses for which they are most highly-valued.

There are independent questions about whether the structure and level of benefits provided by the welfare state are appropriate. Those are matters of legitimate policy debate, and those benefits must be funded by taxpayers, but they should be funded in the least distortionary way possible. Bernie Sanders imagines that the burden of those taxes can simply be imposed on large employers with no further consequences, but he is badly mistaken. Consumers will shoulder a significant part of that burden under his latest scheme. And, of course, Sanders’ beef with Bezos is a cynical political ploy. It amounts to cheap scapegoating intended to promote another one of Sanders’ bad policy ideas.

Right-to-Work Promotes Employment, Wage Growth

06 Monday Aug 2018

Posted by in Labor Markets, Right to Work

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The economic evidence is quite clear that state right-to-work (RtW) laws do not reduce wages, though a few seem desperate to convince us otherwise. In fact, RtW has proven to be an unambiguous economic tonic for states that have enacted such laws (though perhaps not for union lobbyists). Note that this has nothing to do with comparisons of nominal wage levels in RtW vs. non-RtW states, as organizations like the left-wing Economic Policy Institute (EPI) are wont to make. Adjusting for the cost of living often shows a different result. Either way, the recency of RTW laws in many states means that those differences tend to be legacy effects and are not useful as a gauge of the incremental impact of RtW laws.

It’s no coincidence that RtW laws have gained favor as a mechanism for encouraging economic growth in historically low-wage states. The efforts have been largely successful. Jeffrey Eisenach reported the following findings in 2015:

  • “RTW laws directly affect economic performance through their impact on business location decisions, especially in heavily unionized industries such as manufacturing. Other things being equal, businesses are more likely to locate in states with RTW laws. There is also evidence that RTW laws have a direct, positive effect on employment, output, and personal income.
  • RTW laws do not lead to lower average wages in either unionized or non-unionized industries. There is some evidence that the long-run effect of RTW laws is to raise wage rates as a result of increased productivity.
  • RTW laws also affect economic performance indirectly through lower rates of union density. The weight of the evidence indicates that lower union density is associated with higher levels of employment, increased investment and R&D spending, and increased innovation.”

Mark Mix reports similar evidence, including more rapid employment growth and larger wage gains in RtW states. And James Sherk addresses some of the myths surrounding RtW, including the misleading narrative that RtW reduces wages and that RtW is unpopular among the American public. Indeed, Sherk quotes a Gallup poll finding that Americans support right-to-work laws by more than a 3 to 1 margin, though it’s not clear how well the average American understands the issue.

A disturbing aspect of the opposition to RtW is an effort to disparage the business community by characterizing private enterprise as exploitative. I leave you with some wisdom from Bran Caplan on that point (HT: Don Boudreaux):

“Businesses produce and deliver virtually all of the wonderful, affordable products that we enjoy. Contrary to millennia of economic illiterates, businesses rarely do so by ‘exploiting’ their workers. Instead, businesses provide gentle but much-needed leadership. Left to our own economic devices, most of us are virtually useless; we don’t know how to produce much, and we don’t know how to find customers.  Businesspeople solve these problems: They recruit workers, organize them to vastly raise their productivity, then put these products in the hands of customers all over the world. Yes, they’re largely in it for the money; but – unlike every government on Earth – business rarely puts a gun to your head. Businesses assemble teams of volunteers to meet the needs of willing consumers – and succeed wildly.” (emphasis Caplan’s)

Right-To-Work Prop A: Freedom of Speech, Association and Contract

30 Monday Jul 2018

Posted by in Labor Markets, Right to Work, Unions

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I’d be angry if my employer forced me to contribute to the company’s Political Action Committee (PAC), and that view is shared by many of my colleagues. It would be illegal, of course, at least as a condition of employment. I love my job, but I give nothing to the PAC because I do not trust it to properly represent my political preferences. That goes for political contributions and lobbying activity that might benefit the company and, by extension, my own economic interests. I simply do not believe the company will refrain from corporatist practices, and I do not under any circumstances want my contributions lavished on politicians with whom I have policy differences.

In my home state of Missouri, unions and their political allies insist that union dues payments should be a condition of employment in unionized workplaces. Like PACs, unions are major political contributors, and I’d be surprised if there weren’t a large number of union members who object to the use of their dues for political contributions and activism. Of course, most of that activism is broadly anti-capitalist. This, quite simply, constitutes compelled speech and is a violation of employees’ First Amendment free-speech rights. Forced membership is a violation of the worker’s freedom of association under the Fourteenth Amendment.

Unions are also presumed to represent the interests of workers in negotiating with management, but not everyone wants that representation, especially given the corruption that has often plagued unions over the years and the poor economic performance of unionized industries in general. That last statement applies to public employee unions no less than private sector unions. Prohibiting non-union workers from employment at a unionized firm violates their freedom of contract under the Fifth and Fourteenth Amendments. I agree, however, that an employee refusing to join a union should not automatically be entitled to the wages and benefits negotiated by the union in collective bargaining with the employer. That should be strictly between the non-union employee and the firm.

Missouri Proposition A, which is on the state’s August 7 ballot, is a referendum on a right-to-work (RtW) law already passed by the general assembly and signed by the governor last year. I’ve discussed reasons why some libertarians have expressed disagreement with this kind of legislation—primarily because it denies an employer the right to hire workers exclusively from a unionized pool of labor. As Daniel J. Mitchell has noted, right-to-work laws are a second-best, compensatory solution to other forms of government intervention in labor markets that essentially grant unions monopsony privileges. Furthermore, giving primacy to an employer’s right to deal exclusively with a union ignores the rights of non-union workers and the rights of union members who do not wish to contribute to a union’s political activities. Trampling on the latter stands in contrast to the established protection of my rights against coerced contributions to my employer’s PAC.

The standard economic argument in favor of RtW laws hinges on the favorability of a state’s business environment and its competitiveness with other states. Andrew Wilson explains how and why Prop A will create jobs in Missouri. He notes that over the ten years ending in 2014:

“…average job growth in the 22 states with RTW laws in place for most or all of that time was more than twice as fast (at 9.1 percent) as in the 28 forced-union states. The RTW states also had considerably faster growth in personal income (at 54.7 percent compared to 43.5 percent) and a much stronger economic growth (50.7 percent compared to 38.0 percent).”

Wilson also remarks on a historical phenomenon which pro-union forces refuse to acknowledge: unions have undermined the competitive position of the industries upon which their members rely. It’s a classic principal-agent problem. Workers appoint an agent for representation, but the agent acts independently to maximize its own gains, often at the expense of the workers. RtW applies discipline to the process, reinforcing the union’s incentive to put members’ interests above of its own. After all, nearly all employers have to compete for workers, and private employers have to compete in product markets. Union workers have been exempt from competition only to the extent that their wage demands have not undermined the business’ competitive position, but they frequently have.

The real rub, according to RtW opponents, is that business interests will simply “crush” unions under RtW and impose lower wages and poor work conditions on workers. But as I alluded above, there are employers that prefer to work with a union for a variety of reasons. Second, suppose that new employees of a unionized firm refuse to join the union, or that some union members opt out. That’s a pretty strong indication that union membership is an unattractive proposition. Whose fault is that?

I favor Proposition A because workers should not be forced to accept representation by any third party, firms should not be forced to hire exclusively from those willing to do so, and because workers should not be required to contribute to union political initiatives. But as Steve Spellman writes, unions could do much to enhance their value to both workers and firms, attracting membership and gaining advantages in bargaining with employers:

“If unions focused on providing helpful, outsourced H.R. functions to companies, such as worker recruitment, drug screening and taking care of all that labor-law-compliance paperwork, it would sure change their reputation. As would standing up for its members, while also taking necessary (and fair) disciplinary actions instead of covering up for the occasional bad apple (even if that is only one worker out of 1,000). … If we can dream a little here, unions could also be best positioned to stand up for workers who are discriminated against, for whatever reason, rather than waiting on the law to catch up with our evolving society.”

Bernie’s Backdoor Minimum Wage Hike

30 Monday Apr 2018

Posted by in Labor Markets, Minimum Wage, Welfare State

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Bernie Sanders’ latest jobs plan is a political fantasy, but also a fantasy insofar as he imagines such a program could improve job market outcomes and the U.S. economy. Sanders wants the government to guarantee a job to anyone who is unemployed and pay them a wage of $15 an hour. But what job roles will be identified and by whom? Will the unemployed be required to accept these jobs or else lose other benefits? Which unemployed workers will come forward voluntarily for “workfare”? What will qualify them for particular roles? How many public-sector workers will be diverted from their existing responsibilities to administer the program and manage these new workers? How much will the program cost? How will the above-market wages and administration of the program be funded? These questions deal only with the first-order mechanics of the Sanders proposal. What will be the second-order effects on the private economy?

Scott Shackford delves into these and other gory consequences that are likely under the Sanders plan, most of which should be obvious to anyone with a modicum of economic literacy. Apparently, that does not include the so-called economists at the Levy Economics Institute at Bard College, who produced a “study” on guarantees of public sector jobs that manages to prove their ignorance of basic economic principles.

The headline for this proposal is about jobs, but the real motive is to impose wage controls through the backdoor. The plan is announced at a time of full employment (now 4.1%), traditionally defined as an unemployment rate of roughly 4%. That level accounts for “frictional unemployment”, which recognizes that job transitions and the normal market process of matching worker skills with jobs are not instantaneous. It’s true that certain segments of the labor force typically experience higher than average unemployment. So Perhaps i should give Bernie the benefit of the doubt by stipulating that the program is geared toward addressing cyclical and structural unemployment, or that it’s intended to benefit minorities. But if the goal is to keep everyone working all the time, it is impossible in view of the informational frictions, skill mismatches, and mobility issues that characterize the labor market. Workers would have difficulty conducting a job search were they employed in Sanders workfare program, and that sacrifice would be particularly costly for skilled workers seeking employment at wages greater than $15/hour.

Again, all “guaranteed” jobs under the Sanders plan are to pay a wage of at least $15/hour. Low-skilled workers whose productivity is not consistent with such a wage can thumb their noses at private employers. Either pay your low-skilled workers $15 or lose them. This is Sanders’ way of implementing a de facto federal minimum wage without actually requiring employers to pay that rate by diktat. Of course, under the plan, the taxpayer is on the hook for the excess of wage payments over and above the value of these workers’ productive contributions. The bulk of those workers lack the skills and job experience to contribute value commensurate with that wage rate, and sometimes they lack even the temperament and comportment necessary to make a sufficient contribution to output, or to keep steady work absent the gift of a wage from government.

But that’s not the worst of it: Sanders’ program is cloaked in terms suggesting that it would have countercyclical effects: government hiring would increase in association with increases in the unemployment rate, and vice versa, or so we are told. But “vice versa” is a stretch: government programs have a tendency to be self-perpetuating. And this program creates instability by allowing government to compete for workers on a distorted basis. The private sector will lose workers as the government gains workers. The tax bill and its burden on the private sector will lead to business failures, still fewer private workers, and still more public-sector workfare. And as the government displaces private activity, good luck to consumers finding the plentiful goods and services to which they are accustomed. The Sanders program is a prescription for economic and social decline.

Public sector competition for workers under Sander’s plan would be distorted because work would be assigned by special interests, not by market demand. Bob Bryan of The Business Insider has the following details:

“Sanders’ plan would create 12 districts within the US that would approve jobs plans from municipalities, states, and American Indian tribal governments and then pass those plans along to the Labor Department for final approval.”

Thus, a new administrative layer of government, 12 districts, would be created wielding the authority to winnow the pool of projects for a new category of spending. In the parlance of public budgeting, this spending would be called an “entitlement” because the spending would be programmatic rather than discretionary. State and local governments would create wish lists, and their wishes would then be constrained by the decisions of district authorities and the Labor Department. Those decisions, however, would very likely be responsive to special interests. Like most administrative decisions, the spending allocations would be guided by politics, not economics.

Shackford quotes the Levy Institute:

“A local artist collective employs painters, actors, musicians, and stage hands to run year-round productions for the community. They organize school outreach programs, run summer camps, and offer free art, music, and literacy classes for disadvantaged/special needs youths. They collaborate with local schools in offering art enrichment programs.”

Those aren’t Sanders words, but he might well entertain such notions. Should we all just agree that the government ought to tax us more heavily and spend the proceeds on supporting local, “unemployed” artists (I use quotes because many artists are not fully employed at their art for lack of demand, and they often work at other jobs from which they would quickly separate given a flow of government funds for their art). Usually those who insist on such things belong to the very interests who would benefit from the programs. One can argue that the “external benefits” of the arts justify public expenditure, but there is no objective measure of those benefits, and those who benefit directly will always want more. Therefore, the Sanders program, like so many other public initiatives, would violate standards of governmental fiduciary duty to taxpayers.

What about construction and repair of public infrastructure? Those projects should be chosen and initiated on their merits and on taxpayers’ willingness to fund them, not because there are people unemployed at the moment. What’s more, construction and maintenance of infrastructure requires various levels of skills that might not be readily available in a pool of unemployed workers.

Regardless of the specifics, the jobs program promoted by Sanders substitutes a wholly unrelated goal, jobs, for the underlying rationale of particular projects. As such, Sanders’ proposal would provide opportunities for special interests to collect rents without a programatic justification for the expense to taxpayers. Shackford says:

“… the examples in the Levy study seem like descriptions of programs that certain types of local government-connected people with very particular ideas would like to see the government doing. Their plan leans heavily on the assumption that all these unemployed or underemployed people would happily do the grunt work that aligns with left-leaning environmental and public policy project goals. The report openly uses the Works Progress Administration of the New Deal as a model to support it. …

But how does one determine what a community needs while ignoring market responses? Why should taxpayers fund community plays if they have no interest in actually sitting through them? This report makes it very clear that the task falls to local public institutions and job centers, not market demands. That necessarily means it will be driven, much like this report is, by the interests of the people who are in charge of the programs or have the most influence over the programs. That these programs could end up as a corrupt breeding ground for government cronyism and nepotism in who gets assigned for which jobs is utterly absent from the study.“

Here is more from Bryan:

“The plan would also utilize job training centers to train and connect workers with jobs on the new projects.”

This is either another new agency or a demand on private job training organizations. Presumably the training would be free to the trainee, in addition to the $15/hour paid during the training period. I would have fewer objections to an explicit job training program than to the sprawling job-making and wage-paying authority called for in Sanders’ plan. Unfortunately, the absence of apprentice wage levels in the U.S. often eliminates the best training of all: on-the-job training.

Shackford wonders whether workers hired under the program could ever be fired for cause:

“I mean, given how hard it is to fire bad teachers or dangerous cops, it’s worth wondering whether people who get these jobs will continue to get paid if they fail to show up for their job trimming the hedges of their community skate park or surveying people about their food insecurities. (According to the Post, Sanders’ plan calls for something sinisterly called the Division of Progress Investigation to handle discipline.)“

The program could employ as many as 15 million people if the Levy Institute study can be taken as a guide. That would represent a huge increase in government employment. Presumably, the burden would be spread across federal, state and local governments, all of which are facing degrees of fiscal crisis.

Bernie Sanders’ jobs program is ill-defined, but we know enough about it to safely conclude that it is economically preposterous. It will compete with job search activity that is necessary to the function of the labor market; lure low-skill workers away from their current employers, or indeed from their highest valued uses; require massive public borrowing and ultimately higher taxes; compromise other functions of government by diluting fundamental program goals and diverting human and other resources; place further strain on government budgets at all levels; lead to business failures; and lead to a permanently larger role for government in the economy. Governments, of course, do not operate under market discipline, so the program would degrade the overall productive potential of the U.S. economy. 

As David Byrge, aka Iowahawk, says about Sanders:

“Who better to get America back to work than a guy who was actually fired from a Vermont hippie commune for being too lazy.”

For a fairly thorough compendium of Sanders’ policy proposals over the years, here is Matt Welch on “Bernie’s Bad Ideas“.

Taxes and the Labor “Discount”: What Could Go Wrong?

29 Wednesday Nov 2017

Posted by in Labor Markets

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A supposed labor market distortion that I’d never considered is that government receives a “discount” on labor services because public employees’ income tax liability is returned to the very government coffers from which they are paid. Tyler Cowen regards this as a “wacky” idea, but not easy to refute. Suppose the income tax rate is 20%. If the government pays a worker $10, then $2 is returned to that same government via the tax. The net cost to government is just $8. But a tax “discount” on cost is not unique to government, though the form it takes may differ.

Who Gets a Labor “Discount”?

Does it cost a private employer more than government to pay a worker $10? It depends on the situation. Maybe more, maybe less. If the private employer pays the same 20% tax rate on its profits, the wage payment creates a tax deduction worth $2 in avoided tax. The net cost is $8, so there is no difference. However, a firm must be profitable to get that deduction, so unprofitable startups, strugglers, and nonprofits do not get the same wage “discount” as government. Of course, losses can be carried forward to reduce taxes if the firm ever becomes profitable, and non-profits have tax advantages of their own.

The value of the tax deduction (the private “discount”) depends on the tax rate paid by the firm. A profitable C corporation with a marginal tax rate of 35% (under current law) gets a steeper discount than a small businessperson in the 28% tax bracket. To some extent, a steeper discount subsidizes the cost of hiring employees who are highly compensated. A highly successful pass-through entity like a sole proprietorship, partnership or S corporation can face the highest individual marginal rates, so the “discount” for such a firm could be the largest relative to wages.

Economic Distortions

There are a couple of potential distortions involved here: one is the standard wedge driven between the value of workers’ marginal product and the after-tax wage they receive. This discourages labor supply. There is a second distortion to the extent that the “discount” gives government and profitable firms an artificial competitive advantage of over unprofitable buyers of labor services. Furthermore, the loss of the labor discount for firms falling into unprofitable positions imparts an undesirable procyclical element into the tax system, potentially aggravating episodes of under-production and high unemployment.

The government’s labor “discount” may reduce the available supply of labor to the private sector. Government does not operate under the profit motive, and unlike private firms, it need not concern itself with efficiency standards for survival. Government production does not face a market test, so it is difficult to measure worker productivity, which is the key to the efficient pricing and use of labor in the private sector. The penalty to government for paying an above-market wage is zero.

The same “discount” argument can be made for government contracts with private firms. The profits earned on those contracts are taxed by the government payer, so the total cost to the government is essentially discounted. Contracts between private firms are on the same footing if the payer is profitable, since the paying firm can deduct its costs from taxable profits. A payer that is not profitable is at a disadvantage. The government “discount” might not be the primary reason to suspect that government contracting is subject to distortion and inflated values, but it is a reason nevertheless. One could be forgiven for thinking that the “discount” creates additional leeway for graft!

Does the government labor “discount” really impinge on the federal agency budget process? I doubt that anyone having a critical role in the Congressional or executive budget process thinks much about it, to say nothing of agency hiring and compensation managers. Yet spending levels may “bake-in” a certain amount of over-payment of wages or fat in government contracts. In any case, historically, federal spending has not been tightly constrained by the flow of tax revenue.

Federal Wages vs. Private Wages

There is empirical evidence on government vs. private wages. These data are of interest in their own right, but since so much of the private sector receives the same tax “discount” as government, it’s not clear that it should cause much if any differential in pay. The Congressional Budget Office (CBO) compared differences in compensation from 2005-2010 and again from 2011-2015 and found that federal wages and benefits exceeded private sector wages and benefits over both periods. The gap decreased with increases in education. For workers with a bachelor’s degree or less (71% of the CBO’s latest federal workforce sample), the gap was substantial. The difference was just a few thousand dollars for those with a master’s degree. The professional degree/Ph.D. category stood in fairly sharp contrast to the others, with private workers having a fairly large advantage. It is possible that the most highly-educated category, being the most scarce and probably the most specialized, has unique market characteristics. It should also be noted that the sample of federal workers was about 4 years older, on average, than the private sector sample, which might have skewed the results.

The CATO Institute used data from the U.S. Bureau of Economic Analysis (BEA) and found that federal civilian workers earned 80% more than private sector workers in 2016. The CATO report cites several other studies, including the CBO’s, which consistently find that federal workers earn more. This could be partly attributable to the government labor discount, bureaucratic laxity, the heavy unionization of the federal work force, and even the geographical distribution of federal workers.

Discount My Taxes, Please

The worst aspect of the tax “discount” on federal and many private-sector wage payments is the taxation itself. However, the fact that some firms and organizations don’t qualify for the discount represents a significant distortion. To some extent, labor input is discouraged for unprofitable startup firms, firms struggling for survival, and of course the non-profit sector. These organizations are at a distinct disadvantage in terms of resource allocation relative to those who qualify for the “discount”.

Nevertheless, this unevenly applied discount may be an unfortunate mathematical implication of a public sector with income-taxing and spending powers. The discount on wages and contract payments provides additional margin along which government can be wasteful. A partial solution is to maintain whatever firewalls exist between taxing and spending authorities, but that won’t unwind past distortions. Of course, the best solution is to shrink government: reduce taxes and reduce the federal role in everything from infrastructure to public health, dismantle the administrative state, and reduce military spending. I didn’t really need another reason to warn of the dangers of big government, but count this one as duly noted!

Mr. Musk Often Goes To Washington

31 Monday Jul 2017

Posted by in Automation, Labor Markets, Technology

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Elon Musk says we should be very scared of artificial intelligence (AI). He believes it poses an “existential risk” to humanity and  calls for “proactive regulation” of AI to limit its destructive potential. His argument encompasses “killer robots”: “A.I. & The Art of Machine War” is a good read and is consistent with Musk’s message. Military applications already involve autonomous machine decisions to terminate human life, but the Pentagon is weighing whether decisions to kill should be made only by humans. Musk also focuses on more subtle threats from machine intelligence: It could be used to disrupt power and communication systems, to manipulate human opinion in dangerous ways, and even to sow panic via cascades of “fake robot news”, leading to a breakdown in civil order. Musk has also expressed a fear that AI could have disastrous consequences in commercial applications with runaway competition for resources. He sounds like a businessmen who really dislikes competition! After all, market competition is self-regulating and self-limiting. The most “destructive” effects occur only when competitors come crying to the state for relief!

Several prominent tech leaders and AI experts have disputed Musk’s pessimistic view of AI, including Mark Zuckerberg of Facebook and Eric Schmidt, chairman of Google’s parent company, Alphabet, Inc. Schmidt says:

“My question to you is: don’t you think the humans would notice this, and start turning off the computers? We’d have a race between humans turning off computers, and the AI relocating itself to other computers, in this mad race to the last computer, and we can’t turn it off, and that’s a movie. It’s a movie. The state of the earth currently does not support any of these scenarios.“

Along those lines, Google’s AI lab known as “DeepMind” has developed an AI off-switch, otherwise known as the “big red button“. Obviously, this is based on human supervision of AI processes and on ensuring the interruptibility of AI processes.

Another obvious point is that AI, ideally, would operate under an explicit objective function(s). This is the machine’s “reward system”, as it were. Could that reward system always be linked to human intent? To a highly likely non-negative human assessment of outcomes? Improved well-being? That’s not straightforward in a world of uncertainty, but it is at least clear that a relatively high probability of harm to humans should impose a large negative effect on any intelligent machine’s objective function.

Those kinds of steps can be regarded as regulatory recommendations, which is what Musk has advocated. Musk has outlined a role for regulators as gatekeepers who would review and ensure the safety of any new AI application. Ronald Bailey reveals the big problem with this approach:

“This may sound reasonable. But Musk is, perhaps unknowingly, recommending that AI researchers be saddled with the precautionary principle. According to one definition, that’s ‘the precept that an action should not be taken if the consequences are uncertain and potentially dangerous.’ Or as I have summarized it: ‘Never do anything for the first time.’“

Regulation is the enemy of innovation, and there are many ways in which current and future AI applications can improve human welfare. Musk knows this. He is the consummate innovator and big thinker, but he is also skilled at leveraging the power of government to bring his ideas to fruition. All of his major initiatives, from Tesla to SpaceX, to Hyperloop, battery technology and solar roofing material, have gained viability via subsidies.

But another hallmark of crony capitalists is a willingness to use regulation to their advantage. Could proposed regulation be part of a hidden agenda for Musk? For example, what does Musk mean when he says, “There’s only one AI company that worries me” in the context of dangerous AI? His own company(ies)? Or another? One he does not own?

Musk’s startup OpenAI is a non-profit engaged in developing open-source AI technology. Musk and his partners in this venture argue that widespread, free availability of AI code and applications would prevent malicious use of AI. Musk knows that his companies can use AI to good effect as well as anyone. And he also knows that open-source AI can neutralize potential advantages for competitors like Google and Facebook. Perhaps he hopes that his first-mover advantage in many new industries will lead to entrenched market positions just in time for the AI regulatory agenda to stifle competitive innovation within his business space, providing him with ongoing rents. Well played, cronyman!

Any threat that AI will have catastrophic consequences for humanity is way down the road, if ever. In the meantime, there are multiple efforts underway within the machine learning community (which is not large) to prevent or at least mitigate potential dangers from AI. This is taking place independent of any government action, and so it should remain. That will help to maximize the potential for beneficial innovation.

Musk also asserts that robots will someday be able to do “everything better than us”, thus threatening the ability of the private sector to provide income to individuals across a broad range of society. This is not at all realistic. There are many detailed and nuanced tasks to which robots will not be able to attend without human collaboration. Creativity and the “human touch” will always have value and will always compete in input markets. Even if robots can do everything better than humans someday, an absolute advantage is not determinative. Those who use robot-intensive production process will still find it advantageous to use labor, or to trade with those utilizing more labor-intensive production processes. Such are the proven outcomes of the law of comparative advantage.

Embracing the Robots

03 Friday Mar 2017

Posted by in Automation, Labor Markets, Technology

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Machines have always been regarded with suspicion as a potential threat to the livelihood of workers. That is still the case, despite the demonstrated power of machines make life easier and goods cheaper. Today, the automation of jobs in manufacturing and even service jobs has raised new alarm about the future of human labor, and the prospect of a broad deployment of artificial intelligence (AI) has made the situation seem much scarier. Even the technologists of Silicon Valley have taken a keen interest in promoting policies like the Universal Basic Income (UBI) to cushion the loss of jobs they expect their inventions to precipitate. The UBI is an idea discussed in last Sunday’s post on Sacred Cow Chips. In addition to the reasons for rejecting that policy cited in that post, however, we should question the premise that automation and AI are unambiguously job killing.

The same stories of future joblessness have been told for over two centuries, and they have been wrong every time. The vulnerability in our popular psyche with respect to automation is four-fold: 1) the belief that we compete with machines, rather than collaborate with them; 2) our perpetual inability to anticipate the new and unforeseeable opportunities that arise as technology is deployed; 3) our tendency to undervalue new technologies for the freedoms they create for higher-order pursuits; and 4) the heavy discount we apply to the ability of workers and markets to anticipate and adjust to changes in market conditions.

Despite the technological upheavals of the past, employment has not only risen over time, but real wages have as well. Matt Ridley writes of just how wrong the dire predictions of machine-for-human substitution have been. He also disputes the notion that “this time it’s different”:

“The argument that artificial intelligence will cause mass unemployment is as unpersuasive as the argument that threshing machines, machine tools, dishwashers or computers would cause mass unemployment. These technologies simply free people to do other things and fulfill other needs. And they make people more productive, which increases their ability to buy other forms of labour. ‘The bogeyman of automation consumes worrying capacity that should be saved for real problems,’ scoffed the economist Herbert Simon in the 1960s.“

As Ridley notes, the process of substituting capital for labor has been more or less continuous over the past 250 years, and there are now more jobs, and at far higher wages, than ever. Automation has generally involved replacement of strictly manual labor, but it has always required collaboration with human labor to one degree or another.

The tools and machines we use in performing all kinds of manual tasks become ever-more sophisticated, and while they change the human role in performing those tasks, the tasks themselves largely remain or are replaced by new, higher-order tasks. Will the combination of automation and AI change that? Will it make human labor obsolete? Call me an AI skeptic, but I do not believe it will have broad enough applicability to obviate a human role in the production of goods and services. We will perform tasks much better and faster, and AI will create new and more rewarding forms of human-machine collaboration.

Tyler Cowen believes that AI and  automation will bring powerful benefits in the long run, but he raises the specter of a transition to widespread automation involving a lengthy period of high unemployment and depressed wages. Cowen points to a 70-year period for England, beginning in 1760, covering the start of the industrial revolution. He reports one estimate that real wages rose just 22% during this transition, and that gains in real wages were not sustained until the 1830s. Evidently, Cowen views more recent automation of factories as another stage of the “great stagnation” phenomenon he has emphasized. Some commenters on Cowen’s blog, Marginal Revolution, insist that estimates of real wages from the early stages of the industrial revolution are basically junk. Others note that the population of England doubled during that period, which likely depressed wages.

David Henderson does not buy into Cowans’ pessimism about transition costs. For one thing, a longer perspective on the industrial revolution would undoubtedly show that average growth in the income of workers was dismal or nonexistent prior to 1760. Henderson also notes that Cowen hedges his description of the evidence of wage stagnation during that era. It should also be mentioned the share of the U.S. work force engaged in agricultural production was 40% in 1900, but is only 2% today, and the rapid transition away from farm jobs in the first half of the 20th century did not itself lead to mass unemployment nor declining wages (HT: Russ Roberts). Cowen cites more recent data on stagnant median income, but Henderson warns that even recent inflation adjustments are fraught with difficulties, that average household size has changed, and that immigration, by adding households and bringing labor market competition, has had at least some depressing effect on the U.S. median wage.

Even positive long-run effects and a smooth transition in the aggregate won’t matter much to any individual whose job is easily automated. There is no doubt that some individuals will fall on hard times, and finding new work might require a lengthy search, accepting lower pay, or retraining. Can something be done to ease the transition? This point is addressed by Don Boudreaux in another context in “Transition Problems and Costs“. Specifically, Boudreaux’s post is about transitions made necessary by changing patterns of international trade, but his points are relevant to this discussion. Most fundamentally, we should not assume that the state must have a role in easing those transitions. We don’t reflexively call for aid when workers of a particular firm lose their jobs because a competitor captures a greater share of the market, nor when consumers decide they don’t like their product. In the end, these are private problems that can and should be solved privately. However, the state certainly should take a role in improving the function of markets such that unemployed resources are absorbed more readily:

“Getting rid of, or at least reducing, occupational licensing will certainly help laid-off workers transition to new jobs. Ditto for reducing taxes, regulations, and zoning restrictions – many of which discourage entrepreneurs from starting new firms and from expanding existing ones. While much ‘worker transitioning’ involves workers moving to where jobs are, much of it also involves – and could involve even more – businesses and jobs moving to where available workers are.“

Boudreaux also notes that workers should never be treated as passive victims. They are quite capable of acting on their own behalf. They often act out of risk avoidance to save their funds against the advent of a job loss, invest in retraining, and seek out new opportunities. There is no question, however, that many workers will need new skills in an economy shaped by increasing automation and AI. This article discusses some private initiatives that can help close the so-called “skills gap”.

Crucially, government should not accelerate the process of automation beyond its natural pace. That means markets and prices must be allowed to play their natural role in directing resources to their highest-valued uses. Unfortunately, government often interferes with that process by imposing employment regulations and wage controls — i.e., the minimum wage. Increasingly, we are seeing that many jobs performed by low-skilled workers can be automated, and the expense of automation becomes more worthwhile as the cost of labor is inflated to artificial levels by government mandate. That point was emphasized in a 2015 post on Sacred Cow Chips entitled “Automate No Job Before Its Time“.

Another past post on Sacred Cow Chips called “Robots and Tradeoffs” covered several ways in which we will adjust to a more automated economy, none of which will require the intrusive hand of government. One certainty is that humans will always value human service, even when a robot is more efficient, so there will be always be opportunities for work. There will also be ways in which humans can compete with machines (or collaborate more effectively) via human augmentation. Moreover, we should not discount the potential for the ownership of machines to become more widely dispersed over time, mitigating the feared impact of automation on the distribution of income. The diffusion of specific technologies become more widespread as their costs decline. That phenomenon has unfolded rapidly with wireless technology, particularly the hardware and software necessary to make productive use of the wireless internet. The same is likely to occur with 3-D printing and other advances. For example, robots are increasingly entering consumer markets, and there is no reason to believe that the same downward cost pressures won’t allow them to be used in home production or small-scale business applications. The ability to leverage technology will require learning, but web-enabled instruction is becoming increasingly accessible as well.

Can the ownership of productive technologies become sufficiently widespread to assure a broad distribution of rewards? It’s possible that cost reductions will allow that to happen, but broadening the ownership of capital might require new saving constructs as well. That might involve cooperative ownership of capital by associations of private parties engaged in diverse lines of business. Stable family structures can also play a role in promoting saving.

It is often said that automation and AI will mean an end to scarcity. If that were the case, the implications for labor would be beside the point. Why would anyone care about jobs in a world without want? Of course, work might be done purely for pleasure, but that would make “labor” economically indistinguishable from leisure. Reaching that point would mean a prolonged process of falling prices, lifting real wages on a pace matching increases in productivity. But in a world without scarcity, prices must be zero, and that will never happen. Human wants are unlimited and resources are finite. We’ll use resources more productively, but we will always find new wants. And if prices are positive, including the cost of capital, it is certain that demands for labor will remain.

How We Hinder Mobility

06 Monday Feb 2017

Posted by in Labor Markets, Mobility

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A plethora of regulations and subsidies established by governments at all levels is making it more difficult for Americans to move, especially from one state to another. Yale Law Professor David Schleicher identifies these barriers to mobility and writes that they compromise the nation’s ability to match jobs with workers. Thus, these laws beget economic immobility as well. His paper, “Stuck in Place: Law and the Economic Consequences of Residential Stability“, describes a number of the barriers:

“Land-use laws and occupational licensing regimes limit entry into local and state labor markets; differing eligibility standards for public benefits, public employee pension policies, homeownership subsidies, state and local tax regimes, and even basic property law rules reduce exit from states and cities with less opportunity; and building codes, mobile home bans, federal location-based subsidies, legal constraints on knocking down houses and the problematic structure of Chapter 9 municipal bankruptcy all limit the capacity of failing cities to ‘shrink’ gracefully, directly reducing exit among some populations and increasing the economic and social costs of entry limits elsewhere.“

To get a sense of the magnitude of declines in mobility over the past three decades, see Figure 3 in this discussion about mobility by Richard Florida at CityLab. The percentage of homeowners who move declined from almost 10% annually in the late 1980s to about 5% in 2016. The biggest declines occurred during the periods of economic weakness in 2001 and 2008. For renters, the percentage of movers declined from just above 35% in 1988 to less than 24% in 2016.

Workers who might otherwise migrate to jurisdictions with better economic opportunities often cannot do so. Schleicher notes that low-income workers suffer the most from these obstacles, which he divides into entry and exit barriers. Most of the obstacles he cites are compelling, though at times his emphasis veers toward enabling more effective government management of the macroeconomy, which is very unappealing to my libertarian instincts.

Entry Barriers

Schleicher emphasizes two major ways in which entry barriers are created. One is the spread and severity of land use restrictions such as zoning and construction laws, which have become so severe in some areas of the country that they have led to drastic inflation in housing prices. In a review of Schliecher’s paper, Ronald Bailey at Reason.com illustrates the disparities created by this process:

“According to the Trulia real estate market analysis, the median house price in San Francisco is $1.2 million, with a median rent of $4,100 a month; in Youngstown it’s $93,000, with a median rent of $650. In other words, a Youngstown worker who sold his home for full price would receive enough money to rent a place in San Francisco for 22 months.“

The contrast in the economies of these two cities is stark. The San Francisco Bay Area has experienced vibrant job growth over the past several years, while Youngstown has been struggling for decades. Given the difference in housing prices and rents, it would be almost impossible for a worker from Youngstown to pursue an opportunity in the Bay Area without a accepting a severe decline in their standard of living. Joel Kotkin makes a similar point in discussing the high cost of housing in some areas, but his focus is on the difficult prospects for economic mobility and homeownership among Millennials.

The second major entry barrier discussed by Schleicher takes the form of occupational licensing laws. They differ across states but have multiplied since the 1950s. According to Richard Florida (linked above), the share of American workers subject to some form of licensing requirement rose from just 5% in the 1950s to 25% by 2008. Schleicher cites low rates of interstate mobility among professions that typically require a license to practice. Veterans of those occupations tend to have an established book of business, however, so it’s reasonable to expect fewer distant moves. Nevertheless, the cost of obtaining a license in a new state and differing licensure requirements are likely to inhibit the mobility of licensed professionals.

Exit Barriers

One of the most interesting sections in Schleicher’s paper is on exit barriers. Locations are always “sticky” to the extent that local ties exist or develop over time, both between people and between people and local institutions. But some institutions create ties that are severely binding. For example, state and local government employees are often enrolled in defined benefit plans with lengthy vesting periods. Remaining in one system throughout a career can be a huge advantage. Other exit barriers involve differences in eligibility and levels of aid under federal programs managed by states such as Medicaid, Temporary Assistance to Needy Families (TANF), and the Supplemental Nutrition Assistance Program (SNAP — food stamps). Beyond the actual benefits at stake, administrative costs and delays in re-enrollment might hinder a needy family’s attempt to make an interstate move.

Local and state law on property transfers can also impinge on mobility. Real estate transfer taxes in some states certainly create an incentive to stay put. Also, while tax reassessments occur with regularity in most jurisdictions, some impose limits on the amount of the annual change in valuation, requiring a full tax revaluation on resale, so a seller must forego such a tax discount. Rent controls reward renters who stay in place, creating another exit barrier. And rent controls prevent entry as well, as they invariably reduce the supply of quality housing, thereby inflating the rents of vacated apartments available to new residents.

Finally, federal policies designed to encourage homeownership create exit barriers across the country. Ownership of a residence increases the “stickiness” of any locale, but the loss of a mortgage interest income-tax deduction adds to the sacrifice of a move to a rental unit in a more expensive location. So does the interest rate subsidy inherent in the implicit federal guarantee against default on mortgages securitized by Fannie Mae and Freddie Mac. Finally, when local economies are in a state of decline, home prices usually follow. Consequently, owners are likely to suffer reduced or negative equity in their homes and may be “locked in”, unable to pay off their mortgage on a sale, and therefore unable to leave their current residence.

Rent Seeking and Good Intentions

Some of the policies discussed above are the handiwork of those powerful enough to enlist government power in their own self-interest. That includes zoning laws, by which property owners can prevent land uses they deem undesirable. It also includes occupational licensing, a political avenue through which established business interests limit competition by new entrants. Of course, licensure is typically sold to voters as consumer protection, a claim that is often dubious.

Other policies that hinder mobility can be characterized as well-intentioned, like the old-style, defined benefit plans still in use by many state and local governments, or federal subsidies for homeownership. Many such policies are, or have been, promoted on the basis of the obvious gains they create for individuals, with little thought given to the “unseen” but damaging economic consequences. Rent controls fall into this category as well, but are very damaging in the long-term.

The Labor Market Ossified

All of the mobility-limiting policies discussed by Schleicher have a detrimental effect on the performance of labor markets. Workers tend to get stuck in depressed areas, where their value as human resources is diminished even while employers in other markets face limited supplies of qualified labor. This leads to higher structural unemployment, lower growth in output, and more difficulty for the private sector in meeting the needs of consumers than otherwise be possible.

I haven’t dealt with one other national policy dealing explicitly with geographic mobility: immigration. Restrictions on legal immigration and the issuance of green cards are often sought by interests hoping to protect Americans from competition for jobs. Suspending competition is never a good idea, however, as it leads to higher prices and undermines consumer interests. To the extent that businesses face a shortage of qualified talent to fill particular jobs, as is often the case, such restrictive policies are unequivocally damaging to the economy for the same reasons as barriers to interstate migration. Liberalized immigration allows more foreigners with peaceful, productive and often entrepreneurial intent to contribute to the country’s ability to create wealth.

Prescriptions

What can be done to promote interstate mobility? Here is a list that is undoubtedly incomplete: encourage state and local governments to end rent controls; liberalize zoning laws; reevaluate construction restrictions; liberalize occupational licensing; reduce real estate transfer taxes and smooth the timing of tax revaluations. Governments should also transition from defined benefit to defined contribution benefit plans, a step that would also allow them to avoid persistent overoptimism about their ability to meet future pension obligations. As long as states manage federal aid programs and have leeway in setting eligibility requirements and their share of benefits, there will be exit barriers to low-income recipients. Perhaps states should be required to coordinate benefits, with strict time limits, when recipients move interstate to pursue employment opportunities. Finally, subsidies encouraging homeownership should be phased out, including the federal tax deduction for mortgage interest and full privatization of Fannie Mae and Freddie Mac. A neutral stance with respect to homeownership would allow the market to seek an optimal balance in residential property ownership without creating excessive locational anchors.

Schleicher devotes a large part of his paper to the implications of reduced mobility for macroeconomic stabilization policy. In particular, he contends that measures intended to stimulate the economy cannot be as effective when labor supplies are inflexible. That might be true, but I’m loath to endorse Keynesian activism. Still, there is no doubt that geographic stasis of the kind described by Schleicher contributes to immobility in incomes as well. The main conclusion I draw from his paper is that governments ought to be very cautious about interfering in market transactions, even when convinced that their cause is noble. The law of unintended consequences has a way of foiling the best laid plans of social engineers.

Give Workers Choice to Rule Unions

02 Wednesday Nov 2016

Posted by in Labor Markets

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Collective bargaining via union representation is a right that deserves protection, but the value of that right is often undermined by union officials because the law empowers them to do so. In a case decided in September, however, a court confirmed that a union cannot force itself on an employer without worker support (and workers must file a request with the National Labor Relations Board (NLRB)).

Almost ten years ago, the Service Employees International Union (SEIU) insinuated itself as representing the employees of Professional Janitorial Service (PJS). The business insisted on a vote of its employees by secret ballot. Fair enough, right? That much is consistent with law and the administrative rules of the NLRB (see the link above). Had I worked for the business, its demand for a secret-ballot vote would have earned my respect. At that point, however, SEIU turned to questionable tactics:

“Unions win such elections more often than not, but the SEIU did not want to leave it to chance. So it retaliated against the company by libeling it with false accusations about illegal labor practices and overtime violations.

The SEIU claimed that Professional fired staff for trying to unionize, and had forced others to work off the books. Both allegations were dismissed as unfounded — lies, in other words — by the Labor Department.

The union’s libel was part of a broader campaign to drive Professional out of business unless it surrendered to union demands. Behind the scenes, the SEIU used its political connections to steer contracts away from the company. Emails showed SEIU officials electronically high-fiving each other every time Professional lost a contract.“

It took almost a decade, but PJS recently emerged victorious in its legal battle with SEIU. A jury in Houston ruled that SEIU defamed PJS, awarding the business a judgement of $5.3 million for damages. This article reports that SEIU kept a “campaign manual” that it relied upon in it’s effort to “kill PJS”, as they so delicately put it. PJS isn’t done yet:

“In a statement, PJS added that they ‘will now ask local prosecutors to investigate apparent perjury by union officials and an attorney who testified in the trial, and will increase its efforts with state legislators to remove the SEIU from eligibility in state-provided union dues collection programs.’“

SEIU has a long history of corruption, so it’s great to see the union’s tactics exposed before a jury. Apparently, too many employers have settled out of court, allowing SEIU to force its way into their businesses without a fair process, and those businesses have taken undeserved hits to their reputations along the way.

What incentives motivate such aggressive tactics? They undoubtedly reflect the value a union organization can capture through exclusive representation of workers and mandatory payment of dues. That is the general theme of “Unelected Unions: Why Workers Should Be Allowed to Choose Their Representatives“, by James Sherk. Once a workplace is successfully unionized, the union not only holds a monopoly on the supply of labor to the business; the government also grants to the union a monopoly over the services it provides to workers via exclusive representation. The workers are a captive market, short of a difficult and risky (for individual workers) decertification process.

That latter form of monopoly power, enforced by legal rules and court precedent, creates a severe principal-agent problem in union representation of workers. Union officials (the agents) have the incentives and power to capture excessive value from the workers they represent (the principles). This value, and historically questionable union financial reporting, has often made union activity a magnet for organized crime elements. This NPR story demonstrates the widespread nature of union corruption. An article about labor corruption by James B. Jacobs describes several common forms of labor racketeering:

“Organized crime bosses exploit unions and union members through alliances with corrupted or intimidated union officials…. In return, union officials provide mobsters access to the union treasury, pension and welfare funds, no-show jobs with the union, and support in establishing and enforcing employer cartels…. Some organized crime members have held formal union office…. In addition, of course, corrupt union officials, whether or not connected to organized crime figures, engage in ‘ordinary’ organizational corruption, such as misappropriation of funds. The most distinctive form of corruption by union officials is taking employers’ bribes to ignore violations of the collective bargaining contract, or even to allow employer to operate nonunion shops….“

Sterk and Jacobs both emphasize the potential that worker choice over their representation has for cleaning up union corruption. Here is an excerpt from Sterk’s conclusion:

“Congress and state legislatures should require unions to run for re-election, or allow workers to designate their own bargaining representative. Workers should not be forced to accept a union’s services.“

The right of workers to control their representation was at the heart of PJS’s original insistence on a worker vote, by secret ballot, over whether they desired representation by SEIU. And SEIU’s underhanded tactics illustrate the importance of giving workers strong control over their unions from the start. While mechanisms creating greater worker choice and control might not be foolproof, it is more likely to minimize union corruption and to maximize the incentives of union officials to truly promote the interests of their workers.