Don’t blame business for slow wage growth

Are wages determined by market forces, or do businesses get to decide what pay they offer to workers?
This question gets at the heart of a lot of the debate about the economy. Why has wage growth been so sluggish for so many years?
If you’re on the market-forces side of the wage question, you might answer that productivity growth has been weak. If you’re on the side of the debate that believes corporations have considerable power to pay workers what they want, thwarting market forces, then you might answer that employers have made the decision to boost profits at the expense of raising wages.
Of course, few people — and even fewer economists — believe that one factor or the other has no role at all in the determination of wages. But it is common to hear some prominent analysts and organisations on the left argue that the link between wages and productivity for most workers has effectively been severed for decades. Likewise, many on the right quickly dismiss
the importance of non-market factors in explaining wages.
Let’s focus on typical workers and on low-wage workers. For them, the standard story finds businesses competing for employees, driving up wages to the point that workers are paid according to their contributions to the company. Businesses don’t pay employees less than the value of their productivity — the amount of revenue workers generate for their employer — because doing so would result in their workers taking another job where they would get paid what they’re worth. In this sense, employers don’t “decide” what wages they pay. Instead, wages are set in markets.
Not so fast, say many economists and commentators. This story leaves out some important, and recently much-discussed, corporate policies that allow employers to pay workers less than market wages.
Over the summer, more than a dozen major restaurant chains — including McDonald’s, Applebee’s and Jimmy John’s — removed ‘no-poaching pacts’ from their contracts with franchisees. These agreements prohibit workers at one McDonald’s restaurant, say, from getting a job at another McDonald’s franchise. These agreements are surprisingly common among low-wage employers, and they may act to put some downward pressure on wages by thwarting the competitive market mechanism through restricting the options workers have to shop around for a different, higher-paying job.
“Non-compete agreements,” in which workers agree not to join or start a rival company for a certain period of time after leaving their current employer, are a similar policy. These agreements make sense in some situations for “knowledge workers” and executives who possess considerable intellectual assets regarding their current employer.
But the evidence suggests that about one-fifth of all workers, including lower-income workers, are covered by a non-compete arrangement as well. And by restricting workers’ options, these policies may be suppressing wages somewhat.
Mobility costs, for example, are much more important. It costs time and effort to change jobs, and takes money to move to a different city for a better job. This gives employers some power over wages. For example, a business could keep wages for some workers below their market level if those workers don’t want to incur the costs of changing jobs.
Governments have thrown a wrench in the market machine through the absurd proliferation of occupational licenses, reducing wages for workers who can’t get a license and restricting the mobility of licensed workers. A recent study finds that the rate of migration across state lines for individuals in occupations with state-specific licensing requirements is over one-third lower than among individuals in occupations that don’t have such rules. A general decline in labor market dynamism and in the prevalence of unions likely both increase employer power over wages, as well.
Despite these important factors, in my view worker productivity remains the dominant force in setting wages. For one, mobility costs and similar factors are much stronger in the near term than over longer periods of time. It may be hard for me to move my family across the country, but it’s relatively easy for a recent college graduate without a spouse and kids or for a newly arrived immigrant to do so.
A recent paper by economists of Harvard find that over the last four decades, a one-percentage-point increase in productivity growth is associated with a 0.73 percentage point increase in the growth rate of median compensation. That’s a strong link.
Such evidence is dispiriting for those of us who want wages to grow faster. It’s much harder for government policy to juice
productivity growth than to clamp down on anti-competitive corporate practices.
— Bloomberg

Michael R. Strain is a Bloomberg Opinion columnist. He is director of economic policy studies and resident scholar at the American Enterprise Institute