When it comes to the One Big Idea to fix the labor market, the left-of-center discourse currently has two main focuses. There is the job guarantee, which will eliminate unemployment as well as all of the bad jobs in the economy. And then there is antitrust enforcement, which will boost wages through greater competition for labor.

I am more or less approving of the antitrust side of things (up to a point) and disapproving of the job guarantee side of things, but I also think I have an even better One Big Idea than either of those. My One Big Idea would be sectoral labor unions that coordinate wage setting across the entire economy. This is what they do in the Nordic countries (always a plus in my book) and this also has the ability to resolve labor market problems that the other two ideas cannot fix.

Job Guarantee and Inflation

The job guarantee (JG), as explained by its most prominent advocates, does not really seem to solve the inflation problem that creates the “need” for unemployment in the first place.

The mainstream view is that when unemployment gets below a certain level, the bargaining power of workers becomes very high. This causes workers to demand wage increases in excess of overall productivity growth, which pushes employers to raise prices, which sets off yet more demands for wage increases from the workers. The inflation caused by this wage-price spiral is unsustainable and so unemployment below a certain level is unsustainable, meaning that the government needs to ensure an adequate amount of unemployment exists so that there are enough jobseekers out there bidding down wages.

JG advocates say that if the government acts as an employer of last resort (ELR) for these unemployed people, then everyone can be employed without setting off wage-price inflation. So the idea is that the make-work sector can absorb the unemployed buffer stock while still allowing the Federal Reserve to do its thing to hold down inflation.

But this theory only makes sense if you believe people in the make-work sector will continue to jobseek for work in the non-JG sectors. If they don’t continue to jobseek in the non-JG sectors, because for instance the JG jobs are paid well and consume all of their time, then wages in the non-JG sectors will not get bid down, and you should see the same unsustainable wage-price inflation that the existence of unemployed people is needed to solve.

Antitrust and Monopsony

Antitrust advocates argue that labor markets suffer from insufficient employer competition, or what’s known as monopsony and that this holds down worker wages. This seems to be true to some extent and that antitrust would help the problem some. But it also seems to be clear that this is not the main cause of wage stagnation and that typical antitrust remedies will not really resolve much of the wage suppression caused by the market power of employers.

Recent reports indicate that most labor markets are highly concentrated, meaning that there are not very many employers hiring in them. But the presentation of these facts can slightly mislead. As EPI notes, the claim that the average labor market is highly concentrated is not the same as the claim that the average worker lives in a highly concentrated labor market. It’s sort of like saying 84 percent of counties went for Trump, a totally true point that nonetheless elides the fact that he only got 46 percent of the vote.

Judging by the maps produced by the reports, most of the concentrated labor markets appear to be in areas with low populations. Which makes sense of course. Areas that do not have a lot of people in them will not be able to support a lot of employers. A grocery store worker living in a major city has dozens of possible employers. One living in a rural area may only have one or two. The antitrust advocates seem correct in saying this dearth of choices gives the rural employers more wage-setting power over their workers, but nonetheless do not have convincing ideas of how to create a bunch more employers in places where there are not very many people.

Additionally, the new monopsony research has consistently argued and plausibly proven that employers have wage-setting power even in markets that are not very concentrated. This is because there are job-switching frictions in every market that tend to keep workers where they are. As with concentration in rural areas, it is hard to see how normal antitrust remedies would resolve these other sources of quasi-monopsonistic employer wage-setting power.

Coordinated Wage-Setting to the Rescue

In theory, setting wages across the economy in a coordinated way through centralized labor agreements can solve both of these problems. It can make it to where you can employ everyone normally without risking inflation and can stop the wage suppression caused by low population and job-seeking frictions.

To understand why centralized labor agreements can solve the inflation problem that JG can’t, it is useful to conceptualize wage-price inflation as a classic collective action problem. Each individual, acting alone, has an incentive to maximize their wage, but if all individuals do it simultaneously and beyond a certain level, it sets off unsustainable wage-price inflation that ends up biting the workers one way or another. Coordinated wage-setting can solve this problem by ensuring that workers, and their representatives, hash out appropriate wage levels every few years. If the worker groups act responsibly, they will take note of what sort of wages productivity growth will permit and restrain their wage growth accordingly. In theory, this sort of wage price-fixing means that you can nip wage-price inflation in the bud and push unemployment all the way down without the need for jobseekers to bid down wages.

Centralized labor agreements also solve the employer market power problems that antitrust cannot. Rural workers will never have that many employers to choose from, but if those employers are forced to abide by the central wage agreements, the workers will be still be compensated fairly. Additionally, the diminished power that results from job-switching frictions need not suppress wages where strong unions can provide countervailing power that does not rely upon the threat of switching jobs.

So when you put it all together, sectoral wage bargaining makes it possible to get to 0% unemployment without a job guarantee because of its ability to restrain wage-price inflation and makes it possible to counteract employer labor market power without antitrust. Sectoral wage bargaining not only makes it possible to achieve many of the aims of JG and antitrust without doing either, but as argued above, it actually has the ability to achieve those aims where JG and antitrust don’t. Thus, it is the king of the One Big Idea universe.


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