Monday, September 2, 2013

Bargaining Power and Immigration: The He-Man Conjecture

The masses have spoken. You seem to like my little dialogues, so here's one between Eric the Economist and Pete the Pedestrian.

Eric: Hey guys, what if wage and income justice are two separate concerns? Economics tells us that in competitive markets, W=MPL. Social justice tells us that mothers who can't buy baby formula is intolerable. Why not get out of the way of wage pricing so that competition can do its job of striving towards full employment and provide a guaranteed minimum income so that no one has to eat garbage or whatever it is very poor people do to keep from dying.

Pete: Typical economist drivel. Jobs aren't about wages, they're also about dignity. A paycheck earned is more than the bundle of rights it commands in your vapid formulations. It's dignity. It's pride. Your handouts insult folks' self-esteem.

Eric: Well, we've got this idea in economics called "revealed preference" that suggests that workers who actually do value the self-esteem generated by productive work will seek to become more productive workers. They accumulate skills, education, discipline, they lay their hands on those characteristics that serve both their narrow self-interest and the interests of their customers and employers.

Pete: What a load of bull. Pay and productivity have nothing to do with each other. Can you link CEO pay to actual value generation? No. And in case you haven't heard of a little something called "bargaining power", there's another idea that says that employers can bid down wages like crazy since low-skilled employees are a dime a dozen.

Spivonomist: Hm. Interesting, Pete. That's actually an empirical claim. Yes, there's the normative notion of BATNA disparity in there that underpins your moral intuition, but is it actually the case that employers enjoy a superior bargaining position? Let's see what the literature has to say.

And the econ literature is a little inconsistent. Where it is pretty clear is when it comes to immigration. Study after study after study (including my own research) shows that middle on up immigration is a complement for native labor. That is to say that professionals that come to work in the US appear to actually boost the wages of natives. Only for low-skilled labor does this pattern reverse, and the effects tend to be pretty mild. Statistically significant, yes, but the magnitudes are small (in my judgement anyway) and they don't linger.

This seems to suggest to me that the bargaining power is actually on the side of the low-skill native workers' side. Only by restricting the supply of their competition can they sustain artificially high wages, just like plain-jane relative price economics predicts. Low-skilled labor is not euvoluntary, but for the precise opposite reasons that are usually brought to bear.

Of course, there's a lot more to it than that. The question is fraught with measurement bias, longitudinal concerns, endogeneity problems, and GE projection errors. What if most of the problem can be attributed to the capitalization of existing labor market restrictions? Important concerns, of course, but I think it might be wise to reconsider how we think about the relative market power of different productive entities.

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Do you have suggestions on where we could find more examples of this phenomenon?