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Far From Being Perfectly Competitive, Markets are Perfect at Extraction & Exploitation

There are no more illusions that ordinary workers, from the gig economy to each corner of the service industry, are robbed every day of a livable wage and are increasingly denied access to the broader economy because they cannot even afford to pay to purchase the fruits of their own labor. This is the overarching trajectory of capitalism as it always has been realized by most, which is uniquely characterized by violence and abuse. Workers are not realizing the gains from paychecks commensurate with their productivity at the workplace, and broadly shared economic prosperity is becoming swiftly deleted by economic precarity as wages fail to keep up with inflation, contributing to income inequality. As the country’s largest corporations known to mankind accumulate an immoral stockpile of wealth, it is worth reflecting on decades of bad economic policy permitting the unduly wealthy capital-owning class (what Thomas Piketty calls “super-managers”) and firms to extract labor by squeezing workers.

Decades of bad economic policy, informed by flawed economic theory, have created a culture in which the primary justification for paying workers a poverty wage, a sub-minimum wage, or even allowing firms to legally classify their workforce as independent contractors (legal non-employees who are thus not eligible for employee protections and fair compensation) is that they are perfectly compensated in the labor market because the labor market perfectly serves to pay them their worth as it concerns the production of goods and services that we as consumers buy. Since the 1970s, worker productivity has increased tremendously as technology advances and as new legal protections are established. But wages have stagnated and workers’ productivity-to-pay gap has ballooned. Firms and their boards became enormously more wealthy as a direct consequence. And as CEO and executive pay becomes tethered to stock performance, what is known in the literature as shareholder primacy, managers and top executives are accumulating more and more wealth without becoming any more productive themselves.

A recent debate from one of graduate classes rekindled this contentious precedent and raised questions as to whether w = MPL, the mathematical expression representing how labor markets are (allegedly) perfectly paying workers what they’re worth, is still a reasonable metric to determine how much managers should pay their workers (assuming they are even legally classified as employees at all). If you take empirical evidence seriously then I believe there is no reason to have faith in this flawed metric.

Not only is it permissible to value work based off of “non-economic” things, as the growing body of work that feminist economics shows (care work, work at the home that the labor market can not and does not allocate a value to, and whoever cooked Adam Smith’s home meals is grossly undervalued), but it is also true that workers actually have been immensely productive over time and have simply been fleeced. Our society right now is structured such that productivity most definitely does not explain income, and that workers have fewer and fewer rights to bargain for a just wage against the growing hardships of increased costs of living and legal arrangements.

One piece of evidence against w=MPL is growing monopsony power.It is because of growing monopsony power that allows firms to utterly dominate and maintain control of labor markets and hiring of all employees. According to David Weil, “By exercising power in the labor market, companies are able to set wages below those that would prevail in the more competitive conditions posited in economic models.” Workers for the past 50 years have not seen a wage increase commensurate with their productivity because firms have so much power in labor markets that they actually coordinate and pay below rates that workers would otherwise realize in a perfectly competitive market. And because this phenomena concerns inequality broadly, It is also important to note that wages have failed to keep up with productivity because of “rising inequality of compensation (more wage and salary income accumulating at the very top of the pay scale) and the shift in the share of overall national income going to owners of capital and away from the pay of employees.”

What’s more, workers’ productivity isn’t the sole cause of a firm’s poor performance, but it is the cause when the firm does well (because it relies on its workers to produce goods and services). However, a company does not rely on those same workers to make poor financial or executive management decisions that ultimately sink them (if Amazon went bankrupt it is not because of a warehouse employee who makes $15 an hour or a Whole Foods cashier who is barely allowed to take breaks). This just shows that firms operate on their own set of rules, subjecting workers to arbitrary and extralegal conditions having absolutely nothing to do with a workers capacity to produce goods and services. 

Lastly, Because the growing market power that firms hold gives them the ability to coordinate and alter the structure of “internal labor markets,” which in turn gives firms the ability but to change the structure of pay entirely and not merely to reduce wages. The fact that company X doesn’t necessarily employ their own labor to deliver services we pay for is evidence against w=MPL. Think of Uber. We pay for the service of Uber but they have so much control over the internal labor market that they do not actually have to extend legal employment (and thus employment benefits and thus a feral minimum wage) to their workers. Their workers are not in fact, legal employees. They are private contractors with no legal entitlement to the protections and rightful compensation of legal employees. Their productivity is no less than someone who is legally categorized as an “employee,” yet their pay is far below the minimum wage due to costs imposed on their vehicles. Costs that they are often responsible for. This is not exclusive to Uber drivers. Restaurant workers as well as other “gig economy” workers are subject to this very same abuse. It is again another instance where a firm’s market power allows them to avoid paying labor a fair wage not because workers are unproductive but because corporations are greedy and have the power to literally define employment and thus pay. Profit is theft and that profit is increasingly squeezed from “private contractors” and other service industry employees. 

I often think back to one of my undergraduate business professors who once proclaimed, so sure of himself, that capitalists who own the capital are always smarter than their employees–otherwise it would be the employees who would lay claim to such capital and its subsequent ability to generate even more wealth. We should be suspicious of this kind of pompous bootlicking, because more often than not, there are well-funded interests behind that very sentiment. Time and time again, labor markets have been shown to be exploitative and squeeze workers because of legal arrangements that reflect the power of firms to coordinate and exercise power over their employees. On top of being bad economics, it ignores the wealth of evidence to support the opposite. These kinds of non-facts are only constrained to econ 101 textbooks and corporate-sponsored “research” (insofar as you believe research to mean producing an answer before conducting the experiment) and do not exist in the wild. That is, it doesn’t square with economic reality whatsoever. I am positive, however, that Google might insist the opposite and agree with my undergrad professor. If we want a better society in which so many would not have to toil in hardship and endure the trauma of poverty, companies are not going to just start doing the right thing, we have to force them.

Sources:

  1. David Weil for iNET https://www.ineteconomics.org/perspectives/blog/why-we-should-worry-about-monopsony
  2. Economic Policy Institute https://www.epi.org/productivity-pay-gap/ &
  3. Josh Bivens & Lawrence Mishel for the Economic Policy Institute https://www.epi.org/publication/understanding-the-historic-divergence-between-productivity-and-a-typical-workers-pay-why-it-matters-and-why-its-real/