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July 25, 2007

Are Labor Markets Monopsonies?

Sadly, the best thing written on the blog today didn't come from me. Rather, it's a comment from Kathy G. arguing that labor markets don't look much like classical assumptions would suggest, and that the data -- and some emergent theory -- offers evidence that they're closer to a monopsony than the more traditional competitive-market-in-equilibrium model. Full comment below the fold:

Anyone who thinks mandated leave would inevitably lead to a decrease in employment or wages most likely has not taken any econ beyond Econ 101. Because if you believe that such results would inevitably follow, you clearly are not familiar with the empirical research on paid leave, nor do you understand economic theory beyond a very superficial and incomplete level.

I've studied the economics of paid leave fairly closely. I've read all the research and the first thing that needs to be said is that there is little evidence empirically that government-mandated paid or unpaid leave leads to a decrease in employment or wages.

Secondly -- and I can't emphasize this strongly enough -- economic theory does not offer *any* strong predictions about how government-mandated leave would effect employment or wages. If and only if we assume that the labor market is perfectly competitive and that there are no transaction costs, no externalities, and no market failures like imperfect information or adverse selection, then yes, mandated paid leave would have those negative effects, according to neoclassical economic theory.

But we don't live in a world of perfect competition, perfect information, zero transaction costs, etc. For example, employers may assume they know their employees' preferences and therefore they don't offer them more than a week or two of paid leave or vacation, even if that is not actually what employees want (and would be willing to take a pay cut to get). For family leave, in particular -- there is evidence that paid family leave increases women's employment, wages, and productivity (because it helps them maintain good job matches). It also saves the firm money in recruiting and training. And, if it really does do these things, the net result could be, not decreased employment and wages, but maybe even increased employment and wages.

Paid family leave can also create a positive externalities. For example, several studies show that paid family leads improved child health and decreased infant mortality. One particularly interesting (and very good) study showed that while government mandated, job-protected paid leave had a strong and significant positive impact on child health, leave that was unpaid and non-job-protected had no effect whatsoever on child health.

One final point -- a basic problem with the way the economics of labor policy is often studied is that it is assumed that labor markets are perfectly competitive. The perfect competition model may be useful in certain limited contexts, but it's a very flawed and misleading way of looking at the labor market as it actually exists. The basic problem with the competitive model is that it assumes that, if an employer cut wages by one cent, every employee would quit and go work for a different firm. But of course, that's not the way the world works. Imperfect information and significant transaction costs create strong barriers to employee mobility (and employee bargaining).

Influenced by Alan Manning's groundbreaking 2003 book Monopsony in Motion, some economists are beginning to view the labor market not as a perfectly competitive, but as a monopsony. Monopsony literally means "one buyer" (of, in this case, labor). When economists refer to a labor market as a monopsony, they generally don't mean it literally; instead, they use the term to refer the case where the labor supply to a firm is not infinitely elastic (in other words, not everyone will quit if wages are cut by one cent).

Manning and others argue that in situations where there are important frictions in labor markets, and where employers set wages, monopsony is a reasonable assumption. And you'll find, if you do the graphs and the mathematics assuming monopsony rather than perfect competition, the predicted results of various labor policies are different. For instance, the perfectly competitive model will predict that raising the minimum wage inevitably leads to a decrease in employment. But the monopsonistic model shows that employment may actually increase. Although, of course, even in the monopsonistic model, you can raise the minimum wage so high that employment decreases.

Monopsony is a better model for the labor market than is perfect competition, and not only because it's more theoretically compelling (since it incorporates the fact that there are transaction costs to leaving one's job and that employers, not employees, set wages), but also because it's a better fit for the empirical evidence. Research shows, for example, that the impact of the minimum wage on employment is mixed at best, and that it often increases employment. These results are consistent with the monopsony model but very much at odds with the assumption of perfect competition.

And one final note: since theoretically, you would model mandated paid leave similar to the way you'd model a minimum wage (because to the employer, mandated leave would be the same thing as a wage increase), the theoretical results of paid leave would be the same as the theoretical results of the minimum wage. Meaning: if you assume perfect competition (and no transaction costs, etc. etc.), mandated paid leave would definitely result in lower employment (or lower overall compensation). Whereas, if you assume monopsony, there is no strong prediction either way -- employment and wages could increase, decrease, or stay the same, depending on how much it cost the employer.

Posted by: Kathy G. | Jul 24, 2007 3:57:43 PM

July 25, 2007 | Permalink

Comments

Sure, if you assume monopsony, then you can prove all sorts of things.

The important question is, is monopsony a valid assumption?

How many millions (tens of millions?) of employers are there in the USA? Are they collaborating on wages paid, or competing with each other to attract labour?

Difficult to see that monopsony is a valid assumption.

One interesting test would be what actually is the effect of a change in minimum wage rates. The UK one (in a report from the Low Pay Commission, the people who actually recommend the rate) is that a rise does indeed reduce employment (although not very much) and hours offered. This is not a slam dunk of course, as it is consistent with the labour market being a monopsony ("anything can happen") and competetive.

Posted by: Tim Worstall | Jul 25, 2007 4:44:18 AM

This is a fair point, but vacations are a good thing by themselves, and should not need to be defended by free lunch arguments. This only reinforce the legitimacy of economism, which actually is a pretty silly idea (as Ezra pointed out the other day, economic resources are means, not ends - there is not much you can do with a bank statement per se). So what if vacations cost money? It's not like the US, as a whole, lacks money.

Posted by: Dan Karreman | Jul 25, 2007 4:58:15 AM

A little knowledge is a dangerous thing. Using Ms. Kathy's logic, what market isn't a monopsony? If Safeway raises the price of bread by a penny, will it lose all its customers? No - must be a monopsony. GM, cars, a penny? Monopsony.

The Econ 101 reference should be some sort of variation on Goodwin's law.

Posted by: ostap | Jul 25, 2007 8:19:34 AM

The Econ 101 reference should be some sort of variation on Goodwin's law.

Yes, it should. Since Kathy G was responding to the conservatarian penchant for bolstering their economic arguments with references to "econ 101," though, it doesn't apply here.

Also, while a little knowledge is indeed a dangerous thing, that applies better to the comments criticizing what Kathy G said than to her comment. If you think she's using the term "monopsony" in its most literal sense, then read her comment again, you got it wrong. The point is that projections based upon a monopsonic labor market reflect actual data, while traditional models don't.

In terms of what workers want, it seems that FMLA is the big issue that none of us are talking about. Twelve weeks of unpaid leave, though if you or your employer purchase short-term disability insurance you can get 2/3 salary for at least some of it.

But you will take a pay cut if you use your FMLA "benefit," which means that the substantive part of that legislation is your legal right to return to either your exact same job or one of the same level of responsibility and pay grade.

Millions of people take advantage of FMLA every year. Millions of people make the decision - or have it foisted upon them - to take a pay cut in order to have some time off work. Since most FMLA leaves are for maternity, IIRC, and since most of those pregnancies are planned, there seems to be a strong case for the idea that even American citizens take pay cuts in order to have time off work.

Posted by: Stephen | Jul 25, 2007 8:35:07 AM

For family leave, in particular -- there is evidence that paid family leave increases women's employment, wages, and productivity (because it helps them maintain good job matches). It also saves the firm money in recruiting and training.

If this is the case, then why don't some firms use relatively generous leave policies to attract workers? Even in the tech industry, where talent is scarce, you don't see firms offering vastly more vacation then other types of companies.

Posted by: TW Andrews | Jul 25, 2007 9:45:54 AM

Posted by: Tim Worstall | Jul 25, 2007 4:44:18 AM

Sure, if you assume monopsony, then you can prove all sorts of things.

The important question is, is monopsony a valid assumption?

How many millions (tens of millions?) of employers are there in the USA? Are they collaborating on wages paid, or competing with each other to attract labour? ...

I find it odd when the answer to a comment is to quote the post it is commenting on:

When economists refer to a labor market as a monopsony, they generally don't mean it literally; instead, they use the term to refer the case where the labor supply to a firm is not infinitely elastic (in other words, not everyone will quit if wages are cut by one cent).

IOW, what is being discussed is monopsony power, which, just as monopoly power is not restricted to monopolies per se, is not restricted to monopsonistic markets per se.

However, it should also be noted that even competitive labor markets yield similar outcomes if there is not full labor hour employment ... and certainly in the US, we are nowhere close to full labor hour employment. In that case, the marginal value product of labor falls to zero (or below) at the quantity of labor required to produce the output for which there is effective demand. That means that the competitive labor demand relation stops being driven by the marginal physical product of the next labor hour employed, and is essentially drops directly down to the quantity axis.

In that case, there is a bargaining range between the last positive marginal value product of labor, and the minimum labor supply price for that quantity of labor. And with positive unemployment, there is no need to hire workers "away" from other firms, so that there is no need for inter-firm contest for workers in that bargaining process.

Posted by: BruceMcF | Jul 25, 2007 9:49:20 AM

The point, to me, is not that labor markets "are" monopsonies - obviously, there are lots and lots of different workers. The point is that, if we try to apply econometric models to empirical data, we find that the monopsony model actually works better.

This seems to me to suggest not that labor markets are monopsonies, but that the model of society and the human which underlie econometric models are really stupid and wrong.

Posted by: DivGuy | Jul 25, 2007 9:51:21 AM

Sure, if you assume monopsony, then you can prove all sorts of things.

I thought this was interesting. I mean, Worstall surely knows that modeling human behavior proves nothing about actual human behavior - it's just a way of attempting to understand it, in part. But I think the slip speaks to a deeper truth about the discipline of economics, and conservatarian neoclassicism in particular - he ignored the actual data about real people, and talked about how to "prove" something with a model. I don't know if I could come up with a better parody of the economist if I tried.

Posted by: DivGuy | Jul 25, 2007 9:55:30 AM

New weekend guest blogger?

Free Kathy G!

Posted by: David S | Jul 25, 2007 9:59:40 AM

Well said DivGuy, you picked exactly on the sleight of hand in Worstall's response.

Posted by: Meh | Jul 25, 2007 10:18:44 AM

The monopsony power is really wielded by the federal government, through the Federal Reserve, if you think about it. In a properly working labor economy, from time to time we'd see sellers markets, per se, where employers would need to compete to hire employees. However, the central bank works in such a way to prevent that from happening, in the guise of fighting employment.

How a good portion of the employment world works (and as someone who has worked in these things), is that employers have X units of labor they need at a given time. They hire as few people, as cheaply as they can to perform those X units of labor.

The actual value of that labor, the added value of the employee, usually is much much higher than what one is getting paid. So even with a substantial wage increase, it still makes economic sense to keep that person employed, as long as the added value is still more than the wage paid.

As it stands right now, the wages paid are way way below the value created. (Increase in value is measured in productivity, of course).

The downfall of that, is that the overheated stock market is trading on future profits, and not current profits, and to maintain his, requires the promise of infinite profits over infinite time.

Posted by: Karmakin | Jul 25, 2007 10:21:45 AM

milton friedman once wrote that the market for cigarettes could be examined using models that assumed perfect competition.

when people objected that there were only X (X well under 10 at the time, i think) tobacco companies selling in America, friedman countered that it didn't matter - as long as the predictions of a competitive market held to the tobacco market (and, empirically they seemed to), that was all that was needed.

he was right on this - it's always an empirical question, so, just noting that there actually is more than one employer in the US labor market does not kill (or even damage) the monopsony argument (which is really quite powerful - you may not be convinced, but, reading Alan Manning is absolutely worth the time).

a second example friedman gave - you can assume great billiard players, when setting up a shot, are wizards at trigonometry and are carefully calculating the perfect angles in their head needed to sink their shots.

most, of course, are not math wizards, but, long practice has given them very good feel at angles, and, predicting the arc of their shots by using a model that *assumes* they're solving trig problems yields very good predictions of what will happen.

lastly, since we're talking predictions, it should be noted that the prediction of a perfectly competitive labor market is that if a store (say Wal-Mart) cut its hourly wage by $.01, they would lose every single worker to competitors. This obviously doesn't happen. Manning builds up from here and makes a great case that labor markets are not very competitive at all, and, an awfully good case that they're monopsonies.

Posted by: josh bivens | Jul 25, 2007 10:33:02 AM

There's an unfortunate trend in economic commentary evident here: a self-styled maverick will list the assumptions of the standard neoclassical model, note that they aren't being met, and declare (ergo!) that the model's implications are meaningless. This is often accompanied by the tired ploy of "Econ 101" condescension, where we're assured that only observers whose education ended with sleeping in a soggy lecture hall can possibly be naive enough to swallow the ever-so-simplistic presumptions of prevailing economic theory.

It's all predictable enough that I feel obliged to offer a more efficient solution. Why not save the humans some time, cut the pretense of actual writing, and program a computer to do the job instead? We can write something like this: "When we're dealing with [insert economic issue], the neoclassical model only shows [insert standard conclusion] if the world is free of [insert list of canonical market failures]. Therefore [insert standard conclusion] cannot be held for [insert economic issue] in a sophisticated analysis."

Much easier, isn't it? You might complain that computers aren't smart enough to apply the concepts behind market failures, or to show how such failures actually affect the issues at stake. But I don't see a loss -- after all, it doesn't appear that the people involved understand them either. Machines can parrot cliches about neoclassical economics as well as any human, so why not let them?

With that commonsense suggestion out of the way, let's move to the closing paragraph of Kathy G's comment:

And one final note: since theoretically, you would model mandated paid leave similar to the way you'd model a minimum wage (because to the employer, mandated leave would be the same thing as a wage increase), the theoretical results of paid leave would be the same as the theoretical results of the minimum wage.
No. These are very, very different. Employees receive compensation in multiple forms, including both regular wages and benefits like paid vacation. These forms of compensation all have specific costs to the employer, and these costs (along with employees' preferences) determine the bundle the employee will receive. For low-income workers, the dominant form of compensation is an hourly wage, and as a result the minimum wage raises employees' overall compensation – it doesn't merely cause a reallocation of payment from other benefits to wages.

Mandatory vacation time is unlikely to be the same. Employers are forced to shift part of the compensation package offered to their employees into vacation -- or, if you're looking at the unpaid variant, employees are forced to purchase leisure by sacrificing wages. This doesn't mean an increase in overall compensation; it's just a shift in the kind of payment.

(The only case where it directly implies an increase in compensation, making the minimum wage analogy even remotely relevant, is when you have a minimum wage held constant while instituting paid leave. Since they can't pay any less in salary to minimum wage workers, employers are forced to increase the overall value of the compensation they offer. But this doesn't mean much, because the minimum wage is set by the same policymakers who are presumably making the paid leave requirement, and if they wanted to increase the overall value of compensation given to workers, they could just increase the minimum wage. Moreover, this situation only happens because the minimum wage is there in the first place, further emphasizing how Kathy's analogy between the two is horribly wrong, and only has the slightest meaning in a corner case that stems from the minimum wage itself.)

This destroys the core of her “monopsony” argument. As far as I can tell, it was based on the ideas that: 1) labor markets are imperfect, and are partially monopsonies (true enough), 2) under some monopsony conditions, an increase in the minimum wage can actually increase employment (a sketchy result that might have some truth), 3) since mandating vacation is like increasing the minimum wage, this conclusion extends to the situation we're discussing (here the premise is just incorrect).

What about her other arguments? Let's examine another:

For family leave, in particular -- there is evidence that paid family leave increases women's employment, wages, and productivity (because it helps them maintain good job matches). It also saves the firm money in recruiting and training. And, if it really does do these things, the net result could be, not decreased employment and wages, but maybe even increased employment and wages.
If this is actually true, then employers must be real idiots for not giving their employees more paid leave. Any employer who decided to follow such a clearly beneficial policy – one that both increased workers' overall productivity (enough to give them higher wages) and attracted better workers down the road – would reap enormous financial benefits, placing itself in a very favorable position against its competitors. Does anyone seriously propose, then, that our nation's businesses are under some collective delusion about the advantages of paid leave, and that government (apparently knowing better) should enforce its superior wisdom upon them? When Kathy claims that “increased wages” could result from paid leave, that's what she's saying.

By the way, there isn't some fancy market failure like monopsony to cite here; this is just straightforwardly uneconomic thinking on her part.

And finally there's this argument:

Paid family leave can also create a positive externalities. For example, several studies show that paid family leads improved child health and decreased infant mortality. One particularly interesting (and very good) study showed that while government mandated, job-protected paid leave had a strong and significant positive impact on child health, leave that was unpaid and non-job-protected had no effect whatsoever on child health.
Then address the externality in the correct way: subsidize paid leave. As a dedicated progressive, I'd be very supportive of that solution, and that I think that most people of our ideological bent would agree. Simply mandating paid leave, however, has the potential to significantly hurt millions of low-income workers, and all I see here to support it is some confused blather about the failures of neoclassical economics.

Posted by: Matt Rognlie | Jul 25, 2007 10:58:05 AM

matt

i would grant that 'econ 101 doesn't explain enough to capture all the angles of this issue' is quickly becoming a meme here and other places.

but, that's because the same issues (health care and labor market outcomes) keep cropping up, and, there's a good case to be made that indeed, econ 101 doesn't capture all the angles of these issues.

bring up, say, the market for cars, shirts, accounting services, groceries, etc... and then it would be awfully silly if people claimed that relatively basic principles didn't apply to micro-developments in these markets.

but, the labor market and the market for insurance are really 2 that many, many economists (granted, not all) think are genuinely too complex to be usefully analyzed with 101-style perfectly competitive market models.

Posted by: josh bivens | Jul 25, 2007 11:14:17 AM

but, the labor market and the market for insurance are really 2 that many, many economists (granted, not all) think are genuinely too complex to be usefully analyzed with 101-style perfectly competitive market models.

That's not quite my point. I'm perfectly happy to acknowledge that these markets are more complicated that their idealized, intro-to-econ variants; that's inarguable. What upsets me is the silly presumption where standard economic results are tarred by association with "neoclassical economics," as commentators criticize them for their "simplicity" but don't make a serious case for how these simplifications actually damage the logic. You can't just make a laundry list of standard "market failures" in the classical model; you have to explain why those failures are specifically relevant to the case at hand. When Kathy attempted to take that step, she made some arguments that were simply wrong, and that's why I decided to respond.

Posted by: Matt Rognlie | Jul 25, 2007 11:29:56 AM

Rognlie,

You, like others in this thread, apparently didn't read what Kathy G wrote.

Monopsony is a better model for the labor market than is perfect competition, and not only because it's more theoretically compelling (since it incorporates the fact that there are transaction costs to leaving one's job and that employers, not employees, set wages), but also because it's a better fit for the empirical evidence. Research shows, for example, that the impact of the minimum wage on employment is mixed at best, and that it often increases employment. These results are consistent with the monopsony model but very much at odds with the assumption of perfect competition.

See, using a monopsonic model produces results that more closely resemble reality than standard theories. Jeez, people, Kathy was clear and I thought I was clear in my previous comment.

Further, your argument about paid leave being fundamentally different than minimum wage just doesn't hold water. If mandated paid leave means that businesses will have to hire more people to accomplish the same amount of work, then the bottom line is that their labor costs will increase. Just like with an increase in minimum wage. If the government mandated that every employer put $50/year into a retirement account for every employee, then the labor costs for each employer would increase by exactly $50/yr for each employee. When employers consider, then, how many people they want to hire, that number is taken into account. Where the increase comes from is very nearly irrelevant.

In reality, something that seems quite elusive around here today, the difference between the labor cost impact of mandated paid leave vs. a mandated wage increase is that mandated paid leave does not necessarily result in a labor cost increase. The real effect of vacations is usually to just have the vacationer's responsibilities transferred to one or more other employees while they're gone. In contrast, a mandated wage increase means that everyone costs more.

If this is actually true, then employers must be real idiots for not giving their employees more paid leave.

It certainly wouldn't be the first time that various employers were found to be real idiots. Most likely we're just dealing with entrenched ideas and ignorance instead of intentional idiocy.

"Confused blather" is a good term, but it doesn't apply to Kathy. Seriously people, work on reading comprehension. I've yet to see a criticism here that responds to what Kathy actually said.

Posted by: Stephen | Jul 25, 2007 11:30:57 AM

Piling on:

Matt - "There's an unfortunate trend in economic commentary evident here: a self-styled maverick will list the assumptions of the standard neoclassical model, note that they aren't being met, and declare (ergo!) that the model's implications are meaningless."

Matt, Kathie's argument was entirely based on starting with certain outcomes, and note that they were not what would be predicted by a certain simple model. Therefore, alternatives to that model should be explored.

IOW, she's working the opposite way from what you're saying. You didn't just miss her argument, you missed it by 180 degrees.

Posted by: Barry | Jul 25, 2007 12:12:11 PM

Posted by: Matt Rognlie | Jul 25, 2007 11:29:56 AM

... don't make a serious case for how these simplifications actually damage the logic.

Failing to fit the reality that it is attempting to explain is sufficient ... indeed, if it fails to fit the reality that it is attempting to explain, it would be rejected as a scientific explanation even if its logic is impeccable.

This is, indeed, one of the key differences between scientific research and pure mathematical research.

Posted by: BruceMcF | Jul 25, 2007 12:50:50 PM

"One final point -- a basic problem with the way the economics of labor policy is often studied is that it is assumed that labor markets are perfectly competitive. The perfect competition model may be useful in certain limited contexts, but it's a very flawed and misleading way of looking at the labor market as it actually exists. The basic problem with the competitive model is that it assumes that, if an employer cut wages by one cent, every employee would quit and go work for a different firm. But of course, that's not the way the world works. Imperfect information and significant transaction costs create strong barriers to employee mobility (and employee bargaining)."

I think this a bit of a straw man. You don't need to assume anything near this strong to generate a prediction that mandating more vacation time will lead to lower wages.

Do you doubt a 4% payroll tax would depress wages? To the extent that workers don't value vacation time as much as being paid, a vacation mandate acts like a tax.

Btw I agree that labor markets are a bit different from standard commodity markets but not because employers are a monopoly. The difference is workers have feelings. It doesn't matter if the gas you buy is happy or unhappy but it does matter if the worker you employ is happy or unhappy.

Posted by: James B. Shearer | Jul 25, 2007 1:01:02 PM

Thanks to everyone for the many great comments (even the ones I don’t agree with!). A few more points:

1. I’d be happy to cut out my snark about “people who believe X obviously haven’t gone beyond Econ 101” if conservatives stop accusing supporters of the minimum wage of “not understanding Econ 101” or the law of supply and demand etc. etc.

2. While the monopsony model takes issue with standard labor market theory, it’s still (in my mind) very much in the neoclassical tradition, in that it still assumes incentives, maximizing behavior, and (at least bounded) rationality.

3. I was imprecise in my comparison of mandated leave to mandated minimum wage. There are important differences in both mandates, but the bottom line is, as long as total compensation is at or below the employee’s marginal revenue product, employment will not decrease. And since the assumption is that monopsonistic employers pay wages below the marginal revenue product, it means that in many cases a mandated increase in compensation would not decrease employment (and might even increase it).

4. Here are three ways a paid leave mandate could increase wages:

a) Paid leave could increase wages by encouraging longer job tenure and the maintenance of a good job match, and enhances the employee’s ability to climb a firm’s career ladder.

b) Wages could also increase if the benefit enables firm-specific human capital to be retained.

c) Universal paid leave could solve the problem of adverse selection. Adverse selection might occur if too few firms offer family leave relative to the optimal number, given employees’ preferences. In this case, employees who desire paid leave will all want to work for the firms that offer the benefit. Since the employees of those firms would therefore have a high probability of taking leave, the cost of the benefit to the employer would increase. The employer would then pass on the cost to the employees, in the form of lower wages. This would make the adverse selection problem worse, since the only employees who would be willing to work at such low wages would be those who were most likely to use the benefit. Because of the high cost, firms might stop offering the benefit all together, or perhaps they’d cut wages even further. But if paid leave were universal, adverse selection and the attendant problem of wage cuts and suboptimal leave benefits would diminish.

5. I don’t argue that mandated benefits will never result in lower wages or employment. Theoretically they can, even assuming the monopoly model, and the empirical evidence shows that occasionally they do. For example, there’s a famous paper that was done about the impact of mandated maternity benefits in the U.S. that showed that such benefits had a negative effect on women’s wages and mixed effects on employment. (But then again, an unpublished paper I saw that re-analyzed the same data concluded that the effects were slightly positive).

The best paper I’ve seen on European paid family leave shows that paid leave for moderate durations had no impact on women’s wages but improved women’s employment relative to men’s by 3 or 4%. However, longer leave times – 14 weeks and over – caused women’s employment to decrease by about 3% relative to men’s. That sounds plausible.

Yet it’s the case that standard models of mandated benefits would predict only negative effects and have no way of explaining other outcomes. Whereas, monopsony models or models that incorporate market failures are consistent with empirical observations.

I think one reason why some economists are so resistant to more complicated modeling is that, the more complicated the model, the murkier the predictions. And of course, it’s really cool if you set up a model that makes clear predictions – that’s exciting, dammit! It’s powerful! However, it’s not cool at all if the predictions your model makes are a poor fit for the empirical facts.

6. Yes, no question that mandated paid leave would disadvantage some people – namely, people who’d prefer wages to time off. But to say we shouldn’t mandate paid leave seriously disadvantages the millions of women who forced to choose between keeping their jobs and caring for their sick or newborn kids. Leave inequality, btw, is even worse the wage inequality, and has been getting worse over the years. Low-wage workers have the least leave, so they would stand to benefit the most from a mandated leave law. Perhaps there’s evidence that low-wage workers would prefer higher wages to more time off, but I find it hard to believe that that’s true of low-wage workers who are female.

In general, I just think that, overall, mandated paid leave would do more good – both in numbers of people who directly and indirectly benefit, and the magnitude to which they benefit – than would the status quo.

And just to be clear – by mandate, I don’t mean that the government would force workers to take vacations or take time off to care for their kids. I just mean that it would mandate employers to offer job-protected paid leave to employees who want it.

7. As for the argument that we should subsidize paid leave – how, exactly? And do you mean we should guarantee taxpayer-subsidized paid leave to every employee who wants it, or merely that we should provide tax breaks to firms that provide it? If it’s the former I agree 100%; if it’s the latter, not so much, because I doubt it will be effective, especially for the low-wage workers who already have the most trouble accessing leave.

I think California’s paid leave law has at least part of the payment scheme of the thing right. The paid leave law is financed by an infinitesimally small payroll tax paid entirely by employees. Like most payroll taxes, this tax is, unfortunately, regressive (and that should be changed). Also, of course paid leave will cost money beyond what the tax covers – the employer would need to pay overtime to their regular workers, or pay for temp workers, to cover for the employee taking leave. But so far the evidence on paid and unpaid family leave in the U.S. and abroad shows that, by and large, employers are not passing on that cost to workers in the form of higher unemployment or lower wages. Being that paid family leave also has some very nice positive externalities, like improved child health, why the hell shouldn’t we adopt it?

8. One final note: over 160 countries all over the world have some form of government-mandated paid maternity leave -- the only industrialized countries that don’t are the U.S. and Australia. We and the Aussies join only four other countries in this achievement: the stellar economies of Lesotho, Papua New Guinea, Liberia and Swaziland. Way to go USA!

Posted by: Kathy G. | Jul 25, 2007 2:09:12 PM

"Do you doubt a 4% payroll tax would depress wages?"

Before Card did his empirical work on minimum wage, I wouldn't have doubted that a hike in minimum wage would depress employment.

But Card (and others afterwards) found the impact on employment was minimal: the elasticity was far higher than previously assumed.

This would be consistent with monopsonistic competition. Are employers meeting in smoke filled rooms a la Archer Daniels Midland to fix rates? No, but there are industry norms that employer HR departments will conform to.

Posted by: Sock Puppet of the Great Satan | Jul 25, 2007 2:59:56 PM

Pretty much every discussion of career development I've seen says not to change employers for less than somewhere between 15-33% improvement in expected compensation. (The "expected compensation" part accounts for the people who switch jobs because they'd otherwise be fired or go postal.)

So that puts a lower bound on the effective transaction costs of changing employers. That's in the same ballpark (or possibly rather higher) than the effective transaction costs for selling a house, and we know how thoroughly sticky that market is. So I guess the only thing that surprises me here is that anyone could ever have seriously thought otherwise.

Posted by: paul | Jul 25, 2007 10:00:15 PM

"you picked exactly on the sleight of hand in Worstall's response."

Never assume evil intent when ignorance is a possible explanation.

"a better parody of the economist if I tried."

Most kind. Perhaps I should point out that I'm not an economist? An interested amateur at best? So being pointed out as a parody is an advance I link to think. For as every comic knows, to manufacture decent parodies you do have to understand the underlying concepts.

Rereading all of the above OK; I've learnt more. In the limited sense in which the phrase was used, labour markets are monopsonies. What rather worries me though is that the observation will, as it moves through the political discourse, become freed from that "limited sense" qualification.

Imagine some of the wilder commentators: hey, we can mandate a $20 minimum wage, it doesn't matter, because labour markets are monopsonies and Econ 101 doesn't hold!

Posted by: Tim Worstall | Jul 26, 2007 6:21:13 AM

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