The unemployment rate has fallen from 5 percent to 4 percent in the past two years, but workers aren't getting any bigger raises than they were before. What in the name of supply and demand is going on?
Well, the truth is, it's not clear. Part of it is probably that productivity growth has been so bad that you wouldn't expect wage growth to be that good no matter what. Another part is that there still seem to be a lot more people who want work than are officially looking for it. But the final part might be that employers are doing whatever they can, whether it's forcing morally dubious noncompete agreements onto workers or entering legally dubious non-poaching agreements themselves, to try to maintain their bargaining power in the face of lower unemployment.
Now, up until a few years ago, this last part was something we knew about only anecdotally. Companies don't exactly advertise that they're colluding against their workers. But as even sandwich shop employees, doggy day-care workers and summer camp counselors have found themselves subject to noncompetes — which were originally aimed at preventing top executives from taking trade secrets to a rival, not locking minimum-wage workers into a state of semi-feudal dependency — economists have begun to study the issue.
The Treasury Department, for one, has found that the most cynical explanation is the correct one: Noncompetes tend to result in both lower initial wages and lower wage growth over time. In other words, companies aren't using noncompetes to help them hold on to workers they've spent a lot of money training — in which case their wages would be growing faster from all the specialized skills they'd learned — but rather to keep workers from going to a competitor for higher pay.
But this is only half the story. Employers don't just try to make it harder for workers to leave. They also try to keep them from having anywhere to go by agreeing not to hire them away from one another. This, of course, is flatly illegal when it happens between two different companies, as Apple and Google had to settle a $415 million lawsuit against them for such an under-the-table no-poaching agreement. But it's a legal gray zone when it comes to two franchises of the same company.
Which is why it shouldn't be too surprising, as Princeton University economists Alan Krueger and Orley Ashenfelter have found, that 58 percent of major franchises, such as McDonald's, Burger King and Jiffy Lube, do in fact collude among themselves. That means that one McDonald's franchise can't hire a worker away from another McDonald's. How much does this matter? Well, Krueger and Ashenfelter can't say for sure, but they note that in Rhode Island these kind of no-poaching agreements would mean that, from the workers' perspective, the state's 261 fast-food restaurants were effectively only six.
It's just another part of what's known as labor market monopsony, where there's only one buyer. It's the reverse of a monopoly, when there's only one seller, but the effect is the same: Companies have the power to set prices — in this case, for wages — independent of what supply and demand say those prices “should” be.
That's not to say that there is literally only one employer, but rather that there are so few that it's easy for them to offer wages that are well below what they would be in a truly competitive market. Indeed, economists José Azar, Ioana Marinescu and Marshall Steinbaum have found that the average labor market in the United States is “highly concentrated” like this and that the more concentrated it is, the lower wages tend to be.
That, more than anything else, might explain why even a labor market where, for the first time in almost 50 years, there is more demand for workers than there is supply — more job openings than unemployed people — hasn't made wages grow any faster. (The official numbers go back only as far as 2000, but Federal Reserve economist Regis Barnichon has put together unofficial ones that go back to the 1950s.)
So the economy might be giving workers more leverage than they've had since Richard Nixon was president, but employers are trying to wrest it away so that workers have as little leverage as they did when Herbert Hoover was in office, which is to say none.
It's a reminder that labor markets aren't just about supply and demand but also about who has the power to make the demands. A weaker welfare state, a lower minimum wage and business-friendly courts — the kind, for example, that say companies can force their employees to sign away their rights to join class-action lawsuits over things such as wage theft — all give businesses more bargaining power no matter what the unemployment rate is. So do “right-to-work” laws that make it harder to form unions.
It's a new Gilded Age that not even 4 percent unemployment can make a dent in.