This week, labor market economist Suresh Naidu explains how his field attempts to account for the influence of power while studying employee/employer relationships, and unveils the hidden tricks of the coercive labor market.
Suresh Naidu is a professor of economics and international and public affairs at Columbia University as well as a fellow at the Roosevelt Institute, external faculty at the Santa Fe Institute, and a research fellow at the National Bureau of Economic Research.
Twitter: @snaidunl
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Further reading:
‘Essential’ workers are just forced laborers: https://www.washingtonpost.com/outlook/2020/05/21/essential-workers-pay-wages-safety-unemployment/
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Nick Hanauer:
The bottom dropped out of the labor market for low and middle income workers a long time ago. It’s just that the pandemic made it even clearer.
Suresh Naidu:
So you can’t go to your employer and say, “Hey, if you don’t give me a raise, I’m going to quit.” Because the employer knows that there’s no place for you to go, so it’s that sense of having no other options but to work that you were forced labor.
Speaker 1:
From the offices of Civic Ventures in downtown Seattle, this is Pitchfork Economics with Nick Hanauer, where we explore everything they forgot to teach you in Econ 101.
Nick Hanauer:
I’m Nick Hanauer, founder of Civic Ventures.
David Goldstein:
I’m David Goldstein, senior fellow at Civic Ventures. So Nick, I think there’s been a theme, an inadvertent theme to our podcast the past few weeks.
Nick Hanauer:
Yeah. The demise of worker power and-
David Goldstein:
Right.
Nick Hanauer:
… the massive accumulation of both legal, political and economic power at the top that defines American life today.
David Goldstein:
We’re seeking to that theme on this week’s podcast, too.
Nick Hanauer:
Yeah. We get to talk to this really incredibly talented young economist Suresh Naidu out of Columbia University, who’s one of the bright lights in that field. He’s been writing about labor markets for a long time and thinking about them. He’s a bunch of cool new writing in particular around what do you call as forced labor, the forced labor of so-called essential workers.
David Goldstein:
Right, which came to the forefront during this pandemic-
Nick Hanauer:
Right.
David Goldstein:
… where it turns out that these essential workers are largely low-wage workers, so workers in the bottom half of the distribution. These people were not seeing hazard pay in this economy.
Nick Hanauer:
No. What’s even darker than that is it not only weren’t these folks being compensated for the extra risk they were taking by going to work during a deadly pandemic, they could have their unemployment benefits taken away if they stayed home.
David Goldstein:
Just like?
Nick Hanauer:
No, you will work. I could see both sides of it, of course, but it’ll be really fun to talk to Suresh about his perspective on all of this.
Suresh Naidu:
My name is Suresh Naidu. I’m a professor of Economics and Public Affairs at Columbia University. I’m a fellow at the Roosevelt Institute. Should plug my forthcoming book, a book I’m working on on historical labor markets. I work basically on the history of labor markets from American slavery to Amazon Mechanical Turk, just some type of the market now.
Nick Hanauer:
Covered some good ground there. You’ve written a lot about labor markets, and you have a recent piece out where you talked about forced labor in the context of what we’re now calling essential workers. Give our listeners a preview of that piece in your argument.
Suresh Naidu:
Yeah. So the argument there was that essential workers… One of the puzzles for example is that hazard pay for essential workers didn’t increase at all. Even though the risks of being a worker in a grocery store or in a meat processing plant obviously shut up enormously during COVID and yet there was no evidence that wages were sort of increasing to compensate these workers. It’s because for an obvious reason that workers didn’t have any power. The normal thing that’s… If the labor market’s working the way the textbooks say it should work, it should be like you can just go to your boss and say, “Hey, there’s this pandemic. I need a raise. Otherwise, I quit and I get another job somewhere else that will involve me risking COVID.” Then your employer needs to keep you and so gives you a raise. That’s the fiction around which a lot of economics is taught to undergrads is sort of based on that fiction of the labor market looking competitive.
When you actually look, the bottom fell out of the labor market in COVID and so workers really had nowhere to go. Essential workers had nowhere to go. So you can’t go to your employer and say, “Hey, if you don’t get me a raise, I’m going to quit.” Because the employer knows that there’s no place for you to go, so that sense of having no other options but to work that you were forced labor. An important footnote to that is that in the US unemployment system, it’s an important caveat that if you voluntarily quit your job, you’re ineligible for UI. So all of the workers that got laid off, they could get the $600 a week expanded federal endemic unemployment assistance. If you were still working, if your job was still available, you couldn’t quit and get that same UI.
There’s legally gray areas. I’m sure in some places people did quit, and you can give a health raise and things like that. There’s still a real sense in which if you were an essential worker, you had nowhere else to go and you had no bargaining power vis-a-vis your employer. So that’s the sense in which there was essential workers are coursed.
Nick Hanauer:
The bottom dropped out of the labor market for low and middle income workers a long time ago. It’s just that the pandemic made it even clearer, right?
Suresh Naidu:
I mean, that’s true in some sense, but it’s also the case that we had 3% unemployment leading up to the pandemic, which is just also puts the lie to lots of people that thought, “Oh, my god. The robots are coming. We’ll never have full employment again.”
Nick Hanauer:
Yeah.
Suresh Naidu:
So I think there was a real sense in which the labor market was getting really tight in 2019. The thing I thought was going to happen was that I thought we were going to see what was called like [Kaletsky 00:06:30] and business pressures, business cycle. When the labor market gets so tight that nobody cares about losing their job because there’s another job for them to go to, the thing that happens is that employers lose the power they have to threaten workers with unemployment. So you’re like, “Oh, if you don’t do your job properly, I’m going to fire you.” A worker is like, “Yeah, so I can go get another job,” and you start seeing things. My favorite example is the waiter that spit in Eric Trump’s food. I think it was [inaudible 00:00:07:02]. I was like, “That’s what 3% unemployment looks like.”
Nick Hanauer:
Spitting at Eric Trump’s food. Oh, god, let it be true.
David Goldstein:
Yeah, but outside of the restaurant industry and we certainly had that here in Seattle, where there was this incredible shortage of experienced labor in the restaurant industry just before the pandemic. Outside of that, we didn’t really see that type of behavior anywhere in the labor market and we generally, we don’t see it. We still had an economy in which when states or cities raised the minimum wage, suddenly a lot of people got a raise. So this tight labor market was not increasing wages substantially at the low end.
Suresh Naidu:
Yeah. So I think that is a good point. In fact, I think some estimate I saw it was about one-third of the wage increases that you did start to see over the last business cycle came from states raising minimum wages, so suggest that the market alone wasn’t doing that. Another share of it though is due to composition. So it’s that a lot of workers that you might’ve thought of as permanently out of the labor force came into the labor force but at wages that were lower than workers that were already in the labor market. So that drags the average wage down even as it increases unemployment, and that’s probably another third.
Then there’s just the other part of it, which is just the employers have market power. So even when the labor market is really tight, they don’t necessarily want to raise wages because they’re making profits off every worker that when they’re keeping the wage low, they’re making some profit off every worker. Even if they’re suffering high turnover and even if there is a worker shortage, they’re still not willing to raise the wage because it’s profitable for them to bear that high turnover and bear that labor shortage because you’re making profits of all the workers that you do have.
Nick Hanauer:
That’s right. The problem employers face of course is that if you pay the incremental worker more, you have to pay all workers more, right? You can’t bring a new person in a $15 an hour and continue to pay all of your prevailing workers $10 an hour.
David Goldstein:
Well, you can if they don’t know.
Nick Hanauer:
Yeah, well.
David Goldstein:
They don’t know that there’s a lack of information.
Nick Hanauer:
Of course, but that tends to seep out and that becomes highly problematic. So the cost to employers goes up dramatically as the labor market tightens [crosstalk 00:00:09:42].
Suresh Naidu:
Is that because to get pissed?
Nick Hanauer:
Yeah, they get pissed.
Suresh Naidu:
Okay, that’s my guess is that workers get pissed and that’s like a different… Yeah, that’s a real reason why you have to-
Nick Hanauer:
Yeah. Suresh, I was really excited to talk to you about this forced labor concept and the way in which the pandemic has exacerbated coercive market power, because I am a frequent critic of your beloved profession and in particular the neoclassical framework. One of the things I find most wanting is that it doesn’t account for the most important force in human affairs, which is a relative power that at the end of the day an economy is a set of power relationships. As far as I know, no one has ever successfully accounted for it, either qualitatively or to say nothing of quantitatively. It just strikes me that I’m wondering how you think about this. Because neoclassical economics, the marginalist effectively assumed power away by making price equal the value and a bunch of other tricks and so on and so forth, but we are living in a world that makes all that stuff more obviously a lie. How do you think about this?
Suresh Naidu:
So I feel, I mean, it might just be my background because I came from UMass. I started as someone trained in heterodox economics and started learning. I learned the Marxism before I learned anything else so. So I always think what I get out of my discipline actually, I feel it’s more analytical take on how to think about power. So for example, you might want to think about power at three different levels. You want to think about it in terms of who controls the state, what kinds of rules and rights is the state enforcing on behalf of whom that’s the kind of political power, that’s the standard thing that’s studied by political scientists. Then I think what’s uniquely economic is thinking about the power inherent in the market. You can think of multiple sources and dimensions of power exercise in the market. So one is just regular old like monopoly or monopsony power where somebody has just the power to set the price and the other side has to take it, but there’s also more other kinds of powers.
So there’s types of power where it’s not that I have any market power, but the nature of their transaction is such that I need to maintain some power over you in order to get you to work on the job or deliver the service on time or something like that. That’s what we call short side power and that doesn’t require a perfect competition but it’s a different kind of power that you have in the economy. Then there’s bargaining power, which is another kind of power. So I feel we get a library of ideas of power in economics. The problem is that they’re not used more I guess is the main problem. So I feel the concepts that they’re awaiting to be picked up, but they’re just not picked up.
Nick Hanauer:
It seems to me that there are at least two reasons for that. The first is that the beauty of the neoliberal narrative is that it teaches people that they get what they deserve and therefore the outcomes in the society are morally justified and that if you’re complaining, you’re greedy or stupid or don’t understand economics or wrong or whatever it is. The neoclassical structure, even the concept of marginal productivity, marginal utility was invented to make people not complain about what they got.
David Goldstein:
Also, Nick, it’s math that you can do.
Nick Hanauer:
That’s the second thing is, is it all these other things you can build basically a quantitative model around, but power, how would you model power?
Suresh Naidu:
So for example, in chapter three of my book, one way of operating power is what we call the envelope theorem. It’s like, “When I have power over you, I can inflict.” So the way I say it is like, “Do you have to laugh at the jokes of your boss?” If your boss is like, “I can fire you,” it might cause me a small inconvenience, but it’s going to cause you a huge pain. It’s going to be a huge pain for you. That’s power, and that’s the idea that I can add only the formal language is like a second order cost to myself, I can inflict the first order cost on you.
David Goldstein:
Adam Smith writes about that. I mean, that’s right there in The Wealth of Nations. He makes that observation that the employer can always outlast the employed that the worker will starve. It might be an inconvenience to the employer, but they naturally have the advantage because, well, they start with more resources. They’re not going to personally suffer.
Nick Hanauer:
That’s right.
David Goldstein:
One of the things that gets me about power relationships, I think a lot of people miss is how personal it is. When you go supermarket shopping and you buy a head of lettuce and some tomatoes and maybe some box of crackers or something, there’s no personal relationship. You’re just buying some food. When you’re negotiating a wage, this is in some ways it’s face to face. It is a personal status, power relationship between you and me, Nick. We get along pretty well, but you’re the boss and I want to get paid as much as I can and you don’t want to get ripped off. I mean, because it really wouldn’t be anything to you to triple my pay, but you’d feel you were getting taken advantage of. I think this gets back to what I was bringing up earlier, not only is there an imbalance of power, but you have preferences that are distinct from market pressures and maybe you have a preference, and I think a lot of employers do to pay as little as they can.
Suresh Naidu:
That might be the preference of their investors more than, but I think you can have. That’s the thing about capitalism that you can have really nice boss, individual bosses, but the systemic pressures on employers is that you got to pay the landlord and you got to pay your investors and you’ve got to make the dividend payments. So even if you are a nice guy, there’s real pressures on you to not give a raise.
Nick Hanauer:
Correct. One of the ways in which capitalism in the United States went off the rails a bit is when executives became shareholders and that when the majority of their compensation was linked to stock, their willingness to be in concert with their workers ended, right? You end up with shareholder value maximization at every cost and the rest is history that that has been obviously a big part of it. You also think that there are some 1970s fed policies that have played a really important role in low wages. Can you explain that, Suresh?
Suresh Naidu:
Yeah. I mean, so the early 1980’s recession was really like, “They really hated labor unions irrationally so.” They were really that early 1980’s recession was almost deliberate to break American manufacturing unions so that they would stop pushing for wage increases that kept up with the price increases and that would break the wage price spiral. If you read the fed transcripts, they’re really just always talking about the power of labor unions. Mitchell I think has a paper on this. Even into the 1990s after unions have been well-broken, there’s density is falling. There’s still like, “Oh, my god, the unions,” and when there’s no threat. So it’s definitely I think the fed engineered recession of the early 1980s. I feel there’s a lot of histories written about it. I still want to see the history of it that is looking at it as a concerted attack on the expectations of middle class people and what they can expect from their jobs.
Obviously, it was like unions were a big part of that, but I think it happened on so many fronts, and Volcker says it. He’s like, “Americans are going to learn how to make do with less,” or something along those lines.
Nick Hanauer:
Except for people like me.
Suresh Naidu:
Yeah, [inaudible 00:18:29].
Nick Hanauer:
Yeah. Well, I mean, of course, there is a lot at stake because in the day that class of people earned 30 times the median wage and today they are in, I don’t know, 500 times the median wage. So a world in which labor unions, I mean, no matter what it is, I mean, maybe it’s labor unions, maybe it’s some other mechanism that gives workers power is a world in which the distance between the median wage and high wages is measured in the 10s versus a world in which the distance is measured in the hundreds. The way you get there is you eliminate worker power, and it worked super well.
Suresh Naidu:
I think there are two things going on. It’s like there is the smashing of worker power and then there’s just the transformation. It’s the rise of finance and the intellectual property really. So there’s a combination of the assault of the right on all the institutions of social democracy and then there’s also a technological and trade story that are both happening at the same time.
Nick Hanauer:
Yeah.
Suresh Naidu:
Yeah, and they’re hard to disentangle, but I think they certainly are both happening.
Nick Hanauer:
Tell us a little bit about your thoughts about the ways in which the pandemic has highlighted some of these issues and what we might do to get ourselves on a better track.
Suresh Naidu:
My god, there’s so much. So I think I want to flag just the CARES Act as remark, everyone’s like, “Oh, the pandemic is exacerbating inequality,” and it’s true. I mean, particularly on the schools, it’s going to be a disaster. If all the rich parents are putting their kids in pods and all the kids in poor families are just not able to get any access to education, that’s terrible for the long run. [inaudible 00:20:29] just like the rut income inequality, it was actually the CARES Act was an enormous transfer to low income Americans. $600 a week of expanded UI, that’s effectively $15 an hour at 40 hours a week if you were unemployed. So the amount that that boosted incomes of what would normally be low wage Americans was just amazing.so I just want to flag that as like, “Holy crap, America did something incredibly progressive for once.”
It was maybe by accident because apparently it was done because all the UIA, state-level UI systems are written in Fortran and couldn’t be updated. So they were just like, “Fine.” Implementing a more sophisticated update role was just too complicated to do in time. So they’re just like, “Fine. Fine, it’s good, 600 bucks.” I just want to flag that that was a good idea.
Nick Hanauer:
Beyond unions, what can we do to more successfully balance both the power dynamics within the economy and the outcomes produced by it?
Suresh Naidu:
So, I mean, if I was somebody who’ll serve in a different time, you can come up with policy tools and policy options and all of that stuff, and there’s lots of ideas out there. I’m really, and I think David Graber passing recently just reiterated this for me. There’s really no substitute for people getting together and moving politically themselves. The right has money, the left has people. So the only resource is something like collective action. It’s why I keep coming back to unions. It’s not because they’re a policy option, but because they’re an organic, actual people getting together and articulating a common interest and demanding it together is what unions did. There’s no substitute for that I think. So we don’t have to call them unions. They can be all kinds of other organizations, community groups, data unions. I don’t really care. I think that general idea that we’re going to have to solve this ourselves and there’s not a policy fix is something I deeply think.
David Goldstein:
I wonder if the economy has gotten so complex that we actually need to rely on government rules and regulations to defend the rights of workers than we used. The old labor model obviously was for an industrial economy where you could unionize a Ford automobile factory where tens of thousands of people worked. That’s not the economy we have today. It’s just so complicated to unionize a McDonald’s when it’s thousands of franchisees.
Suresh Naidu:
I mean, I don’t disagree with that, but I also think there’s a lot. We really built unions in this country when the government put us down heavily on the scale with the war labor board. So AT&T is a giant dispersed employer. All of its workers are these phone operators in every little town. They have sporadic strikes in the late 1944 and ’45. Then AT&T probably wouldn’t have recognized them, but then the government just came in and told them, “Cut it out, recognize the union,” and it happened and that was CWA.
So I think it’s like, “Yeah, there’s…” So I think it’s a symbiosis of you need some policy levers and hooks for people to grab onto, and then you need to get people to organize and take advantage of those, those policy levers and hooks.
Nick Hanauer:
Right, but that was an example of government putting its thumb on the scale.
Suresh Naidu:
It was putting his thumb on… It was reacting to organizing efforts by workers themselves. It was very much like, “Okay, there’s these strikes. We can’t abide by disruptions in the phone service and so we’re going to pull you guys together and make you work out an agreement.” They weren’t doing that for every industry. They were doing that for the ones in which workers organized themselves enough to disrupt it. I think that capacity to disrupt and inflict costs is the root of it. You can only demand up to what you can inflict in costs is a good rule. So if you’re wanting to think about what raises power in the workplace, it’s got to be what are the tools that workers or citizens have that let them go toe-to-toe with the business and demand something. So it’s got to be some way they have of inflicting costs.
Nick Hanauer:
So let’s talk about what the rest of us can do. Is there a role for consumers to boycott companies that we don’t feel are treating workers fairly, or does that end up hurting those workers as well?
Suresh Naidu:
This is another good point. When the workers themselves asked for a boycott, you should absolutely comply with the boycott. So when it comes from a union or even a workers’ rep, you should absolutely comply with a boycott. Just you on your own as a consumer boycotting, I’m not sure it doesn’t help unless it’s part of a campaign. It’s just you exercising your consumer privilege, I guess. So unless it’s part of an organized campaign to put pressure and win a demand, it maybe makes you feel better, but it’s not actually going to accomplish anything until there’s, like unless it’s like synchronized as part of a campaign.
Nick Hanauer:
So if you were a benevolent dictator in charge of the world, what would you do in the United States?
David Goldstein:
Political constraints.
Suresh Naidu:
I deal with climate change. I mean, it’s a no brainer, right?
David Goldstein:
So you’re telling us you’re working on the wrong issue.
Suresh Naidu:
Yeah. I have my hooks, but it’s true that I’m not an idiot. Come on, I see it. It’s like the writing’s on the wall with all of the… Just even forget about preventing climate change too why we’re here. The large scale adaptation program that we need for planet earth so that we can keep it livable, it’s just, yeah, that would be and that would also create a ton of jobs and raise wages a lot. So that’s my global green new deal.
Nick Hanauer:
That’s a good answer. It’s an excellent answer. Great. Well, Suresh, thank you so much.
Suresh Naidu:
Thank you so much for having me.
Nick Hanauer:
Yeah. When’s your new book out?
Suresh Naidu:
Well, I need to submit. It’s not sometime next year, I think, the year after.
David Goldstein:
Hopefully, maybe.
Nick Hanauer:
The year after. That’s what we always say.
David Goldstein:
Yeah.
Nick Hanauer:
We’ve had forced labor in this country for most, for a long time. Of course, we had real forced labor in the very old days, but we have a form of it today. Certainly, I think that Suresh explained really well the differences in power, the way in which differences in power express itself. As worker organizing declined, employer power went up, and we have this very, very difficult circumstance today that most people face.
David Goldstein:
I don’t want to make any false equivalency between slavery and working at a fast food restaurant. You go back to the narratives in the first half of the 19th century defending slavery, and they said it was essential-
Nick Hanauer:
Yeah.
David Goldstein:
… that these were essential workers that the economy. The argument south was making was that not just the southern economy, not just the plantation cotton economy couldn’t work without them. They said the northern economy couldn’t either because it was that southern cotton that was feeding the mills in the north. So there’s a long history to saying, “Oh, yeah. These workers are essential.” By the way, paying them crap or nothing at all is essential, too.
Nick Hanauer:
Yeah. Well, the more things change, the more things they say the same, don’t they? Yeah.
David Goldstein:
Unfortunately.
Nick Hanauer:
Yeah.
David Goldstein:
Until they don’t, until the pitchforks come, Nick.
Nick Hanauer:
Yep. Well, it’s a super interesting conversation with Suresh and just continues to remind you, America is probably not going to do better until individual Americans do better, too.
Speaker 1:
Pitchfork Economics is produced by Civic Ventures. If you like the show, make sure to subscribe, rate and review us wherever you get your podcasts. Find us on Twitter and Facebook at Civic Action and Nick Hanauer. Follow our writing on medium at Civic Skunk Works and peek behind the podcast scenes on Instagram at Pitchfork Economics. As always from our team at Civic Ventures, thanks for listening. See you next week.