Anna Stansbury: Worker Power, Wages, and What's Gone Wrong in the American Labor Market

Ben Zweig: Workers' share of national income has been falling for 40 years. The question is why and whether anything can be done. My guest today to help us get to the bottom of it is Anna Stansbury, assistant professor at MIT Sloan, great recommender of books, and one of the sharpest minds working at the intersection of labor markets and macroeconomics. Here's our talk. Welcome to the Economics of Work. I'm excited to welcome Anna Stansbury, assistant professor at MIT. And the economist who I think is the best in the biz when it comes to discovering and articulating the relationship between labor markets and big macroeconomic questions. Anna, welcome to the show.

Anna Stansbury: That's a very kind introduction, Ben. Thank you. I'm excited to be here.

00:34 Is labor's share of income falling?

Ben Zweig: For sure. No, it's true. Okay, so I want to start with labor share of income. So global income, general GDP is attributable to labor and capital. Labor share of income is like this big question that I think is being brought up more and more. What do you make of how that's trending and where you think it's going?

Anna Stansbury: Yeah, so I think the big picture on the labor share of income in the US is that it is trending downwards slightly and has been doing so for about the last 40 to 45 years.

Ben Zweig: From what to what? Like, what are the bounds of that?

Anna Stansbury: So it depends exactly how you measure it. And we can get into the measurement weeds because there's a lot of kind of ink expended on this and also misconceptions, I think, about the measurement. But roughly speaking, my favorite measure of the labor share would be you look at employee compensation in the non-farm business sector in the US out of net product of the business sector. You're taking the total GDP equivalent that's produced, but you're subtracting out depreciation. And if you look at that measure, then it used to be about two thirds was the labor share, and it's gone down from about there to about 60%, just a bit below 60%. So that would be the kind of picture.

Ben Zweig: Okay, so like a seven percentage point decrease. Is that like... And for over what timeframe?

Anna Stansbury: Over since the early 1980s.

Ben Zweig: Okay, so a long time. So it's like, it's like kind of gradual, but like very meaningful. And is that really just the US? Like, what do you... I mean, I know it's like very hard to get that globally, but like, if you have to take a shot in the dark, like what do you think those numbers are globally?

Anna Stansbury: So again, very debated question. I don't want to make it sound like this is settled science. It depends exactly how you measure it. My best read of the evidence is that this phenomenon is stronger in the US than in most other countries. So many other countries have seen some portion of a labor share decline, but many also haven't or have seen some increase. And it's stronger in the US and other countries. There's a big wrinkle, which is whether or not you include housing. Measurement question, but massively changes the results. But there's research from a researcher, Sophie Piton and Germán Gutiérrez, that basically says if you take out housing, then the labor share looks like it doesn't decline that much almost anywhere except the US.

02:56 Why the US is different

Ben Zweig: So interesting. So what's happening in the US? Why is it so different?

Anna Stansbury: Probably like, broadly speaking, there are three theories as to why the labor share declined in the US. Two would be big picture economic trends, globalization, technological change. And the idea of those would be these trends have happened in a way that has reduced the market returns to labor, increased the market returns to capital, and so has shifted the labor share of income. And then the third theory would be one that's not about big market economic trends.

Ben Zweig: Wait, sorry, that was the first one or?

Anna Stansbury: That would be the first and the second, sorry. Either globalization or technological change.

Ben Zweig: Okay, got it. Okay.

Anna Stansbury: Yeah. So we've got globalization, technological change. And the third theory would be something about power and institutions. Like I have this paper that I wrote with Larry Summers a few years ago that was arguing that the decline of the labor share in the US was about worker power. And it was about a decline of worker power over the last four decades relative to the power companies. And that was what shifted the share of income away from labor and towards capital.

03:59 What is worker power?

Ben Zweig: So worker power, I mean, what is that? Yeah, like, is that general market power? Is that issues around monopsony? Is it around unions? What do you think labor market power is at its core?

Anna Stansbury: So I think it's useful to think about labor market power as the ability of workers to receive pay or compensation broadly that is higher than what they would receive in a competitive, in a market where they didn't have that power. I'm actually not saying competitive because I think there are two really important dimensions of worker power. So bear with me here. Let's think about a firm and a set of workers. And let's say that there are three areas where power can be exerted here. One is actually on the product market side. The firm might have product market power. It might be able to price higher than marginal cost and earn rents. That could be because it's a monopolist. It could be because it has brand power. Then there's monopsony power, which is the labor side for the firm, which is can the firm pay workers below their marginal product what they would earn in a competitive market. And that could be because the firm is one of few employers or it could be because the firm offers a very specific kind of job that attracts a specific kind of worker. And so I would say, okay, you take the kind of market conditions as given, the monopoly and the monopsony power of the firm, and then worker power is whatever workers can do to earn more than they would in that counterfactual world. So worker power there could be workers grouping together as part of a union or informally in order to earn higher pay, or it could be specific workers having power over the firm because of their specific importance to the firm in some way.

Ben Zweig: Yeah. So I would think if there's pricing power in product markets, that's just some surplus, some rents, and those could be distributed between labor and capital somehow. But monopsony I think would be lower than competitive wages. Do we think in the absence of relative bargaining power over rents, do we think that workers are actually getting below what they'd be making in competitive markets? Or is that not so much a big part of the story? Is it more about attribution of rents?

Anna Stansbury: Yeah. I think that's a really nice way to think about it. So I think it probably is true that there's a baseline monopsony power in labor markets. That means that without worker power, workers are getting a little less than they would get in a competitive market. So I think worker power is partly countervailing firms monopsony power. It's partly making up the gap between...

06:42 How big is monopsony power?

Ben Zweig: Yeah. Sorry. What's your guess on the magnitude there of the monopsony effect?

Anna Stansbury: I think a reasonable guess, but with wide bounds of uncertainty would be like 5% to 10% below marginal product is a sensible amount that wages might be marked down. So not a huge amount, a little bit.

Ben Zweig: I asked the same question to Ioana Marinescu, and she had a much bigger answer. I forgot what it was, but it was like big. Yeah. What do you think the crux of that disagreement might be?

Anna Stansbury: So the kind of typical way to come at this number is you estimate the elasticity of labor supply to the firm. So specifically, the kind of thought experiment there is if the firm kind of randomly raises wages and doesn't change anything else, how many more workers would they be able to recruit to work at the firm? In a perfectly competitive labor market, that is infinite. Because if you raise wages above the competitive level, everyone wants to work at your firm. And so you can in theory, you might get an infinite number of workers. So the less competitive the labor market, the less elastic the labor supply to the firm. And if you plug that number that you've estimated into a typical model, then you can back out what that markdown number would be. Now most of the estimates of the elasticity of labor supply to the firm are quite small. So it means that you back out really big markdowns, like 20%, 30%, 40%, 50% of marginal product. But I think that most of the estimates-- I think that there are two reasons why that is probably not reflective of the kind of overall equilibrium markdown. I think one of them is those estimates of the elasticity of labor supply to the firm are estimated off quite small changes in wages and people's equilibrium application behavior. And I just don't believe that if fast food employers raised their wages 50%, they wouldn't get essentially infinite applications. And I think you see examples of this empirically. And the other one is other evidence that's not coming from the elasticity of labor supply to the firm side tends to find much smaller gaps. So I have work on employer concentration. So the idea that if there are few employers in a given labor market, they have monopsony power, how does that affect wages? And in that paper, we estimate that if you go from the median level of employer concentration to the 95th percentile that workers experience-- so a big range that we're looking over-- that's huge. That reduces wages by about 3%.

Ben Zweig: Wow. OK, so that's quite small.

09:21 Who gets the rents?

Ben Zweig: Wow. Interesting. OK, so fine. So sorry. I cut you off earlier, but you were saying, OK, so that's the monopsony effect. What about the rent attribution effect? How much comes from-- I guess the way I'm understanding it is that there's some monopoly pricing in product markets. And that produces some excess profits. And those excess profits could be distributed to capital or labor. And they're basically just distributed to capital.

Anna Stansbury: Yeah. So my gut is that part is more important in terms of the decline in worker power and probably in terms of the level of wages. I don't have a number for you. And this makes me think I should come up with one. But I don't have a number. But my gut is that's what's most important in terms of the decline in worker power. And that's what we were arguing in our paper. Basically, the idea is that when you had strong unions and you had a strong legislative environment around workers being able to share in the rents of firms and strong norms around workers being paid well at firms that made lots of money, because norms also matter, not just policy. At that point, there were lots of workers working in very profitable firms who were able to share in the proceeds of those profits, basically, of that product market power. And that the unions have declined, the legislative environment has become more hostile to workers. And the norms have basically eroded. Plus, you also have this extra dynamic that a lot of workers are no longer employed by the really profitable firms. Think about in the 50s, a whole bunch of workers without a college education were employed by the big manufacturing companies. But now, the really profitable firms are the tech firms that are not directly employing any of the low-wage workers. So you've got fewer mechanisms by which workers can share in those product market rents. And all of those changes, to my mind, is explaining a large part of this decline in the labor share.

Ben Zweig: Interesting. That's such an interesting last bit. So let me see if I understand this. So now, the profitable firms, the ones who have the most product monopoly, are the ones who are most skill-biased, or they're the ones who are employing the highest earners. So even if there were some profit allocation to those workers, it wouldn't help the lower-wage workers, because they are in the firms that don't have profits. They don't have a lot of excess profits anyway. Is that the case?

Anna Stansbury: Exactly. And this actually is where I think the focus on the-- I mean, I have focused on it too. But I think the focus on the labor share is not actually as interesting as focusing on something that you might call the bottom 95% labor share, or the bottom 90%. Make your cut wherever you want. Because as long as the labor share declining, there's been a massive-- as we all know, there's been a massive increase in labor income inequality within labor. And so part of this, we'll think, is that we know that top executives, but also highly paid professional and managerial workers, are still sharing in those product market rents. It's just that the rest of the workers no longer are. So a really good example of this might be thinking about a company like Apple, not just single them out, but because their production system is interesting on two dimensions. One is Apple is not employing the people that are manufacturing its products. Apple is outsourcing the manufacturing and buying the components and the products and the manufactured iPhones. And the people that actually work at Apple, which is where the profits are, which is where the brand and the IP are, are all highly skilled, highly educated people. So they're the ones that are able to share in the rents, but not the manufacturing shop floor workers, who aren't even in the US, but they're not able to share in that. And then there's also this other piece, which is Apple also doesn't... I don't know about Apple, but companies like Apple, companies like Goldman Sachs, also don't employ anymore their own sort of domestic low wage workforce, like janitorial workers, security guards, the people that do operate the canteens and serve food. That's typically also outsourced. And so in the past, you would have had a janitor at Eastman Kodak, who would be sharing in the rents of the Kodak company, and now the janitor is employed by a janitorial services company, and they're not anymore sharing in those rents. So you've got these two channels that have happened at the same time to make the most highly profitable firms of our age, the ones that really don't directly employ any low wage workers.

13:43 Fissuring and the outsourced workforce

Ben Zweig: Yeah, it's such an interesting phenomenon. So let's say that is the story. I mean, that sounds like companies can fragment however they want. That is something that doesn't sound like there's an obvious way to counteract that. If it's more efficient to use a contracting janitorial service or whatever, that seems like there's no way to reverse that. So do you have any... I mean, first of all, is that right? And also, if that's right, then do you have any sort of policy proposals in mind?

Anna Stansbury: Yes. So firstly, I think that is partly right, but not the whole picture. One of my favorite books of the last decade-ish, I think it came out in 2014, is David Weil's book, The Fissured Workplace, which is... David Weil, as but for listeners, is an economist, but also was the administrator of the Wage and Hour Division at the Department of Labor in the Obama administration, and has seen firsthand how firms change their employment structures in response to labor and employment law. And this is really important because some portion of the outsourcing decision of firms, "I'm not going to employ my own janitors anymore. AT&T is not going to employ the people that climb the cell phone towers to fix them anymore. We're going to outsource them to other companies." Some portion of that is, as you said, Ben, it's efficiency. We focus on our core competencies. They focus on their core competencies. We are a software company, not a cleaning company, right? But some portion of it is that in the US, basically the entire legal framework around who has to provide rights to workers and who has liability for problems that happen with workers is a direct employer. And so by doing this fissuring, as David calls it, or by sort of fragmenting who is the actual underlying employer, it is a way to outsource and avoid that liability to some extent. There's also a piece which is not about the legal framework, but is about the norms. If you are, for example, a highly profitable tech company and you employ your janitors, it might be that people would think it was really problematic if you were paying your janitors the minimum wage when you are making huge profits. But if you just say, "Look, we're doing a competitive tender for janitorial services, and in the interest of efficiency and shareholder value, we're hiring the lowest price competitor, what they pay their janitors is none of our business." You've also got this kind of incentive to fissure to not directly employ to kind of circumvent the social norm of paying workers well if you're a profitable company. So I think the efficiency rationale is harder to tackle than the sort of legal liability rationale or the social norm shifting or avoiding rationale. And those latter two, I think there's a bit of scope for policy or public pressure.

Ben Zweig: Yeah, the social norms I always have such a hard time with because I think there's this common refrain in people who care about social issues to think it's kind of abhorrent to hire people who don't work in the best conditions and all that. And I think what that sometimes comes out to is an inadvertent advocacy toward boycotting the poor, which is so backward. So I think there's some disconnect that I don't know how to think about or address. But on this point about fissuring,

17:15 Does fissuring weaken monopsony power?

Ben Zweig: You might think that the more fragmentation of the firm's labor market participation, the better, the less monopsony power. Because, well, I mean, even as I'm saying it, I'm thinking that the monopsony power is probably very siloed by specific labor market they're in. But it still seems that it's kind of like breaking up firms in a way and how they relate to labor markets. And we think about breaking up firms as a way to reduce market power. Yeah, what do you make of that?

Anna Stansbury: Yeah, I think that's a really interesting one. And in some sense, it's going to depend on what market. So to give an example where I think it's the opposite, the security guard market in the US is really interesting. It's been massively-- so the kind of trend towards companies employing security firms to provide security guards started many decades ago. Most companies who have security guards don't hire their own security guards. They hire a security services firm. And you can think about all sorts of reasons why that might be efficient, to your earlier point. There's a certain expertise in providing security. But the security guard market has now gone through a massive consolidation in the US in the last roughly 15 years, such that there are basically two really large employers of security guards now. So if you look at-- among security guards, security guards are one of the most concentrated occupations in the US geographically. Because in most locations, security guards are only employed by two large employers and then a handful of very small ones. In that situation, you've actually got a massive trend towards monopsony power, because you're fragmenting a firm across occupations. But for a worker that's a security guard, what's relevant is not whether you're working for a large factory. It's whether your employer, who is a security guard services firm, is the big one or not. So you've got trends going in opposite ways there.

Ben Zweig: Yeah, but then that firm-- let's say there's one massive security guard firm. They have monopsony power, but they also have monopoly power, because their product is also the labor. So then we're back to this question of how is that distributed?

Anna Stansbury: Yes, completely. That's true as well. So in theory, they could extract rents as monopolists that then they distribute to the workers.

Ben Zweig: Yeah, but they don't do that.

Anna Stansbury: No, so it's interesting. There's actually been a paper that came out very recently looking at the security guard industry and the effects of the mergers. And it doesn't seem to find big negative wage effects of the mergers. So quite possibly, the monopoly and the monopsony power effect kind of outweighed each other from the perspective of the workers.

Ben Zweig: Oh, interesting. OK, so that's kind of an optimistic story.

Anna Stansbury: Yeah, although, that story is only optimistic if you don't worry about the consumers, because of course, at the end of the day, if the mergers raise monopoly and monopsony power, then someone's paying.

Ben Zweig: Well, yeah, but it would be the firms that have fissured.

Anna Stansbury: True.

Ben Zweig: Yeah, I mean, I guess not all the firms that employ these workers are the ones that are fissuring to kind of extract value. It could be the firms that have no pricing power and are in a perfectly competitive market, or a more competitive market, and they're also paying the cost. So I guess the costs are like widely distributed, even though maybe the phenomenon is driven by these very profitable firms.

Anna Stansbury: Yeah, I agree with you. That's a good point.

20:46 Where is worker power headed?

Ben Zweig: OK, so let's say, I mean, I guess just going back to labor share. So if we have these phenomenon, like declining unionization, these changing norms, which are kind of driving these trends toward declining labor market share, declining worker power, then is that a kind of, do you think of where worker power is as sort of in some sort of equilibrium? Or do you think that there will be some reversion toward more worker power, or some continuation of this trend toward declining worker power? I mean, yeah, like how should we think about how the sort of link between labor share and productivity will behave in the future?

Anna Stansbury: Yeah, really good questions. So I would say if we think about the last 40, 50 years in the US, a lot of the big trends that have caused the decline in worker power have, in some sense, bottomed out. The biggest one, or got close to that, the biggest one is a decline in unionization. At the peak in the 1950s, a third of US private sector workers were unionized. Now that's 6%, maybe tiny bit less than 6 now. So it can continue to decline, but just from a macroeconomic perspective, it can't make that much difference if we go from 6 to 4. So that piece of the, and that's not just in terms of the workers themselves that are unionized, but if you're in a world where the threat of unionizing is strong, then that also gives workers that are not unionized power. And if we're in a world where it's weak, notwithstanding the fact there's been some quite prominent unionization in the last few years, like Starbucks and some Amazon warehouses, it's really not made a dent in the overall numbers. Overall, most companies are just not seeing workforces unionize, and they're not worried about the threat of unionization. So that piece of worker power is unlikely to change in the near future. I think the only thing that would really change it is a really big shift in the legislative environment, such that it's easier to unionize. And that seems very unlikely to happen. So that piece, probably not going to change. I think this fissuring piece that we talked about, there's probably still action that can happen there. And there's another interesting angle on that, which is some part of workers' power, which is the, especially the power that comes from being able to act collectively, comes from actually being able to see your coworkers and know them and work with them. So there's an interesting, I think, trend technologically enabled by just-in-time scheduling and shift work and people working. So for example, like gig work is a good example, where people aren't even employees, but you're working separately and independently. There's, I think, technology-enabled trends that are happening that are reducing the kind of collective ability to organize and exert power more. So you can see that happening a little bit more, but probably a lot of that margin has happened already. So I think the big thing that we don't know about that might change is what's going to happen with AI and technological change over the next decade. How is that going to affect this worker power piece?

24:04 Union law across countries

Ben Zweig: Yeah. Okay. So before we get to AI and technology and how that affects it, I would think that if there's some technological reason that affects someone's ability to organize, that seemingly would be in effect across all countries. So do you think that this decline in unionization that happened in the US, do you expect that may start happening across the globe?

Anna Stansbury: So, okay, this is a really interesting in the weeds piece about how union law works in different countries, but actually it really matters. So in the US and the UK, several other countries, the process of organizing a union legally is at the level of an establishment. So you work at a specific McDonald's in a specific place. And if you get a you and your coworkers vote to unionize, then you form a union and that union represents the workers at that establishment to bargain with McDonald's or with the franchisee. That means it's difficult to organize and it's difficult to maintain a high level of unionization. Because if this cafe goes out of business, but this one, new one starts up, has to be newly organized and no collective agreement that is bargained in one establishment applies to anyone else. In many countries in continental Europe, collective bargaining happens at a different level. So for example, in Germany, you have collective bargaining happening at the level of a sector within a region. So you've got the entire metal manufacturing sector where the unions and the firms all come together and they negotiate their agreement. And then the agreement applies to all the firms that are part of that employer association group. And so it doesn't apply to everyone in Germany, but in practice it applies to a very, very large share of the sector. And so it matters less if you have the ability for the individual workers at the individual establishment to organize. So it will play out everywhere, but how it will affect worker power will depend on the underlying legal framework that it interacts with.

Ben Zweig: Yeah that framework, I mean, I think on the one hand seems like less vulnerable to decline, but there's also something that I'm finding like a little weird about it. Like if it happens at the industry geography level or sector or whatever it is, then it's sort of got a mix of occupations. And the labor market at least wages, I would think would be hugely determined by occupations. So you have this like, this kind of union that's negotiating wages across like a variety of different occupations. And then if there's another industry, they're going to have some overlap of occupations. So they're sort of like going to compete in a way where if you have occupation A in industry one and occupation A in industry two, like they're competing. So that seems like they don't have a lot of bargaining power. But also, as we're getting to AI and technology, I would think that like the what the work that's involved in each occupation is probably going to change quite a bit. And it sounds just kind of harder to maintain. If there's a mix of occupations, if the work inside the occupations, if the returns to different like skills within those occupations change, like there might just be a lot of changes happening within that set of like industry geography. So it sounds really tough to maintain to me. I don't know. What do you think?

Anna Stansbury: Yeah, I agree. And I mean, yeah, the downside of this system is it becomes immensely bureaucratic by definition, right? Because every one of these collective agreements has to negotiate lots and lots of different minimum wages effectively for all these different occupations. And then to your point about there being many occupations that span industries, basically what happens is they'll typically be a sequence where the kind of export oriented industries will go first and then the others will follow them and maybe match it, but we'll sort of respond to it. So everyone is having to respond to and follow the agreements negotiated in the other sectors. But it does, so it does mean that in that sense, it's quite hard to respond to technological change because you've got this kind of every two or three years bureaucratic negotiation apparatus that has to happen within every industry. On the other hand, you have more of an ability to respond than if things were done legislatively. So if you're comparing it to a purely competitive market, definitely slower, more bureaucratic. If you're comparing it to a world where we're saying national government or state governments or whatever should be regulating this stuff, it's probably much quicker and more responsive to technology. There's actually a quick plug for Sarah O'Connor's book, We Are Not Machines, which you may or may not have heard.

Ben Zweig: She's coming on the pod to discuss it soon. Yeah. No, I just got an early copy. I haven't read it yet. So no spoilers.

Anna Stansbury: Well, I'm going to give you a spoiler because she might discuss this on the podcast, but there's a perfect example of what you're talking about, which is there's a case study of a mine in Sweden where the AI, the introduction of Wi-Fi into mines plus driverless driving technology has enabled the cars that are in the mines to be driven remotely. And the drivers of the mine cars that used to be the workers that were down in the mines are now operating them remotely from a control room. And there was a big debate between the employer association and the union about whether these workers are still blue collar workers because they're now sitting in an office operating the mine cars with a computer rather than sitting in the mine and that affects which collective agreement they're part of and therefore what their pay is. And so exactly what you said is happening. It is very difficult how to reclassify people.

Ben Zweig: Yeah, that's wild. I mean,

29:49 Bargaining as technology changes work

Ben Zweig: Yeah. Okay. I mean, we'll see what happens. Do you have a prediction on like, I'm like, what, what sort of paradigms will, will be able to persist in, in the future in 10 years, if you had to guess how many, how many like systems of, of wage negotiation would happen like through establishment level bargaining, through just perfect competition through sector level bargaining through legislation, like, do you think there's going to be a shift as, as technology continues?

Anna Stansbury: Yeah. I mean, I think my read is that the sectoral bargaining systems are relatively resilient and particularly the systems where workers are able to negotiate over more than just wages. So the Swedish case that we just mentioned, the workers have some, and Germany as well, the workers have some power to negotiate over how technology is introduced. And that I think makes the system more responsive in a way that the workers interests are, are kind of aligned with the firms, which is to be long-term profitable and productive, but in a way that smooths the transition for the workers. So I think I can imagine those systems largely surviving. I mean, a lot of these systems, you're still seeing declining union membership, but it's from a much higher base and much slower. I think the establishment level systems like the US and the UK, I cannot see a future that is anything other than continued declines in membership that is probably accelerated by these technological changes.

31:13 What are unions good for?

Ben Zweig: Yeah. Yeah. Interesting. So, so is that like, is that necessarily a bad thing or do you think, do you think there's something like, I guess, I guess when I think of unions, like when we learn about unions in like undergraduate economics, I think the way it's presented is that like, there's some firms that have monopsony power and they, they and then you have, you could have unions to kind of counteract that monopsony power and you have like anti-competitiveness on the firm side of labor markets and anti-competitiveness on the worker side of labor markets. And then they just like have this zero sum bargaining that to me seems just like very hacky. It's just like, all right, you have monopoly and then more monopoly and you're just like bargaining over like in this very zero sum way. And it just sounds like not that interesting. But then as you get deeper, you sort of like introduce this idea of like rent sharing, you introduce this idea of like just like, um, communication with management and advocacy and all that. So like, like, I guess in your mind, like, what are the, what are the best parts of unions that are worth like really caring about and protecting and what are the parts of unions that we just shouldn't really care if they decline.

Anna Stansbury: So many, okay, there are so many directions I want to go with this.

Ben Zweig: Yeah, yeah.

Anna Stansbury: Great questions. Yeah. So first kind of high level response to this is if we're just thinking about unions right now as bargaining over like wages and the conditions of employment, even if we just think about that piece, I think there are two possible worlds we could be living in or somewhere along the spectrum and how much you think unions are a socially useful thing depends very, very heavily on what you think is the underlying structure of the economy. So the first world is what I call the sort of small is beautiful world, which is it is possible to achieve a world of perfect competition like in our models. And in that world, if we had good antitrust policy and other good policy environments and no barriers to entry, we would have firms that are competing and they don't have product market power and they're competing for workers so they don't have labor market power. And in that world, unions are on the whole quite destructive if they are bargaining over wages and employment because they're raising wages above the competitive level, they're reducing employment, they're reducing efficiency. In the other world, which I call the kind of Galbraithian countervailing power world after J.K. Galbraith's book on the topic is a world where intrinsic to the structure of markets is market power. And it is not possible, even with the best policy in the world, to get rid of most market power. And that might be because there are increasing returns to scale. It might be because there are natural barriers to entry in many industries. It might be because there is always going to be some kind of brand loyalty and brand power that is going to give companies product market rents. And on the labor side, it might be because workers are quite immobile and they geographically and also across occupations and they have specific preferences and also because companies are quite large. And so there's always going to be monopoly and monopsony power. And in that world, as you said, in our Econ 101 logic, the unions can not only be beneficial from a redistributive perspective, but also not harmful from an efficiency perspective because they're countervailing their monopsony power. And so I think which world you think we live in really matters. And so basically, which we live in is a function of underlying technology, whether you think we live in a world with increasing returns to scale and all these things I outlined. I tend to think much of the economy is in that latter bucket, but not all of it. And so I had this paper actually recently that's just come out on unions in Norway when we're looking at what is the effect of unionization on firms with very detailed data on the firm's profits and prices and employment and all sorts of things. And we find both worlds are existing in Norway. Basically in the service sector, the lower middle wage service sector, you're seeing the unions do kind of Econ 101 outcome. They raise wages, it reduces employment, firms become less profitable. It's probably reducing efficiency. It's redistributing, but it's reducing efficiency. And in the manufacturing sector in Norway, which is highly specialized, quite large firms, high profits, you're finding the opposite. You're finding the real evidence that the unions are doing this kind of countervailing power thing. It's more efficient. They're also redistributing those. So which world you think we live in, I think really matters.

Ben Zweig: Yeah.

35:51 How much monopsony power is there, really?

Ben Zweig: So let me tell you what world I personally feel like we live in, not having done research on this, but I'm curious to hear your thoughts on it. I think I'm skeptical that there's much monopsony power because I think I just don't see it. Operating as a firm, I think when I talk to people who are hiring, I think just like on the ground, it doesn't seem like there's been any kind of, what's the word? Smoking gun that firms are being very anti-competitive when it comes to wages. And I think when I talk to hires, I think they just are desperate to compete on talent. There's all this talent hoarding. It's very, very competitive to compete on talent. So I think that to me, I don't know if I really buy, but this issue of persistent pricing power on the product side because of brands and just monopolistic competition and just differentiation and complex value chains and all this, I really buy that. I think every firm really has to have some unique ability to provide value where they can extract some value beyond what's perfectly competitive. Now, I don't think that necessarily has to coincide with barriers to entry. I don't really believe there's barriers to entry, but it's just hard to develop a reputation and produce enough value. So yeah, it's hard to get big and you can only be very profitable when you're big and have a reputation. So I guess that's kind of my view of the world. I don't know. What do you think I'm like, what would you disagree with or agree with on the margin?

Anna Stansbury: Yeah, I think we're not that far apart, frankly. I think, as we said earlier in the conversation, relative to some estimates, I think I'm on the side of there being not as much monopsony power as some people think. And it's funny because that's actually changed. I started working on this topic in about 2018. When I was first putting out my results in employer concentration, I was saying, "Oh, look, employer concentration can reduce wages by whatever, 3% to 5%." And people were saying, "Wow, that's big. That's more than I expected. I thought the labor market was competitive." Now I present exactly the same results and people say, "Wow, that's small."

Ben Zweig: Yeah, I think that was my reaction when you said it.

Anna Stansbury: Exactly. So I think the average belief on this has shifted very fast in the last 10 years. So I think I'd be close to, I think there's more power on the product market side than the labor market side. But I do think we have quite good evidence on the labor market side, particularly for people as they get older and their skills are more specialized and they're less geographically mobile. So you do have this time dynamic over the life cycle where young workers are probably subject to the least monopsony power.

Ben Zweig: Yeah, interesting.

Anna Stansbury: Highly skilled, highly mobile workers geographically, but probably the people that you're hiring also probably subject to the least monopsony power.

38:59 Class and careers in economics

Ben Zweig: Yeah. Yeah, no, I mean that kind of like, the market we're in is the market for economists, which you've also written about the persistent effects of class in economics. I mean, that's a good segue. So I was so interested to read this result because, I mean, class is not like a major thing that gets talked about in the US, I think. But it seems like there's a real effect of just like socioeconomic status. How would you characterize what we see and why?

Anna Stansbury: Yeah, so I have been working on this topic because I come from the UK, we think about class and class background quite a lot and came to the US and it was quite jarring to me that people didn't think about it a lot, frankly. So what I see is that I think in the US people think about the effect of socioeconomic background is mattering a lot for how well you do at school, whether you go to college, what college you go to, maybe the first job that you get after college, and then after that, it's washed out. Your educational attainment has washed out any lingering effects of your background and you're now succeeding on your merit. And we think about that, by the way, very differently in the US about race and gender, where people still think those qualities or identities matter later. So what I'm finding, I found in academic careers, I'm also found in another tech company setting in the US, the paper is not out yet, but it's coming soon, is that actually it still really does matter. So you compare people who did the PhD in the same program but came from different socioeconomic backgrounds and you see very different academic career outcomes, where the people from advantaged backgrounds are more likely, among those who stay in academia where we have the best data, are more likely to get top tenure track jobs, are more likely to get tenure, and this is true even conditional on what they publish. So this is not like they're publishing better and that explains it, it is even conditional on that. Then in this tech company we're finding similarly, we're looking at people that are employed in the same job and we're finding that people from more advantaged backgrounds are more likely to get promoted than people from less advantaged backgrounds. So why would this effect still persist even into these elite spaces where people have gone to top colleges and done really well and made it? I always like to come back to the French sociologist Pierre Bourdieu who talked about different kinds of capitals that people have. So as economists we often think about financial capital, you know you're bestowed with some wealth or income from your family and that affects your outcomes and that affects what college you go to. It might also affect later things like can you take an unpaid internship that gets you into a job or can you afford to move to a city for a good job. But on the whole, once you're already in these elite spaces, the effect of financial capital is maybe more smoothed across people. But there's also the other two capitals I think are really important which is social capital and cultural capital. So social capital in Bourdieu's term which is different from Putnam's social capital and it's confusing is basically networks. Who do you have access to through your family, your friends, your connections and how can they be helpful for you. And then cultural capital which I think is the most interesting because I think is the one that's talked and thought about the least is like the modes of behavior, habits, hobbies, ways of speaking, ways of addressing that are perceived as high value and give you high status in the context that you're operating in. And that is definitely bestowed into you by your family, your schooling, your background and can be really valuable in later professional settings. And we're finding that part matters a lot in both the settings we're studying in the US.

Ben Zweig: It's so interesting. I mean I think it really rings true in a way where you know I think very often you know the way that someone presents themselves I mean it gives you a tremendous amount of information about who they are and how they think. And you know there's I think some vibe that if someone you know speaks like they're from an elite group you know and like has grown up knowing how people behave in elite society you know then there's someone you can like put in front of anyone. You know there's like there's something that is valuable in kind of hiring someone like that or working with someone like that. Or maybe you know you sort of you know by partnering with someone like that you expect to sort of you know tap into their network to the extent that cultural and social capital are correlated which I expect they are. So it's like so do you think it's like really a latent characteristic of the of the worker that it's like coming from the supply side of labor markets and less about demand? Or do you think there's also some demand element where you know maybe employers just have some preference for you know people who are kind of high status that is less about like their capabilities?

Anna Stansbury: Yeah I think this is so interesting to disentangle and my you know this is where we're going to have to get into the realm of speculation rather than hard data. I think it's going to be both. So the demand side I think is that I think our judgments of quality is very easy to conflate with these other proxies, these other kind of social capital proxies. So for example in academia which is one of the settings I've studied right but I'm also in it so I see it all the time. You're judging people's work partly based on, you're judging people's quality as a researcher partly based on reading their papers and seeing their work. But in very large part you're also judging it based on I see them give a 20-minute presentation at a conference or I talk to them in a networking drinks at the conference and I hear them talk about their research and I hear them talk about other stuff and I make some judgment about how brilliant they are. And I think our judgments of brilliance and polish and professionalism and competence are all things that are kind of coded in slightly cultural and socio-economic ways. And I mean that's very obvious to me in the UK because in the UK like these markers of class are very much more obvious than in the US for example accent. But I think this is also true in the US. So I think there's some extent to which just the less objective it is to judge quality of someone's work the more you're relying on these proxies and these proxies can be viewed through these lenses that are biased by cultural capital type things. So I think that's part of it. Then I think there's part of it on the demand side which is it is easier to work with people that are like you. And that is true on many dimensions but it is also certainly true on like wow we get along so well we can talk about the same hobbies we both went skiing in Utah in the spring like whatever it is right that's easier. And so in the academic setting we see that people are it's already well known that people are more likely to co-author with people of the same gender or the same race. We also find that this is true for people of the same socio-economic background. So it just seems to be true that there are less barriers to interaction if you're from the same background because elite spaces are full of people from elite backgrounds that's going to bias against people from non-elite backgrounds as well.

Ben Zweig: Yeah it's such a fascinating topic. I mean I can't wait to see like what you uncover with this because it's like about time for this conversation to come to the US. It's so rich and interesting.

46:06 The case for a 4% inflation target

Ben Zweig: I know we're like we don't have a lot of time. Do you have a hard stop?

Anna Stansbury: I don't have a hard stop.

Ben Zweig: Okay cool. There's something that's like a little bit off the beaten path but I heard in an interview that you did with Scott, I'm forgetting his last name, but you had done some really early work pre-academia arguing for a 4% inflation target. Is that right?

Anna Stansbury: Yeah that was in my master's.

Ben Zweig: What is the best argument for that? Because I'm so curious about this topic but I'm curious to hear your take.

Anna Stansbury: It was so interesting and it's interesting also because I think having seen how much people hate inflation my take has probably changed on it. So this was a popular argument in I would say like the mid 2010s in a period because

Ben Zweig: Of the zero lower bound.

Anna Stansbury: Zero lower bound exactly. Yeah. So the idea of the 4% inflation target is if you have the zero lower bound on nominal interest rates then when the inflation target is too low you can't bring real interest rates that much lower because if the nominal interest rate is zero then the real interest rate can at its lowest go to minus 2% and if you're stuck in a really depressed economy or a secular stagnation economy you might want to push the real interest rate lower than that but you can't. So if you have your inflation target at 4% you've got inflation running at 4% you can push it lower. So the basic argument there is just about it's enabling economic stimulus in times of recession or depression or secular stagnation. And I think there's a second interesting argument which is you know to the extent that inflation greases the wheels of the labor market because it enables you know one of the problems we think about why unemployment rises during recessions and why sectoral reallocation is difficult is that people don't like nominal wages falling. So if you've got a higher baseline level of inflation that enables real wages to fall without nominal wages falling and so that enables more of this relative price reallocation across sectors and also relative wage level falling which enables less smaller increases in unemployment. So I think both of those were the kind of good arguments for it.

Ben Zweig: I think that second argument is so powerful and underrated because like if you believe I mean one way that I sort of thought about it is that like oh to the extent that you have this like you know Keynesian sticky wage type model then of course like you know just regular you know wage inflation is like going to you know make it more possible to decrease real wages which will allow the market to clear. But I think it gets even more powerful when you think of the labor market as like a lot of different tiny labor markets where they're all kind of like you know demand is falling in a bunch of them at any moment in time even during an expansion period. So it makes me wonder like how much of the like unemployment rate that we think of as more structural is actually just cyclical and due to sticky wages but just like cyclical within it's like very tiny subset. So I wonder if there could even be like a lower you know natural rate of unemployment with like a higher inflation target. I don't know, what do you think?

Anna Stansbury: That's a really interesting point because you have these effectively sector specific demand shocks or recessions that are causing this and because sectoral reallocation is difficult for workers. Yeah I think that's a very compelling argument. It makes me want to measure it.

Ben Zweig: All right go for it go crazy.

49:33 Does class persist across generations?

Ben Zweig: So maybe that could be revisited at some point. Okay so oh yeah actually one other thing I wanted to say about mobility that just kind of makes me think of class. I know we're like going back but just like to bear with me on this. So when I was doing work on mobility you know everyone like measures these intergenerational coefficients of income and you know you get like point four or something you know where you have like the relationship between income you know in one generation and income in the next generation and like it looks like there's a lot of independence. Like like basically you know you know new generations can kind of like you know be quite mobile but then um you know Gregory Clark the economic historian wrote this book The Son Also Rises, S-O-N where he shows that like if you look at like last names across like many generations um he can like back into intergenerational coefficients that are like 0.98 or something you know some enormous you know persistence. It just made me think that there's like some class thing that persists and you maybe have like volatility every generation because you know maybe people that are like high status take on some profession that's not highly paid but otherwise high status or like you know pursue status in other ways but still kind of keep that socioeconomic status latent thing and then but like their children are high status and then go up to high wages etc so you have this like volatility intergenerationally but you have this like long persistent like latent status marker. I don't know what do you what do you make of that? Do you think do you think socioeconomic status is immobile in that way?

Anna Stansbury: Yeah it's a great question and I have to say I haven't I haven't engaged so deeply with Clark's work and some of this are the really long-term work so I don't have a kind of deep take on it.

Ben Zweig: I mean I love it I would recommend the book but I also think that like you know you don't have to like it's pretty simple like I think if you hear one talk I think you basically get the gist.

Anna Stansbury: Yeah no but I think I mean the questions I have about it affect my interpretation but I think one thing I would say is I totally agree with your point about this kind of generation to generation to generational mobility coefficient almost certainly underestimates it for the reasons you talk about right like think about all the kids of rich people that go off and become artists or teachers but their kids still have their kids still have access to the cultural and social and financial capital of the grandparents generation and the parents generation right so I'm sure we see much more mobility from one generation to the next than we see over the longer run. I think one of my one of the questions I'm really interested in is this just true of the elites or is it also true throughout the whole society? I can totally imagine and you see in the UK through surnames having not read Greg Clark's book but you can just see it right that there's still a disproportionate representation of people with Norman origin surnames in the like elite tiers of UK societies that's a thousand years of persistence but I don't know that I necessarily believe that's true within the rest of the strata of society and that's what I'd love to understand because I can imagine more how elite status can persist than how sort of 20th versus 40th percentile status can persist.

Ben Zweig: Yeah yeah I mean as you're mentioning that it also makes me wonder if you can sort of look at the extent to which people choose last names like you know when that happened you know in like the immediate post-war period when someone would like I think my family had the last name Zwick which was like a Polish version and then like chose Zweig I think when coming to New York and Ellis Island because like at that because it was like more German and I think it was like fashionable to be German to be like German-esque. I think so yeah it was just like the more elite version of it so I don't know like to the extent that people like select into high status names I wonder if that signal is like you know if it's really if you can use that to somehow disentangle like real signal versus kind of like you know sort of artificial signal.

Anna Stansbury: Right like adopted yeah borrowing from yeah that's really interesting.

54:01 What Studs Terkel's Working teaches economists

Ben Zweig: Yeah but I guess even the even the desire to kind of like level up your signal is probably yeah I don't know I don't want to get too in the weeds to this. But thank you so much I have one final question for you. So you were the first one I heard recommend this book Working by Studs Terkel or even this like radio series and it's so fun it's like you know he talks to all these like you know people about their profession and I loved it so thank you for that recommendation and as you are going through all this research like what have you learned about like hearing about people's specific jobs and like their day-to-day and what would you still like to learn about that?

Anna Stansbury: Oh great question yeah I love the book Working and actually at some point I was doing a bunch of interviews to try and write a new version of that but that kind of fell by the wayside and I never did it.

Ben Zweig: Please do or someone should it really needs to be done.

Anna Stansbury: But in my MBA class I get all the students to interview three frontline workers from the industry they're focused on so I end up as well as talking to workers myself I end up reading a lot of interviews with workers. I think one of the things that I and a lot of people persistently underestimate is the combination of how much meaning and value people get from the ways that they make other people's days better in their work whatever that work is like I've interviewed a tugboat driver in New Orleans and you know frontline retail sales workers and all sorts of kinds of people who get real like deep value from being able to provide that service for other people but also on the flip side of that how much the interactions between a worker and their manager their co-workers and the customers can make or break the job and so particularly how hard service sector jobs are because of how rude and unkind a lot of people are to service sector workers and I think that piece of it you know as economists we're so often thinking about like things we can measure which is wages and benefits and hours and but actually the human dimensions of the job is what gives it meaning and joy and also what can make it really awful and so those pieces I think about a lot in terms of what I still want to learn I think those questions become even more important with what AI is doing to work right like trying to understand what sources people where people are going to get meaning and dignity and identity from as their work is changing that piece feels crucial to understand

Ben Zweig: Yeah there's so much so many cool things to study and learn and I'm and I'm excited about your upcoming research so for any listeners check out Anna's upcoming research and also you have a great twitter presence so props on that so um so follow on twitter um yeah thank you so much for being part of the show

Anna Stansbury: Thanks Ben this is a great conversation thanks for having me

Ben Zweig: The Economics of Work is brought to you by Revelio Labs workforce data for research and benchmarking if you enjoyed please remember to rate review and subscribe it'll help us reach other curious listeners I'm your host Ben Zweig our producer is Cole Wagner thanks for listening