Call & Times

Don’t blame business for slow wage growth

AS OTHERS SEE IT Don’t allow ad targeting to become discrimina­tion

- By MICHAEL R. STRAIN This editorial appeared in Sunday’s Washington Post: Strain is a Bloomberg Opinion columnist. He is director of economic policy studies and resident scholar at the American Enterprise Institute.

Bloomberg Opinion

Are wages determined by market forces, or do businesses get to decide what pay they offer to workers?

This question gets at the heart of a lot of the debate about the economy. Why has wage growth been so sluggish for so many years?

If you’re on the market-forces side of the wage question, you might answer that productivi­ty growth has been weak. If you’re on the side of the debate that believes corporatio­ns have considerab­le power to pay workers what they want, thwarting market forces, then you might answer that employers have made the decision to boost profits at the expense of raising wages.

Of course, few people – and even fewer economists – believe that one factor or the other has no role at all in the determinat­ion of wages. But it is common to hear some prominent analysts and organizati­ons on the left argue that the link between wages and productivi­ty for most workers has effectivel­y been severed for decades. Likewise, many on the right quickly dismiss the importance of non-market factors in explaining wages.

Let’s focus on typical workers and on low-wage workers. For them, the standard story finds businesses competing for employees, driving up wages to the point that workers are paid according to their contributi­ons to the company. Businesses don’t pay employees less than the value of their productivi­ty – the amount of revenue workers generate for their employer – because doing so would result in their workers taking another job where they would get paid what they’re worth. In this sense, employers don’t “decide” what wages they pay. Instead, wages are set in markets.

Not so fast, say many economists and commentato­rs. This story leaves out some important, and recently much-discussed, corporate policies that allow employers to pay workers less than market wages.

Over the summer, more than a dozen major restaurant chains – including McDonald’s, Applebee’s and Jimmy John’s – removed “no-poaching agreements” from their contracts with franchisee­s. These agreements prohibit

Discrimina­tion against women in hiring was outlawed a half-century ago. But there was no Internet in 1964. Now, advanced technologi­es allow advertiser­s to target segments of the population based on their interests or characteri­stics. And Facebook is facing a complaint from the American Civil Liberties Union and others for letting employers use its system to exclude women from seeing job postings.

When businesses book an ad on Facebook, they may choose whether they want both sexes to see it or only one. They also select their audience from a curated menu of characteri­stics and interests that Facebook has identified among its users, some of which are highly correlated with gender. The effect, the ACLU argues, is the exact sort workers at one McDonald’s restaurant, say, from getting a job at another McDonald’s franchise. These agreements are surprising­ly common among lowwage employers, and they may act to put some downward pressure on wages by thwarting the competitiv­e market mechanism through restrictin­g the options workers have to shop around for a different, higher-paying job.

“Non-compete agreements,” in which workers agree not to join or start a rival company for a certain period of time after leaving their current employer, are a similar policy. These agreements make sense in some situations for “knowledge workers” and executives who possess considerab­le intellectu­al assets regarding their current employer. So it may not be surprising that over 60 percent of CEOs and 4 in 10 engineers have a non-compete.

But the evidence suggests that about one-fifth of all workers, including lower-income workers, are covered by a non-compete arrangemen­t as well. This is harder to understand. And again, by restrictin­g workers’ options, these policies may be suppressin­g wages somewhat.

I applaud the end of no-poaching agreements in restaurant chains and do not see a valid reason for non-competes to apply to lower-wage workers. In general, I’m am all for making labor markets more competitiv­e. But I’m skeptical that these corporate policies are having a major effect on the earnings of typical and low-wage workers.

How often are such agreements enforced? And if a McDonald’s cashier can’t get a job at another McDonald’s down the street, why can’t he just go to Burger King? It’s hard to imagine that these restrictio­ns are significan­tly lowering his wage. And there is little evidence to show they do.

This is not to say that frictions in the smooth operation of the competitiv­e market mechanism don’t give employers some power over the wages they offer. But the most important frictions are not driven by corporate policies.

Mobility costs, for example, are much more important. It costs time and effort to change jobs, and takes money to move to a different city for a better job. This gives employers some power over wages. For example, a business of discrimina­tion civil rights acts aimed to outlaw. The advocacy organizati­on is far from alone in its unease: Facebook also faces litigation over housing, credit and employment discrimina­tion based on the targeting of users’ ethnicitie­s, religion, age and more.

Facebook’s policies forbid discrimina­tion, and in the course of confrontin­g these lawsuits, the platform has adjusted its practices, particular­ly in the areas of racial, ethnic and religious profiling. The company no longer allows employers to exclude users from the targeted audience of employment, housing and credit ads according to what it calls their “multicultu­ral affinity” – essentiall­y, interests and behaviors that Facebook attaches to sensitive identifier­s. Yet housing advertiser­s can still use attributes such as users’ Zip codes, which can cut out racial minorities, or they can pick from other could keep wages for some workers below their market level if those workers don’t want to incur the costs of changing jobs. Another critical factor is the lack of informatio­n workers have about what they could earn elsewhere, which likely reduces mobility.

Government­s have thrown a wrench in the market machine through the absurd proliferat­ion of occupation­al licenses, reducing wages for workers who can’t get a license and restrictin­g the mobility of licensed workers. A recent study finds that the rate of migration across state lines for individual­s in occupation­s with state-specific licensing requiremen­ts is over one-third lower than among individual­s in occupation­s that don’t have such rules. A general decline in labor market dynamism and in the prevalence of unions likely both increase employer power over wages, as well.

Despite these important factors, in my view worker productivi­ty remains the dominant force in setting wages. For one, mobility costs and similar factors are much stronger in the near term than over longer periods of time. It may be hard for me to move my family across the country, but it’s relatively easy for a recent college graduate without a spouse and kids or for a newly arrived immigrant to do so. And intuitivel­y, there is a limit to how far an employer can push its wages below the market wage. Over time, that business will find it hard to hire and retain workers, and to get them to put in a hard day’s work. Market forces are powerful.

A recent paper by economists Anna M. Stansbury and Lawrence H. Summers of Harvard confirms this. They find that over the last four decades, a one-percentage-point increase in productivi­ty growth is associated with a 0.73 percentage point increase in the growth rate of median compensati­on. That’s a strong link.

Such evidence is dispiritin­g for those of us who want wages to grow faster. It’s much harder for government policy to juice productivi­ty growth than to clamp down on anti-competitiv­e corporate practices. categories that Facebook continues to offer to achieve similar goals.

With regard to gender, the situation is more troubling. Facebook invites employers to exclude women wholesale every time they set up an advertisem­ent. Facebook says the ACLU’s suit fails to prove that the companies it cites are actually discrimina­ting because complainan­ts cannot see the totality of their recruitmen­t; they may well be running other campaigns directed at people of all genders. But that does not change the reality that Facebook’s systems are set up to facilitate discrimina­tion should an advertiser decide to carry it out.

Facebook’s targeted advertisin­g system is the company’s secret sauce, but others such as Google and Twitter use similar tactics. It would be unreasonab­le to ask these sites to remove tailoring from their ad platforms altogether.

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