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What monopsony power in the labor market looks like, by Scott Sumner

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In previous comment sections, I've seen a lot of confusion over the concept of "monopsony power", which means the buyer can influence the price of what they buy. It is the buyer side equivalent of sellers having "monopoly power".

Many people seem to assume that only monopolies have monopoly power. Not so, most firms do. If your firm can raise prices by 1 penny without seeing sales drop to zero, then you have monopoly power. And if you can reduce wages by one penny per hour without losing all your employees, then you have monopsony power in the labor market.

That's not to say perfect competition is not a useful model, it's is a good approximation of reality in some contexts. But it's becoming increasing clear that monopsony power is more than a minor characteristic of the labor market, it gets to the heart of the current issue of labor shortages.

Rick Newman of Yahoo.com did what I've been calling on reporters to do, in depth interviewing to see what a "labor shortage" involves. He decided to interview a small manufacturing firm in Indiana, to get a sense of how there could be a shortage of labor. I'd encourage you to read the entire piece, as it beautifully describes what a labor shortage feels like from an employer's perspective, when they have monopsony power:

And you've had a hard time finding workers lately?

The unemployment rate in my area is about 2%. [Indiana's unemployment rate is 3.6%, lower than the national rate, now at 4.3%.] We've struggled to hire office staff, entry-level, skilled and highly skilled employees. Almost every business owner around here is struggling to find help. Help wanted signs are posted throughout the community. We have three key positions open right now, which amounts to almost 10% of our workforce.

So this is not typical of America, it's a really, really tight labor market.

Are you paying more these days?

We have been paying more. Starting wages have gone up 20% to 30% in the last three years. At the entry-level, we've had to raise starting pay from $11 per hour to over $13 per hour. That's for somebody with little to no applicable skills, in need of significant training. For skilled workers, pay has gone from $14 or $15 to $18 to $20, and highly skilled, even higher.

That's also atypical; at the national level wages are rising less rapidly.

Our readers raise a reasonable question: Why don't you pay even more to get the people you need?

We will as long as it makes sense. If there was a direct correlation between the amount you pay somebody and the amount you're able to get as an output, including loyalty and dedication, simply paying more would be a no brainer, but business isn't just binary. Some businesses have price inelasticity, high fixed expenses and tight margins, and raising wages too quickly could greatly affect the company's ability to turn a profit. You can't just say, I'm going to raise labor costs without considering all the other variables that impact the business. . . .

What kind of workers are hard to find?

Right now in our area, all kinds, at all wages. We have struggled to find people from the front to the back of the business. Office workers, service workers, trades people, general labor, engineers, sales people. . . .

Getting people to show up is as important as getting people with skills. If you're absent, chronically missing work or always late, you are not protecting your job or concerned with your future at the company. It's hard to want to help those people. When the unemployment rate is under 2%, the people who are responsible, really good, valuable, are taken, so you have to figure out how to attract good workers from other companies. Many business owners and HR folks I have talked to feel there is a lack of dedication in the available workforce. I do see where some workers could say the same thing about employers. I know using temp agencies for extended lengths of time is rather popular right now.

That's what monopsony seems like from an employer's perspective.

As an aside, manufacturing is no longer concentrated in the old rust belt. Iowa is more of a manufacturing state than Ohio, and Nebraska and South Dakota are more manufacturing intensive than Pennsylvania. Here are the top five states, in terms of share of the workforce in manufacturing:

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Indiana has 3.6% unemployment, Wisconsin has 3.2%, and Iowa has 3.1%. That's the job market in America's most manufacturing-oriented regions.

Now I'd like to see a reporter interview unemployed workers in these three states, to get a sense of why they cannot find jobs. Maybe sit them in a room with a few employers, and try to get to the bottom of this issue.

Update: Rick Newman has another piece that explains why many workers are reluctant to move for a new job---distrust of companies who may later outsource their job overseas.

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11 days ago
Great read.

Silicon Valley: A Reality Check

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The nation has spoken: weird pointless $400 wi-fi enabled juicer company Juicero is the perfect symbol of Silicon Valley.

So says the Washington Post: Juicero Shows What’s Wrong With Silicon Valley Thinking. So says TechCrunch, which calls Juicero “the absurd avatar of Silicon Valley hubris”. So says Newsweek, which renames the area Silly-Con Valley in its honor. And of course there’s Deadspin, which calls it “the best story ever written about Silicon Valley… a stupid libertarian dystopia where investor-class vampires are the consumers and a regular person’s money is what they go shopping for.”

In case you missed it, Juicero was a startup that got $120 million in funding to manufacture high-end juicers which were supposed to be the bleeding-edge in juice-related technology. Then Bloomberg View did some investigative reporting and found that you could actually make juice equally well by skipping the $400 juicer and just squeezing the juice packets with your bare hands.

This is, admittedly, pretty silly. But I want to take a step back and suggest a reality check.

While Deadspin was busy calling Silicon Valley “awful nightmare trash parasites”, my girlfriend in Silicon Valley was working for a company developing a structured-light optical engine to manipulate single cells and speed up high-precision biological research.

While FastCoDesign was busy calling Juicero “a symbol of the Silicon Valley class designing for its own, insular problems,” a bunch of my friends in Silicon Valley were working for Wave, a company that helps immigrants send remittances to their families in East Africa.

While Vox was busy writing about how Juicero “says a lot about the state of Silicon Valley right now”, Silicon Valley was leading a revolution in solar power that’s resulted in a 1500% increase in cell installations over the past few years.

While Slate was busy telling us that Silicon Valley companies “repackage familiar ideas and sell them back to us as exemplars of Groundbreaking Disruptive Innovation”, Silicon Valley was shooting a fifteen-story rocket a hundred miles into the air at 4,100 mph, then landing it gently on a 300 foot platform in the middle of the ocean.

While Gizmodo was busy writing that this “is not an isolated quirk” because Silicon Valley investors “don’t care that they do not solve problems [and] exist to temporarily excite the affluent into spending money”, Silicon Valley investors were investing $35 million into an artificial pancreas for diabetics.

While Freddie deBoer was busy arguing that Silicon Valley companies “siphon money from the desperate throngs back to the employers who will use them up and throw them aside like a discarded Juicero bag and, of course, to themselves and their shareholders. That’s it. That’s all they are. That’s all they do”, Silicon Valley companies were busy inventing cultured meat products that could end factory farming and save millions of animals from horrendous suffering while also helping the environment.

Or maybe we should try to be more quantitative about this. I looked at the latest batch of 52 startups from legendary Silicon Valley startup incubator Y Combinator.

Thirteen of them had an altruistic or international development focus, including Neema, an app to help poor people without access to banks gain financial services; Kangpe, online health services for people in Africa without access to doctors; Credy, a peer-to-peer lending service in India; Clear Genetics, an automated genetic counseling tool for at-risk parents; and Dost Education, helping to teach literacy skills in India via a $1/month course.

Twelve of them seemed like really exciting cutting-edge technology, including CBAS, which describes itself as “human bionics plug-and-play; Solugen, which has a way to manufacture hydrogen peroxide from plant sugars; AON3D, which makes 3D printers for industrial uses; Indee, a new genetic engineering system; Alem Health, applying AI to radiology, and of course the obligatory drone delivery startup.

Eighteen of them seemed like boring meat-and-potatoes companies aimed at businesses that need enterprise data solution software application package analytics targeting management something something something “the cloud”.

And the remaining nine were your ridiculous niche Uber-for-tacos startups that we all know and love, including Cowlar (“FitBit for cows – it’s way smarter than it sounds!”); Origin (“Keurig for smoothies”), MoveButter, which compares itself to three different companies I’ve never heard of in its first sentence but seems to be grocery-related in some way; Mere Coffee, a better-tasting coffee machine for small businesses; and LitHit, a smart target for shooting sports. I’m sure somebody in the comments is going to tell me why FitBits for cows is actually a vital service that will revolutionize agriculture, but I’m trying to err on the side of caution here.

I’m concerned that Y Combinator might be so successful that they’re unique in going for status and do-gooding rather than being a real cross-sample of startups (and they also seem to recruit a lot of international startups from outside Silicon Valley). So I also looked at the first twenty startups in the portfolio of Andreessen Horowitz, a famous Valley venture capitalist firm. One of them seemed explicitly prosocial – some kind of science education partnership company. Four of them seemed high-tech or otherwise awesome – including the obligatory aerial-surveying-with-drones company. Twelve seemed to be some sort of enterprise data solution software application package analytics targeting management something something something “the cloud”. And only two of them seemed even a little vapid – eg this high-end photo sharing/printing site. Which is hardly that vapid – nobody would bat an eye at that if it were done by Kodak or Staples.

So although meat-and-potato business/software companies do outnumber really high-tech or altruistic ventures, there’s not a lot of evidence for silly Juicero-style startups being much of the Silicon Valley business community at all. So how come everyone thinks that they are?

Here’s my theory. If you’re an average well-off person, leading your average well-off life, consuming average well-off media and seeing ads targeted at the average well-off demographic, and going over to your average well-off friends’ houses and seeing their average well-off products, which are you more likely to hear about? A structured-light optical engine for cytological research? Or a juicer?

Or to put it another way: there’s a chapter in Unsong (spoiler!) where an archangel brings peace to the Middle East by splitting the Holy Land into two parallel dimensions. Any Jew who enters will find themselves in a united Israel; any Muslim who enters will find themselves in an independent Palestine.

And sometimes I wonder if the same archangel has gotten to Silicon Valley.

If a deeply good person crusading for a better world enters Silicon Valley, she’ll find herself surrounded by deeply good people crusading for a better world. She’ll see mobile apps that track tropical diseases, clean energy startups that fight global warming by directly sucking carbon dioxide out of the air, companies bringing microbanking to poor Nepalese villagers, and boutique pharmaceutical labs searching for cures for orphan diseases.

If a futurist enters Silicon Valley, she’ll find herself surrounded by futurists. She’ll see neural nets and deep learning, reusable rockets and flying cars, high-throughput genome sequencing and CRISPR, metamaterials and nanotechnology.

If a social-media-obsessed narcissist whose view of the world begins and ends with his own Instagram page enters Silicon Valley, he’ll find himself surrounded by social-media-obsessed narcissists whose view of the world begins and ends with their Instagram pages. He’ll see a bunch of streaming video services and Uber-for-hair-products apps and elite pay-to-play dating scams and people trying to disrupt the gymwear market.

And if one of those people who talks about “the cloud” all the time enters Silicon Valley, he’ll find himself surrounded by people who talk about “the cloud” all the time. I have no idea who these people are or what they’re doing, but they all seem really happy with each other and I’m glad they’re enjoying themselves.

They’ll all have their blind-men-and-elephant view of what kinds of things Silicon Valley “does”. And they’ll all be sort of right.

(thinkpiece writers: “Can you believe that Silicon Valley only makes products for shallow elites obsessed with the latest fads? It’s the strangest thing!“)

So I would recommend people stop talking about how Silicon Valley only makes ridiculous overpriced juicers. It’s not that it doesn’t make those. It does, just like everywhere else. A Facebook friend pointed out that QVC has been selling our parents ridiculous overpriced kitchen items since before we were born. Billy Mays pitched the EZ Crunch Bowl, which promised to “revolutionize your cereal-eating experience”. The unique thing about Silicon Valley isn’t that it’s got overpriced status goods designed to separate rich people from their money. The unique thing about Silicon Valley is that it’s got anything else.

I don’t want to downplay the problem. Anything remotely good in the world gets invaded by rent-seeking parasites and empty suits. Silicon Valley is no exception, and raising awareness of the infestation is certainly a public service. But for some reason, it’s hard for me to believe that – let’s say Deadspin – really believes in the spirit of Silicon Valley, really thinks that there was once somewhere that weird nerdy people could get together and produce amazing things for the good of everybody, and that to some degree this is still going on, and is a precious thing that needs to be protected. At its worst, some of their criticism sounds more like a worry that there might still be some weird nerds who think they can climb out of the crab-bucket, and they need to be beaten into submission by empty suits before they can get away. Or maybe that’s just paranoia. Fine, I admit I’m paranoid. But I still feel like people should lay off the criticism a little.

When Capitol Hill screws up, tens of thousands of innocent Iraqis get killed.

When Wall Street screws up, the country is plunged into recession and poor families lose their homes.

When Silicon Valley screws up, people who want a pointless Wi-Fi enabled juicer get a pointless Wi-Fi enabled juicer. Which by all accounts makes pretty good juice.

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2 public comments
42 days ago
«Here’s my theory. If you’re an average well-off person, leading your average well-off life, consuming average well-off media and seeing ads targeted at the average well-off demographic, and going over to your average well-off friends’ houses and seeing their average well-off products, which are you more likely to hear about? A structured-light optical engine for cytological research? Or a juicer?»
South Burlington, Vermont
44 days ago
I often feel like Slate Star Codex starts out with some decent points contrary to the conventional wisdom and then goes too far and over-corrects.

For example, it is true that a lot of genuine innovation comes out of Silicon Valley. And it is important to remember that there have always been stupid ideas growing in the field alongside the good ones. And the fertilizer (BS?) of the valley helps both grow. So to that point, SSC is correct.

But by the end, he seems to want to trivialize the problems of SV and exaggerate problems elsewhere. And that is just too far for me to follow.

When SV companies screwed up and made it easy to spread fake news and game their publishing platforms (like FB and Google did), they helped get a senile, authoritarian rapist access to the button. We can only hope that this will not lead to tens of thousands or more getting killed.

When SV companies screwed up, they did so alongside wall street helping spur the last two big business cycle bubbles and the recession (including families losing their homes) that accompanied them.

And many of the SV's darlings are explicitly rent seeking. Creating fake marketplaces that scams both sides for extra nickels and still can't seem to make a profit. Either mostly scammy like Uber or completely scammy like the fake health care analysis company that recently folded.

So it is a bit much to say that Juicero is somehow emblematic of everything that is happening in SV right now. But it is also an important signpost. Because a single bad idea might be rotten when it comes to harvest and only hurt a few investors and customers involved. But a whole crop of bad ideas all at once can bring about another recession or even undermine many of our longer term institutions which are crucial to keep our society together. We shouldn't overstate how important a high end juicer is. But we shouldn't trivialize the trends that it represents either.
43 days ago
You nailed his shtick perfectly – too much in love with the contrarian image

Uber’s Efforts to Bypass Nanny Regulators Lead to Federal Criminal Investigation

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Stop Uber protesterWhen The New York Times revealed in March that Uber had a secret tool that helped its drivers bypass municipal government nannies attempting to shut them down, I openly cheered the company on.

But now, Reuters notes, the Department of Justice is investigating Uber to determine whether this tool, called "Greyball," broke the law somehow. Reuters is short on details, unfortunately, as the investigation is in its early stages and the reporting is reliant on unnamed sources.

Greyball is a secret software tool within Uber's app that allowed the company to essentially create a ghost or faked version of its ride-hailing service. If there was a user of the app that the company didn't want to serve but they also didn't want the user to know, it could simulate fake cars and information. The user would request a ride that would never actually arrive, and he or she wouldn't know what was happening.

The utility of such a tool should be obvious to anybody who has been following Uber's conflicts with entrenched taxi interests. In some countries Uber drivers face actual violence from those who do not want to give up their cartelized government-protected domination of on-call transportation. Furthermore, ride-sharing services, just like taxi drivers, have to deal with dangerous people and frauds. If they know a particular person has threatened or harmed their drivers in the past, they have a good reason to quietly want to deny this person access.

But local government officials playing their role in protecting their taxi industry buddies also presented a threat and a challenge. In communities that blocked ride-sharing services (or declined to grant them official permission, to be a little more accurate), drivers risked getting fined and their cars impounded in stings from regulators. So the Greyball tool allowed Uber drivers to avoid these stings and avoid being punished or financially harmed in cities like Portland, Oregon, where regulators were actively trying to keep them from operating.

After the Times exposed Greyball, Uber has ordered that it not be used for the purpose of evading regulators. Now Uber has received a subpoena from grand jury in Northern California seeking information about Greyball and how it works.

Reuters notes that the revelation of the existence of Greyball "triggered a barrage of negative publicity" for Uber. Well, that's certainly not how it played out among those who see the reality of municipal regulation as a tool that protects select entrenched interests against competition.

The reality is that the negative publicity came primarily from those who are already outraged about Uber and the existence of Uber and the threat that ride-sharing presents both to entrenched commercial cartels and also top-down regulatory economic controls that originate from city leaders. From hotels to taxi companies, cities and companies have operated hand-in-hand in working out ways for both to maximize revenue at consumers' expense. The regulatory and taxation system guarantees a flow of money to the city. The system also serves as a massive barrier to entry for new businesses who can't afford to compete. And the consumer ends up paying more, while low-income citizens have fewer opportunities to make money.

Did you hear the recent story that Uber was tracking people's iPhones even when they deleted their app and was threatened by Apple over it? Those basics were factually accurate, but the reality was much more complicated and less sinister: They were trying to prevent fraud from people using stolen phones and credit card numbers. Read more about what actually happened here.

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Women’s Attitudes on the Gender Pay Gap May Surprise You

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By Emily Ekins of Cato.
"Today is Equal Pay Day, the day that marks how far into the next year women on average have to work to bring home the same income men earned in the previous year. In light of Equal Pay Day I published an op-ed in the Washington Examiner that looks at women’s opinions about the gender pay gap. What I found might surprise you:

Pew Research Center survey found that 62 percent of women believe that women “generally” get paid less than men for doing the same work. However, when asked about their own companies, far fewer — just 14 percent total — believe women are getting paid less than men where they work, and 17 percent say women have fewer opportunities for promotions where they work.
These are nearly 50-point shifts in perception from what women believe is generally happening in society at-large, and what they collectively report is happening based on their experiences in their own jobs.
This in no way discounts the negative experiences women have had, and we should not shy from denouncing inequitable treatment. Yet these data also reveal that although most women believe they are being treated fairly, they also believe that most other women aren’t.
These data indicate that women have come to believe the myth that women are getting paid less than men for doing the same work. However, academic studies show that gender discrimination is not largely influencing wages, as I explain in the op-ed:
Although Census data show that women make less money on average than men, this fails to consider any information about how women and men choose to pursue a work/life balance, whether they enter a career that requires 80-hour work weeks or 40-hour work weeks, whether they take time out of the workforce to raise children, how much education they attain, whether they go into careers like investment banking or education, surgery or nursing, etc.
Studies that take these other factors into account find that the gender pay gap narrows to about 95 cents on the dollar. The remaining 5 cent difference might be due to discrimination, or it might be due to differences in salary negotiations, or other reasons. Harvard economist Claudia Goldin writes, “The gender gap in pay would be considerably reduced and might even vanish if firms did not have an incentive to disproportionately reward individuals who worked long hours and who worked particular hours.”"
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82 days ago
Grass is always drier?
81 days ago
I think this just goes to show that the definition of "equal work" means different things to different people (and it's likely that "equal pay advocates" use a definition that differs from the vast majority of people).

What I Believe About Education


This is in response to comments on some previous posts about teachers’ unions and other matters.

1. The U.S. leads the world in health care spending per person, but not in health care outcomes. Many people look at that and say that health care costs too much in the U.S., and we should be able to get the same our better outcomes by sending less. Maybe that is correct, maybe not. That is not the point here. But–

2. the U.S. leads the world in K-12 education spending per student, but not in student outcomes. Yet nobody, says that education costs too much and that we should spend less. Except–

3. me. I believe that we spend way too much on K-12 education.

4. We spend as much as we do on education in part because it is a sacred cow. We want to show that we care about children. (Yes, “showing that you care” is also Robin Hanson’s explanation for health care spending.)

5. We also spend as much as we do because of teachers’ unions. They engage in featherbedding, adding all sorts of non-teaching staff to school payrolls (and adding more union members in the process). In Montgomery`County, last time I looked, there was one person on the payroll for every 6 students, but there were more than 25 students per classroom teacher. That is why I do not think that cost disease, as discussed recently by Scott Alexander, is the full story. It’s not just that it’s hard to raise productivity in teaching. It’s that teachers’ unions cut down on productivity by continually getting schools to add non-teaching staff.

6. If I could have my way, the government would get out of the schooling business.

7. If we wish to subsidize education, we should do it through vouchers. Note that this could be done on a progressive basis, with the size of the voucher a declining function of parent’s income.

8. I do not expect educational outcomes to be any better under a voucher system. That is because I believe in the Null Hypothesis, which is that educational interventions do not make a difference.

9. However, a competitive market in education would drive down costs, so that the U.S. would get the same outcomes with much less spending.

A few additional notes:

10. When parents seek out schools with good reputations, they are going after schools where most of the students come from affluent families. The schools themselves do not do much.

11. Even within income-diverse school districts, affluent parents figure out a way to keep their kids from being surrounded by poor children.

12. I have grown increasingly uncomfortable with the leftist ideology preached in government schools.

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132 days ago
Los Angeles, CA
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Quotation of the Day…

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(Don Boudreaux)

… is from pages 123-124 of the 1992 collection of some of William Graham Sumner’s finest essays, On Liberty, Society, and Politics (Roger C. Bannister, ed.); specifically, this quotation is from Sumner’s January 1881 Princeton Review essay, “The Argument against Protective Taxes”:

Unknown-2If an industry does not pay, it is an industrial abomination.  It is wasting and destroying.  The larger it is the more mischief it does.  The protected manufacturer is forced to allege, when he asks for protection, that his business would not pay without it.  He proposes to waste capital.  If he should waste his own wealth he would not go on long.  He therefore asks the legislature to give him power to lay taxes on his fellow-citizens, to collect from them the capital which he intends to waste, and good wages for himself while he is carrying on that business besides.  This is what is called “developing our industries,” and the operation of the law is such that the waste and destruction can go on indefinitely.  Either an industry can pay under freedom, in which case it does not need protection, or else it would not pay under freedom, in which case it is wasting the wealth of the nation as long as it goes on.

DBx:  Indeed so.  And yet Trump is hailed by his deluded fans as an economic savior – one who, by punitively taxing American consumers, will enrich them; one who, by artificially restricting the flow of goods and services into America, will make Americans more prosperous; one who, by protecting domestic industries from competition, will re-engerize the U.S. economy; one who, by ensuring that we produce at home those goods and services that we could acquire at lower cost abroad, will make us great again.

Trump and his trade triumvirate are, of course, complete economic imbeciles.  But so too are the millions of Americans who fall for centuries-old fallacies that Trump and his triumvirate peddle will all the wiles of Mr. Haney.

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134 days ago
Love the Green Acres reference.
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