[dalke]

"In practice this almost never happens"

I was using that as an example. It could be "work fewer hours", "reduce health care", "have no chance for promotion", "laid off" or other things where the employer has control over an employee's future.

However, as to "almost never happens", here are some recent examples:

- In the recent Hostess/Twinkie news, "Though he imposed an 8 percent pay cut for all Hostess workers, Gregory Rayburn’s monthly $125,000 pay — or $1.5 million a year — will remain unchanged" http://thinkprogress.org/economy/2012/12/04/1278131/hostess-...

- An undated article but likely from 2008 (not recent, but I wanted the last quote): "The company will slash executive compensation up to 50%, cut many employees' pay as much as 15% and offer voluntary buyouts to its 25,000 workers.", "Ohio-based AK Steel, aks for instance, said on Dec. 3 it would implement an indefinite 5% pay cut for salaried workers, including the CEO and executive officers. ", ... ""It's not common, but in each recession it seems to be picking up speed … as proactive employers figure out that it's very expensive to lay people off and then go back and hire them," Lingle says." ( http://abcnews.go.com/Business/story?id=6514494&page=1#.... )

- more about the steel industry: "the world's largest steelmaker and among the largest in the U.S., has told the union it wants to cut wages and benefits for all workers by more than $28 an hour, or 36%, from an average $77.40 in 2011 and eliminate retiree health care for anyone hired after Sept. 1. The steelmaker also wants the "unilateral right" to cut wages during periods of reduced operations and to schedule 32-hour work weeks." http://online.wsj.com/article/SB1000087239639044409790457753...

- (Ireland, 2012): "The Labour Court has recommended that construction workers should accept a pay cut of 2.5%. It comes on top of a 7.5% pay cut introduced some years ago.". I believe the pay cuts would have occurred earlier had the unions not been involved, but that's conjecture.

- 2012: "Scranton, Pa., slashes workers' pay to minimum wage" and in defiance of a judge's order: http://www.nbcnews.com/business/scranton-pa-slashes-workers-... .

- 2012: "Muskegon school employees take pay cut to save their jobs", http://www.mlive.com/news/muskegon/index.ssf/2012/10/muskego...

- 2012: "Madawaska School Committee backs off teacher pay cut decision". The school board decided to make the cuts, then "general counsel warning that the proposal could “constitute an unlawful refusal to bargain in good faith” and open the school department up to litigation" caused the board to reverse their decision.

- 2012: a first account of how the person adjusted to a spending cut: http://finance.yahoo.com/news/first-person-pay-cut-taught-pe...

- 2012: "Detroit police see pay cut in checks despite judge's order" http://www.freep.com/article/20120826/NEWS01/120826033/Detro...

I think this is enough to establish that, while uncommon, it is no hen's tooth.

My thesis is that some employers can be viewed as a monopoly provider of jobs. But monopolies in and of themselves are not a problem - it's the abuse of monopoly powers which is the problem.

"Abuse" is almost by definition a question of morality, not of economics. It may be better for the economy (more prosperous, shorter recessions, or some other measure) should we once again allow child labor. Indeed, I've heard more than one person argue that a reason for banning child labor was to raise wages for adults by introducing a shortage of workers. But the bans stay because of moral reasons, and we export our morality to other countries when we demand that our clothes and other items not be made with child labor. Even if the economics of that country would be better with more local child labor.

The morality comes into play here because part of the reason people work for a company is to reduce personal economic risk. As a consultant, my income is highly variable, and it's stressful when that income is low. Even when my income is high, I can't make the same economic decisions as someone who is salaried and with the same monthly salary as my average, because of the Gambler's Ruin issue I mentioned. There can be and have been times when my savings became quite low, and I was seriously considering getting a salaried job. While now, my income is quite above my average.

A salaried job is an exchange of services for money. The general expectations are given in the contract, the law, and the general culture. One of the employee expectations is that the salary will generally be stable, and it will be more stable for government jobs than at a company. People will go into civil service for that increased (perceived) stability, even though it doesn't pay as well.

But unlike, say, overtime pay, this stability is not usually part of the contract nor (in the US) the law. A company can unilaterally decide to cut wages and/or benefits on employees. I've shown examples where that has happened this year. The abuse comes in when companies start breaking both the explicit and implicit promises which are part of the employer/employee relationship. If pay cuts becomes more frequent, then there will be increasing outrage, and the implied stability will be made explicit in either the law, or the contract, ... or people will accept that they have no control over their month-to-month wages. I think the latter is bad for us as a culture.

You and the economists may be perfectly correct in saying that "stickiness of wages causes greater unemployment." What action should be taken from that observation? Should there be laws which prevent stability clauses in a contract, in order to reduce unemployment levels? Or should there be a basic stipend so people can be unemployed for longer while they search for a job with higher stability levels?

This thread started in part because of an observation that in many places in the US there is a broadband duopoly with AT&T and Comcast. In and of itself, this is okay, so long as they don't abuse those power. The recent "Data Caps Help Carriers Rake In Huge Profits" (e.g., http://techcrunch.com/2012/12/19/report-data-caps-help-carri... ) gives an example of what I would call an abuse of that duopoly power.

I've carefully said "broadband duopoly." There are other ways to get access to the internet, including some 3 million people who use dial-up for AOL. Monopoly law is careful about defining a market before looking to see if there is an abuse of monopoly powers.

I assert also that employment should also be subject to a similar market segmentation analysis. If there's only one factory in town, paying $45/hour, and the other jobs are retail and fast-food paying $10/hour, then those are different employment markets. Yes, someone could quit the factory and start working at the DQ, but someone could also quit with AT&T and switch to AOL dial-up. The local factory has a monopoly on high-paying jobs for the area, and can (and does!) use that market advantage.

My thesis is that the same analysis used to identify monopoly abuse in the market should also be used to identify monopoly abuse in employment relationships. No, employers aren't necessarily monopolies, nor do they necessarily abuse their monopoly if they have one. But I think the parallels between monopoly abuse and unilateral change of employment conditions are close enough that the former has bearing on the latter.

[yummyfajitas]

The fact that wage cuts occur does not prove your case about using transaction costs to cause wage cuts occur. They appear to simply be cases of market rates dropping, in most cases due to a decrease in demand for labor.

This has nothing whatsoever to do with monopsony buying power - there is nothing preventing Hostess employees from finding alternate employment except the fact that Hostess still pays them more than their next best alternative.

If your theories about employer monopsony power had any relation to the real world, then we would simply not observe wage stickiness.

Your claims about a monopsony on "high paying jobs" is also nonsensical - by this logic, walmart has a monopoly on "low priced goods". You are conflating price point with category of good, which is incorrect.

Now, you might have an argument if you actually want to discuss specific specialized jobs - e.g., statin chemist or algebraic topologist. An argument about monopsony power might actually apply here. But applying it to drivers, machine operators and burger flippers is silly.

Besides, if Hostess cuts wages from $40 to $10 and gives up their monopsony power, isn't that a good thing? By definition, they no longer have the ability to abuse their monopsony.

[dalke]

othermaciej wrote that "In practice this almost never happens". My response was to shows examples where it does happen in practice and so my simple example could not be rejected out of hand. I don't know what "almost never" means for this context. In practice, companies almost never forget to pay overtime to salaried workers. Companies almost never hire child labor. Both are illegal, even though they almost never happen.

"there is nothing preventing Hostess employees from finding alternate employment except the fact that Hostess still pays them more than their next best alternative"

And your point is that it's moral for Hostess to keep cutting wages until people start leaving for other positions?

My argument is all about morality, not economics. How morality is carried out must acknowledge the economics, but economics does not dictate the morality. I argue that there is a cultural expectation that salaries will rarely decrease, and that expectation is part of the cultural morality. The culture expectation exists, because people get a job in part to reduce risk. Otherwise we would all be contractors, and demand a higher income in order to handle the higher risk exposure. But there's a cultural difference in what it means to be an employee and what it means to be a contractor. Perhaps the distinction is that employees also trade loyalty for security, where contractors only trade services for money. I've not thought so deeply about that distinction.

"If your theories about employer monopsony power had any relation to the real world, then we would simply not observe wage stickiness."

You cannot make the observation "we would simply not observe wage stickiness" and conclude there is a lack of employer monopsony power. You have to show that there are no other reasons which can counteract that effect it, even in the face of monopsony.

Other factors may dominate. As an example, suppose a commandment in the Bible were 'employers shall not reduce the wages of their employees.' If the owners of a company followed Christian principles as well as legal ones then you would still observe wage stickiness, despite the lack of a law to that effect. Even if the employees were all non-Christian and don't care about that law per se, and wouldn't protest if the employer didn't follow that religious law.

As a more real-world example, you can't look at Chik-Fil-A and conclude that there's no market for fast-food chicken on Sundays, or that people won't work on Sundays for fast-food chicken stores.

Researching this now, I am expressing basic aspects of the search and matching model. "Jobs in the Search and Matching model are characterized by monopoly rents, due to the matching frictions that give rise to search costs and unemployment," says http://personal.lse.ac.uk/pissarid/papers/WB_ECMA.pdf .

I see that my morality issue is described as a "wage norm" in http://www.tau.ac.il/~yashiv/kl_jme2007.pdf , starting with "We employ a version of Hall’s (2005) notion of a wage norm to introduce real wage rigidity. A wage norm may arise from social convention that constrains wage adjustment for existing and newly hired workers."

I tried to understand their conclusion. It starts off "In a baseline New Keynesian model, labor market frictions render real wage rigidity potentially irrelevant for the dynamics of inflation." and continues "As one component of real marginal costs, wages, becomes less volatile, the other component, hiring and job creation costs, becomes more volatile. The mechanism emphasized by Hall (2005) and Shimer (2005) that helps the search and matching model fit the facts, appears to have a neutralizing effect in sticky price models."

I read the first part as saying that the baseline New Keynesian model isn't affected by real rage rigidity (but you disagree and say it is, correct?) If my interpretation is correct, then this is an area where non-market forces, like wage norms, can be a stronger influence because they don't directly affect the success or failure of the company.

I read the second as saying that the main effect of wage rigidity is the volatility in hiring and job creation costs. How either the dynamics of inflation or the volatility of hiring and job creation costs affects the unemployment level is beyond my understanding, but from what I understand of the paper suggests that what you see as clear evidence - wage stickiness - does not necessarily imply a lack of monopoly.

"But applying it to drivers, machine operators and burger flippers is silly."

I never said it applied to all employees. I say that employment is sometimes not fungible. You seem to both agree (as for an algebraic topologist) and disagree ("there is nothing preventing Hostess employees from finding alternate employment except the fact that Hostess still pays them more than their next best alternative").

When something isn't fungible, then its scarcity affects its price. You can hardly say that that's surprising. In that case, it's easy for an employer (or, yes, employee) to abuse the advantage. The employer's best alternative to giving in to a demand is to fire the person. The likelihood of the company going out of business while it finds a replacement is low. The employee's best alternative to giving in to a demand is to quit. The likelihood of the employee facing tight financial difficulties is higher.

"by this logic, walmart has a monopoly on "low priced goods""

Every time I've said "monopoly" in relation to jobs I've said that the issue is not monopoly but abusing monopoly power. Can you make the case that Walmart is both a monopoly and abuses its monopoly powers?

Microsoft faced monopoly charges not because it was the only supplier of Microsoft products, and primary supplier for the desktop OSes in the world, but because of claims that it abused its monopoly powers. I think the history of unions shows cases where companies have used abused their employment power, and I think the best model is to say that there is either a monopoly or cartel of employers which made that possible.

"if Hostess cuts wages from $40 to $10 and gives up their monopsony power, isn't that a good thing?"

No, because it's a risk management thing. People become employees partially to minimize long-term risk. Giving up their monopsony power (by going out of business) increases employee risk.

I'm fine with monopoly power so long as it isn't abused. I don't want to force a break-up of Microsoft just because they might abuse their monopoly power, because that breakup could be worse for the employer, the employees, and the customers.

A question for you is - do monopolies (or cartels, for that matter) ever abuse their monopoly (or oligopoly) powers? If so, do you use moral guidelines to determine what constitutes abuse?

I ask because I've talked to ardent free economy supporters who believe in no restrictions, not even to prevent monopoly abuse. Yes, even to the point of wanting to allow child labor and indentured servants. Because I believe we must use morality to guide where we want economics to take us, if you don't also believe in moral restraints on the market then this conversation will go nowhere.

[othermaciej]

Yes, "almost never" - it's rare enough that it makes the news when it happens.

The action that should be taken based on the fact that wage stickiness causes unemployment is at minimum to avoid making them more sticky, e.g. by regulating wage cuts as if they are "monopoly abuse".