In case you haven’t heard, the United States economy is doing well. As of September, the unemployment rate is down to 3.7 percent, the lowest that it has been since 1969. The Trump administration has been quick to proclaim that this economic growth is the result of the latest wave of tax cuts, despite the fact that unemployment has already been falling at a steady pace since around 2010.
However, alongside this news of the falling unemployment rate have been a couple other statistics of note — the inflation rate is at 2.7 percent, while wages have grown by 2.8 percent in the past year — meaning that adjusted for inflation, real wages grew only 0.1 percent. According to conventional economic wisdom, such low unemployment should mean that wages should be shooting up as firms compete over scarce labor, but the reality has been that real wages have been fairly stagnant for decades.
Since 1978, real wages have risen by about 11 percent. During the same period, real stock prices have become five times higher and real CEO pay has grown nearly tenfold. The share of national income going toward compensation for labor has been declining, while the share going toward corporate profits, and into the pockets of wealthy shareholders and stock buybacks, has been growing. There are multiple factors which have contributed to this, but most of these factors are in some way connected to the “monopsony” power wielded by corporations.
Just as a monopoly refers to an entity with the exclusive power to sell a commodity, a monopsony is an entity with the exclusive power to buy a commodity; in this case, labor. The most obvious way in which employers maintain monopsony power is through “non-compete” clauses in employee contracts, which prevents them from seeking employment from competitors once they leave their current job — so Burger King can’t poach McDonald’s workers with promises of free chicken fries and a purported lack of sexual harassment. Beyond this, monopsony is reinforced by the limited mobility of low-income workers, and the simple fact that in a given geographical area, the number of employers for specialized workers is going to be limited — which makes collusion to keep wages down, either implicitly or explicitly, much easier to facilitate.
So, what can be done to address this problem? An increased minimum wage is a clear option for addressing this issue for the working poor, and the removal of restrictions on collective bargaining can provide labor with more tools to fight for higher wages. In addition, monopsony power can be weakened through a ban on most “non-compete” clauses in employee contracts. But until then, when someone tells you about how well the economy’s doing, ask them to consider: for whom?