Capitalisn’t: How Antitrust Failed Workers

Eric Posner: As early as the 1920s, the antitrust laws have been interpreted by the Supreme Court to apply to labor monopsony. The puzzle is why there haven’t been more cases, so that happened and that was it.

Bethany: I’m Bethany McLean.

Phil Donahue: Did you ever have a moment of doubt about capitalism and whether greed’s a good idea?

Luigi: And I’m Luigi Zingales.

Bernie Sanders: We have socialism for the very rich, rugged individualism for the poor.

Bethany: And this is Capitalisn’t, a podcast about what is working in capital-ism.

Milton Friedman: First of all, tell me, is there some society you know that doesn’t run on greed?

Luigi: And, most importantly, what isn’t?

Warren Buffett: We ought to do better by the people that get left behind. I don’t think we should kill the capitalist system in the process.

Luigi: One of the privileges of being a professor, and there are many, is that you get to see what smart graduate students produce in their dissertations. And this year, I hap-pened to see two bright students going on the job market with a topic that, until very recently, was basically not analyzed, and now has become the hot topic for the year, and this topic is labor-market power. To what extent the stagnation of wages is the result of firms having market power over workers and paying workers too little.

At the same time, a colleague from the law school has just written a book called How An-titrust Failed Workers. And so, we thought it would be a good idea to invite my colleague from the law school to tell us the legal part, and then Bethany and I will discuss a bit the nascent evidence on the topic and the challenges that this nascent evidence is bringing to the table.

Bethany: I found this fascinating, just the whole notion that there was this entire area of study that hadn’t really been looked at before. I always think it’s interesting when there’s a foundation of what we all believe, and in this case, that people just believed that concen-tration didn’t affect labor markets. And, for me, it was opening up this whole prism on the world, because I think of antitrust in very conventional terms, which is corporate power. But I never thought of it in terms of the power that a company could exert in the labor market.

Eric Posner is a professor at the University of Chicago’s law school, where he is also the Kirkland and Ellis Distinguished Service Professor of Law, and his new book is How Antitrust Failed Workers.

Eric, I’d love to start with a definition and maybe some history. I was struck by somewhere in your writing where you noted that the word “monopsony” was not actually coined with the Sher-man Act. And I was wondering if you could both define it for this noneconomist and also tell us how it came into being, if it did not come into being with the Sherman Act.

Eric Posner: Sure. Yeah. The concept existed before it was coined in the 1930s. The word itself was coined by an economist named Joan Robinson, a British economist.

Luigi: Actually, one of the first big women economists, no?

Eric Posner: Very influential. The word means a single buyer, as opposed to monopolist, which means a single seller. A very big buyer with a lot of bargaining power, and that could be an employer as well as a company that’s buying goods. Because an employer is buying la-bor from workers.

So, we can think of an employer. There’s a long history of monopsony in this country, including, for example, company towns. Pullman, near Chicago, famously operated a company town. Literally, the people who lived in that town had no option but to work for Pullman, which manufactured railroad cars. Now, it’s not like they tried to bring an antitrust suit against Pullman and lost. They just never brought an antitrust suit. I don’t think it would have occurred to them to do so. And there’s a long history of people not bringing antitrust suits against large employers, which contrasts quite dramatically with a long history of people constantly bringing antitrust suits against sellers, monopolists. Like Standard Oil, or Facebook, or Google, or whoever.

Luigi: As an economist, I have to intervene and say the tricky part, both in the definition of monopoly and the definition of monopsony, is how you define the market. Now, this is complicated for the product market. It’s even more complicated for the labor market, be-cause, clearly, the only employer of PhD economists in Hyde Park is the University of Chicago. So, the University of Chicago is a monopsony in a very teeny, tiny environment. Now, if you broaden it to include downtown, there are a lot more employers. And so, the monopsony power disappears. And, of course, if you enlarge the set of potential players, not just PhD economists, but also other jobs, clearly, even in Hyde Park, you don’t have a monopsony. So, it’s a very important issue for the listener, how you define the market.

But one of the things that I found remarkable in your book, Eric, you go through the legal histo-ry of the known enforcement of monopsony in the United States. And even for somebody like me, who is quite skeptical about how well antitrust has worked in the product market in the last 30, 40 years, it is shocking how basically they have not even tried. So can you describe to our listeners some of the most egregious cases? Because they’re really worth reading. I strongly encourage all the listeners to do so, because it’s eye-opening.

Eric Posner: Sure. Well, the most egregious cases are the cases that are not brought. Probably the most famous example, and maybe this is what, Luigi, you have in mind, is the Silicon Valley no-poaching case.

In 2010, the Justice Department sued and settled with the big Silicon Valley firms that we’re all familiar with: Google, Apple, Adobe, Pixar. These huge software companies had agreed not to poach or hire away each other’s software engineers. Now, that’s just straightforward collusion. If this were a lawsuit against sellers, Ford, GM, and Chrysler . . . If Chrysler still exists. I guess it sort of does. If they agreed to divide up markets, they would sell their cars in different states, not only would the consumers have a great case against them, but the executives who agreed to this ar-rangement would go to jail.

In the case of Silicon Valley, though, and this involved people like Steve Jobs, the Justice De-partment entered a settlement with them under which the only obligation on the part of the Sili-con Valley tech titans was to agree never to enter into such an agreement again. I’m not even sure it was never. It may have been for five years or something like that. So, there’s literally no sanction in that case.

And there was a follow-on, class-action suit by the software engineers, and they settled for $400 million. So, it’s pretty amazing that Steve Jobs did not go to jail. I think part of the reason was that, since there’s a long history of nonenforcement of antitrust with respect to employers, the Justice Department probably thought it would be inappropriate to seek criminal sanctions. And, a few years later, they did issue guidance to companies saying, “Henceforth, we will bring criminal cases.” And, in fact, they have over the last year or two.

It was pretty amazing that these enormous companies, which now everybody regards as very anticompetitive, even back then had engaged in what was a very explicit, illegal anticompetitive agreement.

Luigi: I was more taken by the case of Leilani Deslandes with McDon-ald’s.

Eric Posner: OK.

Luigi: Where she was paid $12 an hour. Another franchise at McDonald’s of-fered her $13.75 an hour, and then they withdrew the offer, because they have an agreement not to poach between different McDonald’s franchises. And the court sided with McDonald’s. So, if you are in a franchise—and correct me if I’m wrong—but if you are in a franchise, you cannot unionize, so you cannot fight the power of the employer through unions. But the employers can basically unionize against you. It seems completely unfair and much more relevant for the middle class than the software-engineer case. No?

Eric Posner: Yeah. Each restaurant agrees not to poach or hire away workers from another restaurant. That’s probably pretty illegal. And, in fact, the franchises were all sued by state attorneys general and settled. They just dropped these clauses rather than fight. But there has been litigation now by the employees who are saying, “As a result of this, I’m underpaid. I’m at McDonald’s earning $12 an hour. Another place wants to hire me away and pay me $13 an hour. As a result of this no-poach clause, I’m not hired away. I have to stay.” In fact, in the Deslandes case, the plaintiff in question, she just quit McDonald’s and went to work at maybe Home Depot or some other place at a lower wage.

But it’s also pretty complicated. And this gets back to the issue of what the market is. If you get fired from McDonald’s or you leave McDonald’s, the no-poach clause does not block you from going to work at Burger King or Wendy’s. And so, the question is, should the market be regarded as workers for McDonald’s franchises, or, let’s say, workers for all fast-food franchises, or unskilled workers within a particular area, like downtown Chicago, or all of Chicago, depending on where people commute? And that’s a tricky issue. It can be resolved just through empirical study. You look at how people actually behave if their wages are reduced. Do they have the option to go to a competing franchise or don’t they? But that can be complicated and raises difficult empirical ques-tions that have to be resolved. Those questions are still open, but I think we’ll see what happens in the long term.

Bethany: Are there any historical precedents? In other words, was there ever a time where labor-market monopolies were prosecuted? And so, is there a historical precedent we can look to in cases like this? Or are these issues you’re raising a modern phenomenon?

Eric Posner: As early as the 1920s, the antitrust laws had been interpreted by the Supreme Court to apply to labor monopsony. The puzzle is why there haven’t been more cases. So, that happened and that was it.

And then, ever since then, there have been a few cases every once in a while. It’s kind of a strange situation in law, because on the one hand, you ask if there’s a precedent. Yes, there is. But on the other hand, we think of it as a weak precedent. Since there are not very many cases, it’s hard for lawyers who represent workers to predict how courts will resolve various types of issues, and that discourages them from bringing the cases in the first place.

Bethany: Interesting. I was thinking about it as two graphs, and they would look nothing alike, right? If you saw the graph of conventional antitrust cases brought, and then the graph of these kinds of cases, that you might expect to see some sort of correlation in the patterns, or not, but there’s just nothing, right? There’s no relationship between the two.

Eric Posner: There’s nothing. The total number of what I call labor-side anti-trust cases is trivial, whereas the total number of product-side antitrust cases runs into the thou-sands. Now, over the last few years, there has been an increase in labor-side antitrust cases, proba-bly as a result of some of this empirical research by economists. The problem has become better known. And also, I think, as a result of the 2010 Silicon Valley case, which I think persuaded people in government that there might be a problem here. So, the line is going up now.

Luigi: And there’s also some concern or many concerns about noncompete clauses applied to ordinary workers. When a firm loses a worker because they’re attracted to a bet-ter wage, they generally update the wages of all the other workers to retain them. If one person is prevented from receiving an offer by a noncompete, then the entire firm has less of a wage dynam-ic. No?

Eric Posner: Yeah, no, absolutely. I believe that 40 percent of workers have, at some point, been party to a noncompete. I think 20 percent at any given time and as many as 10 percent of people who don’t have college educations, low-income workers. On the one hand, peo-ple who defend noncompetes say that, without them, employers are not going to trust their work-ers with secrets and are not going to train them.

But on the other side, as you say, Luigi, if a worker’s bound by a noncompete, which could mean that after you’re fired or quit, you can’t work in the industry for a year or two, they’re not going to have a credible outside option, which means that the employer can suppress their wages without worrying that they’re going to quit and work for a competitor.

There’s been a lot of recent empirical work trying to figure out how this plays out. And most of it suggests that noncompetes do, in fact, suppress the wages of lower-income workers. But from a perspective of labor monopsony, this is a really serious problem. And one way to think about it, if you think of all kinds of markets, for example, that are excessively concentrated, like healthcare, what a hospital or other medical clinic could do is simply say to its doctors or nurses or technicians, “Sign this noncompete. We’ll give you a little extra money.” They do so because it doesn’t hurt them in any way.

But what happens is if it’s a rural or thinly populated area, an entrant cannot come and com-pete, because all of the workers are already tied to the incumbent. The only way an entrant could enter would be to somehow get everybody to understand that if they quit and wait a year or two, they can work for the incumbent, and the incumbent will compensate them for this lost time, which is basically impossible. So, I think noncompetes probably have a pretty substantial impact on concentrating labor markets, unfortunately.

As I understand the world of labor economics, to which I’m a newcomer, until fairly recently, the assumption was that labor markets are relatively competitive, in the sense that there are lots of employers competing for workers. There’s an IO, an industrial organization, casebook, I think from 2007 by Dennis Carlton, your colleague and a coauthor, which flatly says that most labor mar-kets are competitive. And they have a box where they have an exception for the market in priests. And he says, well, the market in priests might be one market where there’s a labor monopsony, but that’s an exception.

Now, in around 2016, 2017, a number of mostly young labor economists, I guess they got ac-cess to new sources of data, including Glassdoor, which is an online job-matching platform. They, first of all, just looked at labor markets around the country, and it turns out that if you’re just counting up the number of employers who are hiring a various type of a particular worker in a par-ticular area, usually a commuting zone, there are lots of highly concentrated labor markets. Ex-tremely concentrated labor markets. In fact, far more concentrated, in many cases, than even the worst product markets. And when you think about it for a moment, and this is what their data show, it’s actually not that surprising, because a huge part of the country is rural, small towns, thin-ly populated, and those areas can’t support lots of, let’s say, accounting firms. Often, these areas have a couple of fast-food places, a Walmart, and maybe a chicken-processing plant or something like that.

Now, these papers also show that wages are lower in the concentrated markets than in the competitive markets. And there’s a big question of causation here. Is this just correlation? Is it just that bigger companies are more efficient, and so they can employ workers more productively? Or is it monopsony? And so, I think these earlier papers, they tried to address this issue. One of them, for example, looked at mergers, and mergers would often cause concentration and wages to go down afterwards. The merged entity pays less than the previous entities.

As I understand it, one of the more persuasive papers, which was published very recently in the American Economic Review by Prager and Schmitt, is more persuasive on the issue of causation. That focuses on hospital mergers, and it compares hospital workers who are specialized, like nurses and pharmacists, with hospital workers who are not specialized, like cafeteria workers and custodial workers. And it finds that after mergers, the wage increase of the specialized workers declines, like the traditional wage increases decline, whereas the wages of the unspecialized work-ers remain the same. So, I think this is a more persuasive paper.

But the empirical world is a complicated one. For the purposes of my book, I’m not sure I have to assume that that concentration inevitably causes huge reductions in wages. What I take from this empirical literature is, first of all, the concentration is ubiquitous and in a way that antitrust law has traditionally been concerned, and that there’s reasonable evidence that concentration also produces lower wages.

Bethany: I found that presumption that labor markets were competitive to be so interesting, because I always think it’s fascinating when there are things we completely take for granted that turn out to be completely wrong. Right?

Eric Posner: Yeah.

Luigi: I think that part of what has generated so much interest in this topic is that we have observed that the labor share of value added has significantly dropped in the United States in the last 20 or 30 years. And so, people have been working hard to try to figure out what drives this phenomenon. And when I say, “I’m paying my workers less than their marginal produc-tivity” means that I implicitly leave some money on the table not to increase the salary of my exist-ing workers.

Imagine I have a bakery, OK? And I employ two people. On each one of them, I make twice as much as they’re paid. So, I make a bundle off them. However, I don’t hire the third person, be-cause I’m so afraid that by hiring the third person, I will increase the wages of the two other bakers I have so that it doesn’t pay off. When you put it in these terms, it’s very hard to believe that’s the case. No?

Eric Posner: But the premise is that you have to pay the workers the same amount, right? Just the way in product markets, from an efficiency perspective, we wouldn’t care if monopolists exist. They’d all engage in perfect price discrimination. The labor-market setting is just the same thing in the mirror. The employers, the assumption, again, is that they can’t wage dis-criminate. They’re paying all their bakers $10 an hour when they’re producing $20 in value. If they want to attract additional bakers to sell more rolls and loaves of bread, they’re going to have to offer a higher wage to the new people to attract them from some other industry or whatever. But if they do that, they’re going to have to raise the wages for everybody else. So, that’s a big loss on the inframarginal workers, and bakers rationally don’t want to do that.

So, I think the logic is very powerful. It’s been conventional wisdom in economics for 200 years that it’s rational for either sellers or employers or other big buyers to produce an inefficiently low level of output. And the evidence seems to be consistent with that. So, I’m comfortable with this story.

Luigi: No, but when it comes to the product market, the reason why you want to restrain your supply in order to extract higher prices is because you understand you’re fac-ing a very inelastic demand. OK? The same is true in the monopsony case. It must be true that you think that your supply for labor is very inelastic. Now, if it’s very specialized labor, so if you’re try-ing to hire a top surgeon in the city of Chicago, maybe you think that there is limited supply. But if I try to hire—maybe there is some skill in the baker—but if I hire a basic construction worker or a basic manufacturing worker, is it really that the supply of this is so inelastic? That’s the part that I find it difficult to—

Eric Posner: I see. OK. So, a couple of points. You may be right. If you’re right, then our antitrust concern should be focused on higher-skilled workers. If you’re right. I don’t think you’re right, though, for a couple of reasons. There are some papers which try to look at this issue directly, and they find surprisingly low elasticities for unskilled workers. In fact, there’s one paper that looks at Amazon Mechanical Turk workers. The people on Amazon Turk just get sort of random questions and things, and they get paid by the answer, a couple of cents. And some au-thors ran an experiment where they offered different wages or prices to these people. And they just didn’t respond to the higher prices as you would expect if they were behaving in a purely ra-tional way.

Now, why is that? I think there are a lot more natural frictions that seem, to me, quite intui-tive. I think people trained in economics are maybe indoctrinated not to. But if you think, for ex-ample, about the fast-food worker, there’s actually an article in the Washington Post recently about these . . . I think they were McDonald’s workers who sort of quit en masse because they were being treated badly. They were friends with each other. There was a Burger King that some of them could have gone to, but they didn’t want to leave their friends at this particular McDonald’s. They had relationships. They worked together all the time. After work, they would go to a coffee shop together. So, these sorts of relationships can cause significant fric-tions.

In the Deslandes case that you mentioned at the beginning, Luigi, the plaintiff who ended up, I think, again, it was Home Depot. No, it was Hobby Lobby. Hobby Lobby’s totally different from McDonald’s. Unskilled in both cases, but there’s a difference between working in a kitchen. This was also, by the way, in the Washington Post story. In the kitchen, there’s a lot of ca-maraderie. People are interacting with each other. In the Washington Post story, one person who left the McDonald’s ended up at a mill. At the mill, you just sit there and you lift boards all the time. It’s totally different. So, what might seem to us from our lofty position in the ivory tower as identical jobs turn out to be, from the standpoint of the people who actually take them, quite different from each other.

Bethany: For sure, I would protest the argument that a baker is unskilled la-bor. Baking is incredibly skilled.

Luigi: American bakers are.

Eric Posner: There’s another story for retail. I think the growth of Walmart and Amazon and so forth, they’re opening up new warehouses in stagnant areas, and they, at least initially, offer higher wages, so that benefits workers. Now, one thing to watch is that, as their competitors go out of business, are they going to take the opportunity of reducing wage growth or reducing workers or making conditions worse while maintaining the wage? But I do think the retail side of it may be more complicated.

Bethany: That’s actually a fascinating dystopian version of the future, where Amazon controls all our lives and starts making conditions for workers worse, lowering wages while raising prices for all of us. Don’t let them take over.

Eric Posner: I’ll do my best.

Bethany: But I like the idea that the answer to this issue is complicated and multifaceted, and that all these things interact in ways that no one fully understands yet. Another book.

Eric Posner: For someone else to write.

Luigi: So, what are your solutions for that?

Eric Posner: My focus is antitrust law because I teach and write in that area. I don’t think it’s the ultimate solution. From my standpoint as a law professor who’s interested in antitrust law, I think antitrust law can be part of the solution, but it can’t be the complete solu-tion. One of the reasons why it can’t be the complete solution is, I think a big part of wage sup-pression is the result of search costs and other frictions like that as opposed to concentration. So, antitrust law cannot really handle a problem like high search costs. You can’t sue a firm because search costs are high. So, the best it can do is help reduce the level of concentration.

Outside of antitrust law, I’m not an expert on unions, for example. When I was growing up, what I always heard was that unions actually raise wages above marginal product, that they cause rigidities, and they end up harming workers. I gather the research is a lot more complicated than that. To the extent unions are part of the solution, then the obvious public-policy response is to strengthen labor law. Labor law, which supports unions traditionally, has been weakened dramati-cally within the last many decades. And employers have become much more sophisticated about resisting union campaigns. So, the way to strengthen unions would probably require legal reform that basically made it easier for workers to organize.

There’s another area of law, which lawyers call, generically, employment law. Those are mini-mum-wage laws, and maximum-hour laws, and laws that restrict various types of labor-market abus-es. My guess is that the impact of those can be at best marginal. It’s hard to imagine the traditional, for example, minimum-wage law having a major impact on labor markets. It can help people at the very bottom or maybe not quite the very bottom. It doesn’t help people at the very bottom who can’t get jobs. But there could be more sophisticated versions of minimum-wage laws, like wage boards, where you would have different minimum wages for different industries. People are begin-ning to do research on wage boards, which exist in other countries, and, actually, a little bit in the United States. And I’d be curious how well they actually work. But, of course, there are all kinds of dangers with having the government involved in setting wages, just like prices.

So, those are the solutions that are on the table. There are other general solutions, like greater transfers for workers and so forth, training and all that stuff. I just don’t know how effective those types of policy responses are, but people should be thinking about them.

Luigi: OK. Thanks a lot, Eric.

Eric Posner: My pleasure. Thank you.

Luigi: Bye-bye.

Let me try to explain in simple words what these two students, one coming out of MIT and one coming out of Chicago, describe. And what I find fascinating is that they use completely different techniques and they arrive at very similar results, which is actually quite strange in economics, be-cause they tend to go in opposite directions.

Bethany: Really? That’s interesting in itself, actually, that if you use a differ-ent methodology, you get to a different answer. Anyway, sorry to interrupt. Go on.

Luigi: Let me start with the MIT student. His name is Bryan Seegmiller. He used the idea that, imagine you are a firm, and you have a shock. Idiosyncratic shock. Imagine you are Zoom Technologies, and you’re at the beginning of the pandemic. Your stock price goes through the roof, even controlling for whatever everybody else is doing. When your stock price is going through the roof, it suggests that you have something special that is valuable, and you want to invest more. You want to invest more in capital. You want to invest more in labor. So, if I’m Zoom Technologies, and we are at the beginning of pandemic, I should hire like crazy, right? What he shows is, actually, firms don’t do that very much. They’re not that responsive. And, in jargon, the elasticity of the supply of labor they face is not that high.

Bethany: Couldn’t a problem be that the measurement of a jump in a stock price, couldn’t that be an artificial measurement in and of itself, particularly in today’s market, where companies have irrational jumps in their stock prices for all sorts of reasons that don’t nec-essarily signify more demand for their products? The market today, if it ever were rational, and it is not. So, maybe corporate managers are responding quite responsibly in the face of an unreliable signal.

Luigi: It’s a very good question, but first of all, we’re not looking at the ag-gregate stock prices. So, the aggregate stock prices can be crazy. What he’s looking at is the idio-syncratic, which, of course, could be due to a lot of other things, including, potentially, the manag-er manipulating stock prices. But—

Bethany: You hope that Elon Musk isn’t rushing out to hire 100,000 more engineers for Tesla because it added however many billions to its market cap on the fake an-nouncement of a fake deal with Hertz. That’s right. Anyway.

Luigi: Yeah, but actually, Tesla is a good example, because there is something in the fact that Tesla is going through the roof, and you can say it’s all manipulation, but I don’t be-lieve it. I think there is a fundamental . . . and, actually, Tesla is a platform on wheels. A digital plat-form on wheels, because they have so much data that they look very much like the new Google. Just for cars, not for the rest. And so, actually, he’s hiring engineers like crazy, and the question is, what is the elasticity of the supply of engineers to Tesla?

Now, the other thing that he finds that is intriguing is that the most-productive firms face lower supplies of elasticity on average, and even lower for skilled workers. So, Tesla is the ideal example. I don’t know what is in the sample, but it is the ideal example, because it is a very high-productivity firm with demand for high-skilled workers, so they should have a very high elasticity. In fact, they have a very low elasticity.

What he estimates is that firms at the bottom of the labor productivity range pay 94 percent of the marginal product to their workers. So, they pay what at least an economist would say is the right amount, but firms that are in the top end up paying only 62 percent of their marginal prod-uct. So, a little bit more than half of what they are owed.

Bethany: It seems to imply that the more successful and prominent a firm is, the more control it has in the labor market. Right? Those would be that last set of numbers that you read off about the more-prominent firms or the more-successful firms having even less elastici-ty in their prices.

Luigi: Yeah, I will dispute only the usage you have of control over the labor market, because what my understanding is, and I think that this is helpful for our listeners, is not that you are literally a monopsonist. You are the only buyer. It’s the fact that you are sensitive enough to the fact that if you keep hiring, you’re going to change prices. Traditionally, we thought that was the case for labor markets, that if you increase the demand for bakers, it’s not going to increase the price of bakers by a lot. The moment you understand that your demand for bakers—not the aggregate demand, but your demand for bakers—increases the price of bakers, then you are going to shed your demand. That’s kind of a natural thing that people will do.

The answer is, yes, that more-productive firms are more subject to this impact on prices, and so they shed that demand more. Which, by the way, should impact more highly sophisticated people, highly trained people like engineers, et cetera, rather than the ordinary workers. So, that’s a dif-ferent story, but that’s the result.

The other student, his name is James Traina, and he’s a student of mine, uses a very clever but complex idea of saying, “I want to assume only that firms minimize costs.” So, profit maximizers minimize cost. The only way you can explain the way in which manufacturing firms use workers is if they shed their demand because they expect to have an impact on prices. What is fascinating is he finds this effect to be nonexistent in 1972. By 2014, the labor wedge is huge. In fact, it is equal to 50 percent, so that the firms tend to pay 50 percent of what the marginal productivity of labor is. So, 62 percent, in one case, 50 percent in the other.

Starting from completely different points of view is quite fascinating. Now, what they don’t ful-ly explain, neither paper actually does, is why that’s the case. Eric’s line, which is labor-market concentration, I’m not so sure it holds so much, because it’s very much a function of how seg-mented markets are. For very specialized labor, this is clearly the case. The markets are concen-trated. The important question in my view is, is this a phenomenon just limited to highly special-ized labor? So, the bigger question is whether this applies to the people who are really hurting in the last 30 years, the median workers. The median worker does not have a college degree. The median worker is not that specialized. Even if Eric told us that there is an important specialization of being at McDonald’s versus being at Hobby Lobby. And the paper by Trainor and Kirov is im-portant, in my view, because it focuses on manufacturing. And so, it talks mostly about those kinds of workers and not academic economists.

Bethany: In our discussion with Eric, it seemed to me that it was perhaps dangerous to conflate these two things, which are what affects really highly skilled workers versus what affects where the real issue is, which is the decline in wages among the middle class and the bottom of the socioeconomic ladder. And those are the issues that we as a society are grappling with. And so, when you conflate them into one issue that involves tech workers and investment bankers and manufacturing jobs, what would be the opposite of mistaking the mountain for the molehill? It would be jumbling everything into one big cake in you can’t possibly separate out the different ingredients.

They’re two separate questions, in my mind, because he is so clear about not wanting his work to be used as an explanation for wage stagnation, which is, there’s this antitrust thing over here, which is this issue. And it’s a big issue, how we’ve come to define antitrust, have we defined it in too narrow a way, and should we think of antitrust much more broadly than the consumer-welfare statute that we’ve applied for all these decades?

And I think Eric’s book is really interesting on that point, and the answer is, yes, there are lots of different ways to think about antitrust, and we should have a more multifaceted approach to it. And then there’s this issue of wage stagnation, which may or may not encompass his argument, but is this big, huge, social and economic question that I think is key to the future of our country and key to the future of capitalism. But I’m not sure they’re the same issue.

Luigi: I agree, but I find it very intellectually honest of Eric to recognize that what he’s saying is not necessarily implying the other, because there’s a huge economic payoff in claiming that he has addressed that issue. So, if he wanted to maximize the sales of his book or his own reputation, he could claim that. But he’s not, because I think his book does not deliver on that margin. The book is, in my view, extremely interesting in, number one, documenting this hole in antitrust, and also the historical origin of this hole.

Unions kind of hate antitrust because, initially, antitrust was used against unions. And also, in the book, he explains a number of incentives for why it is so difficult to bring cases of labor anti-trust versus to bring cases of product-market antitrust, and even the product market within anti-trust has not been particularly effective, let alone in the labor case.

So, the book delivers very much on this margin. He wrote the book very early on in this collec-tive research where there wasn’t a lot of research that could link the global slowdown in wages to the antitrust phenomenon. I think these papers on the market this year seem to start to draw that connection. However, until we find a fully satisfactory mechanism, I think we cannot say that we nailed it.

We know that in the United States mobility has gone down. This decreased level of mobility makes people more subject to local market power. After all, the only remedy to company towns was your ability to move to a different town, which, of course, comes at a cost. But if people can-not move, then they are much more subject to market power at the local level.

Bethany: I was thinking, on the subject of manufacturing, I think it would be really interesting if somebody did a paper breaking this down between publicly traded companies and private ones. Because I wonder if that’s part of the dynamic that has taken place, in that a pub-lic company is scrutinized on every metric so closely that, for them to have their cost of goods sold go up, even if they grew, might be a bad thing in the eyes of Wall Street, because it would cause them to miss earnings estimates. It would cause the analysts’ models to be wrong. And if this very desire to please the stock market, particularly on a short-term basis, has also something to do with the decisions that firms make around hiring more employees. In other words, if you’re going to grow, even though ostensibly that would be good, but if you’re going to grow and it’s going to cause your margins to go down, that might actually not be good for your stock price.

Luigi: If I had planted a question to promote my students, I could not have done better, because here is another paper, a very short one, on the profit puzzle. Because he shows that, actually, the profitability of publicly traded firms has not gone up so much in recent years. The one of privately held firms has much more. So, he has not been able yet to link the manufacturing data to the publicly traded firms, but the presumption is the opposite of what you assume, that, actually, the people that pay the workers the least are privately held firms.

So, this is consistent with your view of private equity as evil, because private-equity firms can get away with paying workers very little. Publicly traded companies, much less so. And he conjec-tures this is maybe because of visibility. Because imagine if Ford were to pay workers very little, there would be a lot of discussion. And we see with Amazon how much discussion there is in the paper about how much they pay their workers. There isn’t the same amount of analysis of Cargill, which is a large, privately held company.

Bethany: That’s fascinating. And that is not what I would have expected. I just can’t help but believe in my journalistic, nonscientific way that the pressure on companies to meet earnings estimates and to deliver on profitability targets has got to play into this somehow or an-other, that it has to be yet another factor. But I also wanted to go to what you said on mobility, because that gets at an issue as to why this may be always a difficult topic to capture with a model. Because, at least what I have seen of labor markets, I grew up in a small town in northern Minneso-ta, where the only industry there really was iron mining. There was no way people were going to leave that town to go do anything else because of longstanding family ties there. So, you might be able to say that that unskilled mining labor should have a bigger market than northern Minnesota, but the reality is, just based on people’s lives, that it didn’t.

Luigi: Yeah, I think that, guilty as charged, we economists always want to have one explanation for everything, and probably there is more than one. However, what is fasci-nating is how widespread this phenomenon is. If it was limited to mining in small towns, then, OK, it’s an idiosyncratic factor. But it is not limited to that. It is widespread in manufacturing, it is wide-spread in services, and it is widespread also in construction. Unfortunately, in all these sectors, there seems to be no pricing power of labor and a dramatic stagnation of wages.

Bethany: Our lovely producer, Matt, had a question he wanted us to answer, which is, would it make the market more competitive if all wage information had to be publicly available? If every company everywhere, every employer everywhere, had to post their salary in-formation? It’s interesting, there’s a microcosm of that in law firms, where some law firms divulge exactly what people are paid and exactly why it is, and believe in total transparency, and other law firms do not. And I don’t think even within the legal profession there’s agreement on which is the better way to do things.

But, of course, that’s for the lawyers themselves, not for those of us in the rest of the world. So, maybe there’s a different argument that applies to the benefit of the society versus the benefit of very competitive lawyers in a firm realizing that they don’t make as much as Mr. or Mrs. whatev-er in the office next door. Anyway, Luigi, your thoughts?

Luigi: Let me divide the economist response and the psychologist response. So, I will play the armchair psychologist. As an economist, actually, there is a pretty clear answer that says that if a firm has market power, allowing the firm to price discriminate, which is to basi-cally price different workers differently, it reduces the inefficiency of monopoly or monopsony. So, if you publicize the wages, you make it impossible for a firm not to pay everybody the same salary. Impossible may be too strong. You make it very difficult. And so, paradoxically, you are exacerbat-ing the effect of monopsony because, in order to hire an extra worker, I have to pay all my workers more, and so, I prefer not to hire an extra worker. And so, it does have a negative impact.

This is ignoring, like economists do, this distribution issue. I’m not saying that the workers are going to be better off, but there will be more workers employed. If you’re concerned about, for example, employment, allowing price discrimination makes employment easier.

Now, this is what economists say. There is, of course, a very important psychological factor. I always tell a story that, among academics, salaries are secret, so you don’t know what your col-leagues earn. But academics are super competitive with each other, and so when we got into the new building, this was more than 10 years ago at Chicago, we had to run a lottery in order to allo-cate the offices, because academics overinfer from the difference in offices the difference in status. And I had a very esteemed colleague who went to another colleague saying, “I hate you,” because he had a bigger office.

I thought that was a bit of an excessive thing that he went to that extreme, but that’s to say that, for a few square inches more—because the offices are all gorgeous, and so it’s really a few square inches more in one office or the other—people are willing to say to their colleagues, “I hate you.” Imagine for a few pennies more what they would do.

Bethany: Although, maybe if they knew what the few pennies more were, they wouldn’t be so tied up in what the office signifies, right? It may be that the latter stands in for the former.

I was thinking when you were talking about a friend of mine whose firm did a big reorganization where people lost their jobs and lost their roles, and he came to believe it was all because they were moving into new office space, and it was all a competition for who was going to get the best offices. And so, I think, often office real estate or other things stand in for the transparency that people don’t have about who’s making what. It becomes a signifier of who’s important in a world where we don’t know that information. And so, maybe if we knew that information, you wouldn’t want to kill somebody over their office space. I don’t know.

And now we’re going to do Capital-is or Capitalisn’t, the part of the show where we discuss something that’s happened in the news and decide whether it’s a Capital-is or a Capitalisn’t. And Luigi and I get to have an argument, we hope.

Luigi: Now, is this a show, speaking of?

Bethany: Isn’t it a show?

Luigi: We’re not showing anything.

Bethany: It’s a show. A podcast is a show. Isn’t it?

Luigi: OK. After all, we have capitalism without capital, and a show without showing.

Bethany: It’s perfect. It’s perfect.

Anyway, so this week, we thought we’d talk about Zillow.

Speaker 10: Zillow announced it plans to take writedowns of as much as $569 million and is slashing its workforce by 25 percent. After failures at its iBuying program, the company said it’s going to be winding down that segment of the business that had been trying to buy and flip houses.

Bethany: The recent announcement by Zillow that it would close this busi-ness called Zillow Offers, which was essentially an algorithm-based home-flipping outfit, is one of, as the Wall Street Journal called it, the sharpest recent American corporate retreats.

Speaker 11: We went into the business as a big swing on the bet that we could actually predict the price of a home six months into the future.

Bethany: This business was responsible for a majority of Zillow’s revenue, but none of its profits, and its writedown was more than a half a billion dollars. And, Luigi, you said you had strong opinions on Zillow, so I’m going to let you start.

Luigi: Yes. Actually, by accident, I listened to a paper that was presented at the last meeting of the National Bureau of Economic Research that was discussing another of these iBuyers. I see companies that are trying to buy and sell houses in the market using some algorithm. One of the things that emerged from that paper very clearly is that it’s very dangerous to do that, especially if you are Zillow and you publish your quotes. Because people have some local infor-mation about stuff that you cannot price very well in your algorithm, and so, they will only sell you houses that are worth less than your algorithm and only buy houses that are more expensive in the algorithm.

And so, you end up, on average, facing what is called, in jargon, adverse selection that is very costly. And this is even under the best situation where you have a very fluid market and your in-ventory cost is not going to be very large. So, what is amazing is that Zillow was succeeding in los-ing, what, $320 million, hundreds of millions of dollars, in a market that is growing. Generally, in a market that is dropping, you also face losses on your inventory, but in this case, Zillow should make money on the inventory, and in spite of that, lost hundreds of millions.

Bethany: I suppose, in many ways, that would make it a Capitalisn’t. If you manage to lose money in the housing market at a time when the housing market is going up, then that is definitely the destruction of capital. And, in that sense, I guess it’s a Capitalisn’t.

I’m still puzzling through the Capital-is or Capitalisn’t issue, and I think that’s because I’m dis-tracted by another component of the Zillow story, which, to me, is the human-is or human-isn’t part of it. And what I mean by that is that I worry a lot that AI, artificial intelligence, is coming a lot more quickly than we are ready for it, and I’m always relieved and encouraged by examples of algo-rithms failing and failing badly, and showing that there is something to the world that an algorithm still can’t quite capture.

I remember sitting at a Vanity Fair conference a couple of years ago, and the head of HBO and head of Instagram were on stage, and someone asked them, “Why does something go viral? What makes something go viral?” And they both said, “Damned if we know. We don’t have any idea. We can’t figure this out.” And so, from Netflix trying to build a machine that would be able to predict people’s tastes, to Amazon being able to recommend books that you’re going to like, to Zillow’s algorithm failing to enable it to make money on this home-flipping machine, I’m actually relieved that there are things yet that we haven’t figured out how to measure, that there’s some sort of human intelligence that still escapes artificial intelligence.

So, in that standpoint, I’m very much pro-Zillow’s failure. I’m relieved by it and happy about it, even if they lost a great deal of money. And I don’t mean to be rooting for the destruction of capi-tal, but in this case, I am.

Luigi: I agree with you. If the specific story is an example of failure, you can see it also as an example of a success of capitalism in the sense that the CEO, who was very success-ful in the past, had to reverse his decision pretty fast in face of the losses. In a system where you don’t have the quarterly earnings and the pressure of the stock price, they would have continued operating for years before finding out the damage. So, capitalism does not promise no mistakes. Nobody can. But it promises to correct a mistake faster than most other systems or probably all other systems.

So, in that sense, it is a Capital-is.

Bethany: I love this concept that something that has destroyed a lot of mon-ey can still be an example of how capitalism should work. And I think that’s right. I think they tried to create something new. They failed. They failed badly, and they admitted it, and that’s how the system is supposed to work.