May 10, 2013

Competition in Context: Workers

In a recent post post I outlined five points about competition that tend to go overlooked in economic discourse:
  • The amount of things we are competing for changes over time.
  • The future amounts of things we are competing for are uncertain.
  • The things we are competing for may be created by the competitors themselves.
  • The amount of things we are competing for may be artificially constrained (this is basically a roundabout way of describing the way we often create markets using public or non-rivalrous goods).
  • The current allocation of things we are competing for may have important effects on the ability of competitors to compete for more of them (this is basically a roundabout way of describing things like economies of scale, network effects, path dependency, and first-mover advantage).
I want to take these ideas and look at what they can mean for competition situated in various contexts. What does it mean for a country to be competitive as compared with a competitive business or a competitive worker? I don't want to give a full account of how competition in these areas works, rather to think about why the points I've made above are important.

In all three of these competitive arenas, competitiveness comes from offering more value than competitors are offering. Typically 'offering value' means selling similar (aka substitutable) products or services more cheaply than a rival worker, firm, or country. Although these three realms of competition are similar in the abstract, they compete to provide that value in different ways. This post looks at how workers compete.


Workers compete against other workers but they also compete against technologies, such as machines or more efficient processes. In other words, workers are competing against substitutes for the labor they provide, whether that means their neighbors, robots, or their department being made redundant after a merger. As part of the overall production process, however, they further compete with firm owners and managers for the value that the firm receives in exachange for its production.

Firms want workers that will provide surplus value. Firms in turn sell to consumers or other firms. Economic models assume that workers are paid the wage that is equivalent to the value workers provide for the firm, but of course firms would not hire workers if that were exactly true: workers have to provide more value than they are paid or else there is no point in hiring them. The amount of the "surplus" value that workers are able to capture depends on their bargaining power, and worker bargaining power depends on the availability of substitutes for labor and the demand for pay. A worker may accept less pay if it knows a robot could do its job more cheaply. A business will have to pay more if its potential workforce can easily find better pay elsewhere.

Do we overlook the same points about worker competition that we do about other types of competition? Economics does pay attention to changes in demand for workers, and to the pay that workers receive in exchange for filling that demand. Changes in labor demand can be seen through surveys of firm hiring, changes in wages, or even instruments as broad as GDP growth. All these measurements have been linked to the labor markets through extensive study. For example, it is something of a stylized fact in economics that periods of significant overall growth in the economy are the only times when wages increase for the bottom half of the income distribution--this is one common rationale for the gospel of growth. Within-industry trends are also well-studied. It is common to hear where new jobs are expected to be created and which old jobs will be destroyed.

Despite the attention that economists and the general public pay to changing worker incomes, competition is can be hard to understand in aggregate terms. A single unemployed worker might know that competition for work in their occupation is harsh, but it can be hard to see the structural and macroeconomic causes. Economists might see the effects of a bad economy, but the complex array of causes means that they may have little idea why things are bad. For example, experts are still arguing over whether the current high level of unemployment is structural or cyclical.

The idea that competitors shape the size of the pie they are competing for is perhaps most obvious when looking at individual workers, because workers are the ones actually engaging in production. If workers work hard or if they are well trained or just good at their job, they will produce more. If they are unemployed, they will produce nothing. But what determines how productive those workers are?

Competition between workers can in theory help increase productivity: if I will lose my job to someone else for not picking enough tomatoes, then I will pick more tomatoes. I might also go to school and learn things that make me productivity in order to get a better job, and if lots of people do this they may increase overall economic output significantly. Or I might work hard so I can get promoted so that my friends will respect me.

But there is also good evidence that many of the ways we compete --in particular, for money-- are demotivating and could therefore be hurting productivity. Inequality is another possible demotivator, if we don't think we have a fair shot at "making it". My earlier posts on opportunity address this issue from a slightly different angle.

Where competition in labor markets really gets interesting is when we think about whether or not the "size of the pie" is artificially constrained. We see this in the phenomenon of unemployment. Workers compete for jobs but if there are no jobs, on some level it is absurd that there is no work to be done. Of course there is work to be done--but for some reason nobody wants to pay these unemployed people to do it.

But is the opportunity for employment constrained artificially? What would that mean, exactly? Presumably it would mean restrictions on the ability of workers to produce value and receive value in return. The problem is how broadly the the word "restrictions" should be defined. We could imagine restrictions being anything from overtime laws to antitrust laws to public education: overtime laws because some workers may only be able to work a certain job if they are able to gain extra pay working overtime; antitrust laws because smaller producers may be less efficient and that inefficiency may be due to employing more workers; education because workers are only able to provide certain types of value if they have certain training, knowledge or skills.

These are just examples, but it should be apparent that the size of the pie--that is, the total output of all workers--can be constrained both intentionally and unintentionally. This flies in the face of the "lump of labor fallacy", which (controversially!) asserts that demand for labor increases in lock step as the availability of labor increases. For the lump of labor fallacy to truly be a fallacy, you have to assume that firms employ the available workforce fairly and effectively, that supply and demand consistently and quickly match each other. But in reality often the labor supply is extremely "lumpy", as businesses do not hire enough workers to employ everyone who wants a job for many different reasons.

Moreover, we have to remember that the labor market is shaped by laws, relationships, customs, technologies, and a million other things besides an ideally-responsive supply and demand equilibrium. We can do things to help that equilibrium come into existence, that harness competitive forces between workers, between workers and machines, and between workers and firm owners. But the how of it is never as easy as "unleashing competitive market forces" because those forces are only a byproduct of political, technological, and social forces. If we are not careful about where our competition is leading us there is no guarantee it will take us to a world we want to live in. Competition is not that simple.

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