Journal of Law and Political Economy

In Private Government: How Employers Rule Our Lives (and Why We Don’t Talk About It), Elizabeth Anderson argues that most people in the United States and other liberal societies spend their working lives under the kind of autocratic rule we would normally associate with communist dictatorships. They are forced to work in oppressive environments, deprived of many freedoms, and given practically no say over working conditions. Even in their nonworking lives workers are frequently subjected to employer scrutiny and sanction. And the legal framework and economic realities surrounding employment are such that exit is viable for only a small minority. Anderson’s work has generated great interest and, along with it, several criticisms that take exception to her observations, economic assumptions, and conclusions. This paper delineates the various economic claims made against Private Government so as to facilitate further inquiry of these issues.

Many rules and statutory interpretations in US work law that entrench employers’ power over workers rely on unproven economic assumptions. This article explores three. First, courts assume that the individual employee and employer have relatively equal bargaining power, an assumption often framed and defended within the circular logic of “freedom of contract.” Second, courts assume that the employer’s authority over the enterprise—its managerial prerogative—must be near absolute to promote efficiency in the enterprise and economy. Third, courts assume that the costs of maintaining the status quo of managerial prerogative and an employer’s at-will authority are less than the costs of altering it. Courts use these assumptions to give employers broad rights to terminate employees, to impose arbitration agreements, and to limit worker collective rights.

The “freedom of contract” presumption that employment arrangements negotiated between employers and employees are necessarily optimal exchanges between equal parties willfully ignores the fact that workers rarely enjoy full employment. Without full employment, employers enjoy plentiful access to willing new workers, while employees face difficulties finding alternative jobs. Many groups of workers, particularly Blacks and those without college credentials, have higher-than-average unemployment and never enjoy full employment, even when the aggregate economy is thought to be at full employment. Excessive unemployment matters: when unemployment is high, quitting and the ability to switch jobs diminish, unemployment spells are longer, finding a good job is harder, and, correspondingly, wage growth is subdued for low- and middle-wage workers. Employers, though, are able to fill vacancies with qualified workers more quickly and with less effort. Acknowledging the persistent absence of full employment renders the freedom-of-contract framework a flawed basis for assessing employment relationships.

Worker mobility—the ability to find and take another job—is at the core of worker power, and, conversely, worker immobility is at the core of employer power. This paper presents evidence of barriers to worker mobility in terms of labor market constraints (can a worker find another job?) and financial constraints (can a worker afford to transition to another job?). The theoretical context of these findings is dynamic monopsony: the harder it is for a worker to leave, the more power an employer has over that worker’s wages.

Abstract: One common metric of monopsony power is the quit elasticity, measuring how much more likely a worker is to quit a job in response to a wage change. Experimental and quasi-experimental variation in wages across workers within a given job results in quit elasticities in the 2-3 range, implying that a 10% reduction in wages increases the probability of quitting by 20-30%. In a model with monopsonistic employers, a quit elasticity of 2-3 also implies that workers are paid about 80-85% of the value they produce. These results indicate that employer power is pervasive. We present observational evidence that historically disadvantaged groups have systematically lower quit elasticities, indicating they face even greater employer power. Because monopsony power comes from an inability of workers to voluntarily switch jobs, the quit rate and especially the quit elasticity can be a useful metric for judging the health of the labor market. Pervasive employer power alters the analysis of labor market policy in a number of important ways.

The research on the minimum wage contributes insights into claims raised in legal arguments that employers and workers have equal power and that an employer’s management power must be unrestricted lest the firm or the economy suffer. Mandated minimum wages, the conventional argument goes, will force firms to pay a wage higher than the market rate, resulting in job losses and, potentially, bankruptcy. But evidence from minimum wage increases and expansions finds that the policy can improve labor market conditions without causing harmful side effects because of such “channels of adjustment” as reduced worker turnover, consumer price increases, and the reallocation of low-wage workers to higher-paying establishments. In general, employer mandates can increase the prevalence of good jobs. By altering the mix of firms and reallocating workers across them, the minimum wage creates or at least shifts the composition of jobs toward those that are more productive and pay higher wages.

The claim that labor market flexibility—the lack of regulations and collective bargaining constraints on employers—is essential to maximizing employment, minimizing unemployment, and obtaining growth does not have empirical support. That the claim lacks evidence can be seen by tracing how the market fundamentalist assertions made in the initial OECD Jobs Strategy in 1994 have been reversed by the OECD and by other international financial institutions. The OECD now notes that new evidence “shows that countries with policies and institutions that promote job quality, job quantity, and greater inclusiveness perform better than countries where the focus of policy is predominantly on enhancing market flexibility.” It has also rejected the argument that collective bargaining defends the interest of “insiders” against “outsiders” in the labor market. While OECD reports previously made almost indiscriminate calls for lowering labor standards to increase labor market flexibility, they now caution that irregular work can be a danger.

How does codetermination—entitling workers to participate in firm governance, either through membership on company boards or the formation of works councils—affect worker welfare and corporate decision-making? We critically discuss the history and contemporary operation of European codetermination arrangements and review empirical evidence on their effects on firms and workers. Our review suggests that these arrangements are unlikely to significantly shift power in the workplace, but may mildly improve worker welfare and firm performance, in part by boosting information-sharing and cooperation and in part by slightly increasing worker influence.