When I woke up this morning, I discovered that the Econ blogosphere had erupted into a debate over workplace rules. I won’t ruin your social life by linking to all of these blog posts and asking you to read them. Nor do I have something utterly novel to contribute to this debate. But I do want to use this eruption as an opportunity to do the two things I like to do on this blog: (1.) articulate some basic economic concepts and (2.) try to persuade my progressive peers that, often, progressive-sounding policies are not as good as they sound and evil-sounding laissez-faire policies are not as evil as they sound.
So: What are workplace rules? Well, they’re just that–the rules you are contractually obligated to abide by in your workplace. But when we talk about ‘workplace rules,’ we are, of course, actually talking about the workplace rules worth talking about, meaning the controversial ones. What workplace rules are controversial? In short: the ones that seem humiliating, overbearing, or otherwise sucky. We’re all okay with employers saying, “You cannot drink on the job.” What’s controversial is when they say, “You cannot pee more than thrice today,” or “You must submit to be searched before you leave, so we can be sure you are not stealing merchandise.”
When compassionate people hear about rules like these, they naturally get upset and want to do something. Often, they want their legislatures to pass laws restricting employers’ ability to impose these rules. Are these laws a good idea? What compassionate person could oppose them?
Let’s step back and do a little theory, here. First, why do employers impose sucky workplace rules? Well, in theory, some of them might just be horrible people who get a kick out of humiliating their subordinates. But really, few people are naturally that awful. More, even if they were, competitive markets punish employers for being awful just for the sake of being awful. Think about it: if you impose unnecessarily onerous and humiliating work rules that don’t bring any extra benefits on your employees, then your workers will be demoralized, they’ll be more inclined to take their skills elsewhere, and — once word gets around — you’ll have a hard time hiring new employees. Being a needlessly shitty, evil employer is costly, so if you’re a rational, ruthless profit-seeker, you’ll do otherwise.
So, again, why do employers impose sucky workplace rules? Well, a rational employer will only enforce workplace rules that boost the company’s profit. I.e., only when there is some real, tangible benefit from the rules, like making workers more productive, preventing thefts, etc.
Now, let’s imagine what economists call a ‘perfectly competitive market.’ The ‘perfectly competitive market’ is an imaginary thing that doesn’t exist in reality. But it’s a very useful imaginary thing, so let’s work with it for now. If markets are perfectly competitive, then you, a worker, must earn the value of what you produce. Think about it this way: if you produce, every hour, goods or services worth $20, but you only get paid $18 an hour, then some other employer, eager to make an extra dollar of profit per hour, will offer to pay you $19 an hour for that work…and so forth. So, in this imaginary perfectly competitive market, your compensation should be equal to what economists call your “marginal productivity” — your actual value-add.
Now suppose that you had been worth $20 an hour, but suddenly there have been a bunch of thefts at your firm. Every week, 10% of the value of what you produce has been stolen away by somebody — presumably some other employees. Now, the value to your firm of what you produce is only $18 an hour. Now, because your firm is in a perfectly competitive market, it can’t survive if it continues to pay you $20 an hour, when its weekly revenues have just been cut down by 10%. Your firm has two options: It can cut your pay to $18 an hour. Or, it can impose a new workplace rule that all employees must be searched before leaving work, to ensure that no merchandise is stolen. Furthermore, actually, all the other firms in your industry are facing the same problem. And they’ve roughly divided in half–half of them are still paying $20 an hour, but searching employees; the other half are not searching employees but are paying only $18 an hour. (To generalize this insight: in a perfectly competitive market, the costs and benefits of workplace regulations get passed on to employees.)
What do you do? Well, in a free and competitive market, it’s up to you what you do. If you’re the kind of person for whom an extra $16 a day is worth the humiliation of being searched, then you’ll go with the higher-paying firm. If it’s not worth it to you, then you’ll go with the firm without the search. If every employee in the world prefers the extra pay, then every firm will naturally offer the extra pay (with more workplace rules) in order to attract those workers. If every employee in the world thinks it’s not worth the extra pay, then employers will maximize their profits by letting the thefts slide and lowering workers’ pay. AND (and here’s the really interesting and important part) if different employees have diverse preferences, then different employers will work to meet those diverse preferences. Some firms will occupy the niche of hiring employees who put relatively more value on autonomy rather than pay, and other firms will occupy the niche that is vice versa, and workers as a whole will be better off for it. In other words, in a perfectly competitive market, the only sucky workplace rules that will be imposed upon employees are those rules that are worth the economic benefits they bring to the employees themselves.
And, in this world, laws limiting employers’ ability to impose workplace rules will, consequently, all be either harmful or redundant. If the government imposes rules saying that firms can’t search their employees, then all firms in our example above will end up paying $18 an hour and not searching. This doesn’t change the situation for those employees who chose those firms, but it does hurt the other employees, who themselves chose to opt into firms that paid an extra $2 an hour and searched employees. In other words, the employees at those firms had already voted with their feet, revealing that the workplace rule was worth the extra pay to them–and what right does the government have to contravene their preferences here?
So this is one of those things where the counterintuitive logic of economics suggests that the compassionate and humanitarian thing to do may not be what it initially seems.
But everything I wrote above is in the world of highly abstract theory. And I’m not actually opposing all limitations on workplace rules on the basis of this theory. In the real world, markets are not perfectly competitive. People are myopic, signing into long-term contracts without thinking about what they’ll actually feel in the future, or without being fully aware of other alternatives elsewhere. Many labor markets are dominated by a relatively small number of very large firms, and many sectors of the labor market have high unemployment — this means that in these markets, employers have way more bargaining power than their employees. People are social animals, who are attached to people and social groups in particular geographical areas, etc., which adds “frictions” that mean that labor markets are not perfectly competitive. And to the extent that labor markets are not perfectly competitive, there are gaps between our theory and the reality — and in those gaps there can be space for the government to improve human welfare by sometimes limiting employers’ power/freedom.
But theory is useful because it allows us to get a little closer to tracing cause and effect in the world. And the theory tell us that, in a theoretically perfect market, government-imposed restrictions on workplace rules would be either unnecessary or harmful, because employers would only impose rules that were ‘worth it’ to their employees. And so this theory does provide some useful takeaway ideas. (1) Insofar as the world does conform to the theory, many legal restrictions on workplace rules can be harmful and unnecessary, because market competition should pressure firms to only impose those rules that are ‘worth it’ to their employees, while government regulations can permanently and universally forbid rules that are ‘worth it’ to at least some employees. And (2) insofar as the world does not conform to the theory, one major cause of the problems employees face is imperfectly competitive labor markets, and so one way to dampen the problem of unnecessarily onerous and burdensome workplace rules is to make our labor markets more competitive, dynamic, and liquid.