6/6/2018: Monopsony Power in US labour market

I have recently written about rising firm power in labour markets, driven by monopsonisation of the markets thanks to the continued development of the contingent workforce: http://trueeconomics.blogspot.com/2018/05/23518-contingent-workforce-online.html. In this, I reference a new paper "Concentration in US labour markets: Evidence from online vacancy data" by  Azar, J A, I Marinescu, M I Steinbaum and B Taska. The authors have just published a VOX blog post on their research, worth reading: https://voxeu.org/article/concentration-us-labour-markets.

23/5/18: Contingent Workforce, Online Labour Markets and Monopsony Power

The promise of the contingent workforce and technological enablement of ‘shared economy’ is that today’s contingent workers and workers using own capital to supply services are free agents, at liberty to demand their own pay, work time, working conditions and employment terms in an open marketplace that creates no asymmetries between their employers and themselves. In economics terms, thus, the future of technologically-enabled contingent workforce is that of reduced monopsonisation.

Reminding the reader: monopsony, as defined in labour economics, is the market power of the employer over the employees. In the past, monopsonies primarily were associated with 'company towns' - highly concentrated labour markets dominated by a single employer. This notion seems to have gone away as transportation links between towns improved. In this context, increasing technological platforms penetration into the contingent / shared economies (e.g. creation of shared platforms like Uber and Lyft) should contribute to a reduction in monopsony power and the increase in the employee power.

Two recent papers: Azar, J A, I Marinescu, M I Steinbaum and B Taska (2018), “Concentration in US labor markets: Evidence from online vacancy data”, NBER Working paper w24395, and Dube, A, J Jacobs, S Naidu and S Suri (2018), “Monopsony in online labor markets”, NBER, Working paper 24416, dispute this proposition by finding empirical evidence to support the thesis that monopsony powers are actually increasing thanks to the technologically enabled contingent employment platforms.

Online labour markets are a natural testing ground for the proposition that technological transformation is capable of reducing monopsony power of employers, because they, in theory, offer a nearly-frictionless information and jobs flows between contractors and contractees, transparent information about pay and employment terms, and low cost of switching from one job to another.

The latter study mentioned above attempts to "rigorously estimate the degree of requester market power in a widely used online labour market – Amazon Mechanical Turk, or MTurk... the most popular online micro-task platform, allowing requesters (employers) to post jobs which workers can complete for."

The authors "provide evidence on labour market power by measuring how sensitive workers’ willingness to work is to the reward offered", by using the labour supply elasticity facing a firm (a standard measure of wage-setting (monopsony) power). "For example, if lowering wages by 10% leads to a 1% reduction in the workforce, this represents an elasticity of 0.1." To make their findings more robust, the authors use two methodologies for estimating labour supply elasticities:
1) Observational approach, which involves "data from a near-universe of tasks scraped from MTurk" to establish "how the offered reward affected the time it took to fill a particular task", and
2) Randomised experiments approach, uses "experimental variation, and analyse data from five previous experiments that randomised the wages of MTurk subjects. This randomised reward-setting provides ‘gold-standard’ evidence on market power, as we can see how MTurk workers responded to different wages."

The authors "empirically estimate both a ‘recruitment’ elasticity (comparable to what is recovered from the observational data) where workers see a reward and associated task as part of their normal browsing for jobs, and a ‘retention’ elasticity where workers, having already accepted a task, are given an opportunity to perform additional work for a randomised bonus payment."

The findings from both approaches are strikingly similar. Both "provide a remarkably consistent estimate of the labour supply elasticity facing MTurk requesters. As shown in Figure 2, the precision-weighted average experimental requester’s labour supply elasticity is 0.13 – this means that if a requester paid a 10% lower reward, they’d only lose around 1% of workers willing to perform the task. This suggests a very high degree of market power. The experimental estimates are quite close to those produced using the machine-learning based approach using observational data, which also suggest around 1% reduction in the willing workforce from a 10% lower wage."

To put these findings into perspective, "if requesters are fully exploiting their market power, our evidence implies that they are paying workers less than 20% of the value added. This suggests that much of the surplus created by this online labour market platform is captured by employers... [the authors] find a highly robust and surprisingly high degree of market power even in this large and diverse spot labour market."

In evolutionary terms, "MTurk workers and their advocates have long noted the asymmetry in market structure among themselves. Both efficiency and equality concerns have led to the rise of competing, ‘worker-friendly’ platforms..., and mechanisms for sharing information about good and bad requesters... Scientific funders such as Russell Sage have instituted minimum wages for crowd-sourced work. Our results suggest that these sentiments and policies may have an economic justification. ...Moreover, the hope that information technology will necessarily reduce search frictions and monopsony power in the labour market may be misplaced."

My take: the evidence on monopsony power in web-based contingent workforce platforms dovetails naturally into the evidence of monopolisation of the modern economies. Technological progress, that held the promise of freeing human capital from strict contractual limits on its returns, while delivering greater scope for technology-aided entrepreneurship and innovation, as well as the promise of the contingent workforce environment empowering greater returns to skills and labour are proving to be the exact opposites of what is being delivered by the new technologies which appear to be aiding greater transfer of power to technological, financial and even physical capital.

The 'free to work' nirvana ain't coming folks.

5/4/2014: Is Russian Trade Performance Really That Weak?

Here is another look at trade performance by various countries, this time based on BBVA synthetic index.

First: components of the index (darker colours mark stronger connectedness between trade and domestic economy):

Last: summary of the synthetic index rankings:

So core lesson here is that Russian economy performs right bang in the middle, set between UK and Australia… not bad. But when we look into the underlying drivers for this performance, technology is a weak driver, value retention by primary materials exporters is a major positive driver, specialisation patterns are nowhere to be seen and relevance to the economy is overall much weaker than we could have expected…

5/4/2014: Mystery of exports-growth interconnections

An interesting piece of research from BBVA Research (April 2014) titled "The multifaceted world of exports: How to differentiate between export-driven strategies" dealing, in part, with explicit links between trade and growth across a large sample of countries (Ireland, unfortunately is not included, presumably because our exports are so massively dominated by the transfer pricing by the MNCs that even investment banks don't want to touch our data).

So one very important issue considered in the paper is the overall relevance of exports.

In summary: "Small and medium-sized East Asian economies lead on trade openness among emerging countries, while China outperforms in terms of the domestic connection of exports (i.e. related production generated by other industries). Latin American economies are below average in terms of openness, with Mexico additionally showing a very limited connectivity of trade, which is also the case of Indonesia. Poland outperforms in Emerging Europe as a more open exporter than Turkey and with better domestic connections than Russia."

Chart below summarises: (Fig 5)

Noteworthy feature of this chart is that with strong input from financial services, the UK is virtually indistinguishable from Russia and Canada. The curse of the City seems to be as bad as the curse of oil.

Couple other interesting takeaways:

1) Manufacturers tend to show more close links between exports and value added to the domestic economy (confirming my analysis from the PMIs for Ireland): "Domestic value-added in exports represents around 50% in manufactured goods, while this ratio is much higher for other activities, in which domestic natural resources, intermediation and labour intensity play a very important role. Among emerging economies, East Asian countries lag significantly behind in aggregate value-retention, while some commodity producers import a high share of final goods, which eventually drain the value-added generated at home due to the lack of manufacturing industries."

Chart below summarises: (Fig 8)

2) Diversification is a requirement for smaller open economies: "Product concentration is high for commodity exporters, as well as for specialised manufacturers, while China is the only emerging country with the global capacity to fix market conditions (not only from the supply side but also from the demand side). Saudi Arabia has that ability too for one very important sector: oil. In the case of small economies, for which world market power is much more limited, diversification is the remaining option for shelter from external turbulence."

I wrote about de-diversification of Irish trade that has been on-going with the switch in growth drivers from manufacturing toward ICT exports. But this is of far lesser concern or extent that what BBVA are noting for commodities-based economies. In some ways, we can even think of enhanced diversification happening in Ireland as pharma sector dominance is being eroded. Thus, the only concern in terms of future development is just how much concentration of trade will take place on foot of ongoing expansion of ICT services. For now, this is less of a structural problem than of the short term issue relating to distortions to our GDP and GNP.

3) Apparent technological content is not enough for success: This is a major kicker from our domestic point of view, as most of recent growth in our external trade came from expansion of technologically-intensive sectors. "Many emerging manufacturing countries have a significant share of exports with technological content rated as medium or high. However, none of them has a genuine surplus, as the majority of economies either also import a significant share of these products or just copy the technology or play an assembly role. On the other hand, India records a surplus in tech trade, with exports mainly comprising computer services."

Chart below summarises: (Fig 11)