Surprising Stats (Labor Market Edition)
It's not nice to fool with labor economics.
It is not surprising that people are interested in the labor market. It is also not surprising that people believe they can fix problems they perceive or hypothetically fear exist within it. Yet when they endeavor to do so, they may indeed be surprised at the outcome—unintended consequences strike again.1
Here are a few examples.
Occupational licensing is where we’ll begin. Ritz Penaranda writes,
Today, an estimated 25 percent to 30 percent of Americans require a license – permission from the government (typically the state, rather than federal) – to engage in their occupation. Examples range from the unobjectionable to the eyebrow-raising.
Her article, “Permission to Earn a Living: History, Economics, and the Ethics of Occupational Licensing,” is a succinct look at the history, current state, and political economy of occupational licensing including a balanced analysis of its costs and benefits—both pragmatic and philosophical.
On the pragmatic, I found this part noteworthy:
Indeed, the supply-side theory highlights serious flaws in the demand-side argument. First, occupational licensing drives up prices. It decreases competition. And it leads to market inefficiencies, such as forum-shopping (whereby states attract professionals through higher salaries or lower regulatory burdens) or decreased economic mobility (as professionals licensed in one state will face higher transaction costs, in the form of repeat licensing, if they wish to move to another state.) It’s hard to see how any of these outcomes benefit consumers.
Second, occupational licensing appears to function as a polite form of incumbent protection. A recent Cato Institute report finds that “data on state associations for nine major occupations reveal that the probability of an occupation becoming regulated increased by 20 percentage points within five years of… [the] founding in that state [of a trade association representing that occupation].” Further supporting the supply-side, or lobbying, thesis, the Institute for Justice finds that licensing burdens disproportionately affect low-income occupations.
Third, a study by the Center for Growth and Opportunity at Utah State University identifies three counter-arguments to the public interest (consumer protection) approach: 1) technological advances over the past 30 years have reduced information asymmetries, so, if the consumer [protection] theory is correct, we should see a decline — not a rise — in occupational licensing (see the discussion of alternatives below); 2) consumer protection cannot explain the wide variation in licensing across states; and 3) consumers do not lobby for occupational licensing, but professional associations do, lending credence to the theory that licensing is motivated more by incumbent protection than by consumer protection.
On the philosophical, I highlight this excerpt:
Twentieth-century champions of liberty such as F.A. Hayek, Milton Friedman, and James M. Buchanan – who were all deeply concerned with individual rights and the rule of law – called for public support (if not provision) of such things as primary education, mosquito control, the earned-income tax credit, or even a minimum basic income. Super-minimalists would, naturally, rely first on voluntary market and reputational mechanisms; second, on legal action by the state to prosecute contract violations and fraud; and only then, as a last resort, on positive state action to protect consumers in cases of information asymmetry. They are careful to avoid policies that encourage incumbent protection or rent-seeking. Their approach involves gradually intrusive levels of enforcement: mandatory bonding or insurance could be a first step, followed by mandatory registration or disclosure, and only in extreme cases would they propose occupational licensing — and only for the most critical occupations.
Turning next to unionization, Liya Palagashvilli writes [emphasis in the original],
In 2023, the contract between UPS and the International Brotherhood of Teamsters, one of the world’s largest private sector unions, was widely described as historic. The agreement delivered large pay increases, expanded benefits, and introduced new work rules governing how labor is scheduled, deployed, and compensated. It was heralded as a turning point for workers in the shipping and logistics sector. For many observers, it appeared to demonstrate that aggressive bargaining could reverse years of stagnant wages and restore labor’s leverage.
Two years later, UPS is in the midst of a sweeping restructuring.
Since that contract, the company has eliminated 48,000 operational jobs, announced plans to cut another 30,000 positions, and closed or consolidated more than 100 facilities. Executives describe the effort as a necessary “right-sizing” of the business, driven by lower package volumes, higher operating costs, and a strategic shift away from less profitable delivery segments.
…
It is true that the 2023 contract delivered meaningful gains. Many UPS workers now earn higher pay and enjoy improved benefits. But that is rarely the end of the story.
The question, then, is not whether the gains are real, but how the trade-offs unfold. Why do headline-grabbing contracts so often coincide with downsizing, automation, and job losses in sectors governed by exclusive, monopoly bargaining arrangements? When short-run wage gains are secured through monopoly bargaining power, where do the adjustments occur—and who ultimately bears the costs?
The evidence suggests that this pattern is not accidental, but a structural feature of monopoly bargaining. Our recent study (with Revana Sharfuddin), Do More Powerful Unions Generate Better Pro-Worker Outcomes?, helps explain why the sequence now unfolding at UPS is not an anomaly. Drawing on 147 studies, the paper shows how monopoly union power tends to shift costs into the future, where they often appear as reduced employment, lower investment, and faster automation—often to the detriment of workers over time. This suggests that improving long-run worker outcomes requires rethinking not worker voice itself, but the monopoly structure through which it is exercised.
She uses the UPS example to draw broader points made in the referenced paper. Continuing she adds,
Research on the decline of Rust Belt manufacturing from 1950 to 2000 finds that powerful unions and frequent labor conflict played a significant role in the region’s employment losses—more so than globalization in the early decades. Wage premiums persisted even as investment slowed and firms gradually shifted operations elsewhere. When labor costs significantly rise without corresponding productivity gains, firms adjust over time. The Rust Belt shows this dynamic unfolding over decades; UPS illustrates it in real time.
The ironic twist is that, as argued in the paper and this piece, it is union monopoly that is at the heart of the problem. Whereas unions theoretically fight a monopolistic power (known as monopsony in this case, a single demander), the union itself poses an anti-market power threat to well-functioning markets.
Lastly, let’s look at a knock-on effect from immigration restrictions. Obviously immigration is a key component of well-functioning labor markets—all the more important in an aging, high-skilled economy like the United States. Less obvious, though, is what the downstream effects are from tampering with immigration flows. David Bier writes,
From 1994 to 2023, immigrants generated roughly $100,000 more in taxes per capita than the average US-born person—about 17 percent more over the entire period. In 2023 alone, immigrants paid $1.3 trillion in taxes while receiving $761 billion in benefits—a net fiscal surplus of over half a trillion dollars in a single year.
Here in the 250th year of Adam Smith’s The Wealth of Nations we are still suffering the effects of people of the same trade conspiring against the public and the conceits of the man of system.2 Will we ever learn? . . .
Substack referenced above:
I have to acknowledge that in some cases these are not unintended consequences on the part of the proponents of these policies. Incumbents seeking protection are in many cases advocating these tradeoffs as they benefit at the expense of the rest of society.
Yes, I know that reference is actually to The Theory of Moral Sentiments.