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David Autor on The Unexpected Compression: Competition at Work in the Low Wage Economy

With introductions by Markus Brunnermeier
December 8, 2022
12:30 pm
Markus' Academy

More from this series
Online: Zoom

Video & Timestamps

On Thursday, December 8, David Autor joined Markus’ Academy for a lecture. David Autor is Ford Professor in the MIT Department of Economics.

Watch the livestream below. You can watch all Markus’ Academy webinars on the Princeton BCF YouTube channel.


[0:00] Introductory Remarks
[6:04] What does a competitive labor market look like?
[13:14] Some unexpected facts
[22:40] Distinguishing rising demand from increasing competition: conceptual model.
[36:56] Distinguishing rising demand from increasing competition: evidence
[1:03:05] How much does wage pressure contribute to inflation?
[1:07:33] Conclusions

Executive Summary

[0:00] Introductory Remarks. The recent decline in the skill premium could be explained by different forms of compensation between blue and white collar workers. For blue collar workers, higher compensation took the form of higher wages, but white collar workers may have been compensated with greater flexibility in working hours or increased working from home (non-pecuniary compensation). There are also labor supply side causes such as long covid leading to labor shortages. The skill premium evolution might also interact with inflation dynamics. Whenever the economy recovers and workers gain bargaining power, the central bank steps in with higher interest rates to constrain the price-wage spiral. This can constrain wage growth especially for the poor, which is particularly costly for their well-being since they typically have little or no savings and high marginal propensity to consume out of current income. On the other hand, higher interest rates hurt growth/tech stocks and thus, higher wage earners (this could also lower the skill premium). In Germany’s high inflationary period from 1915-20, low skilled workers’ real wages increased while higher skilled workers’ wages remained relatively stagnant.
[6:04] What does a competitive labor market look like? The post-pandemic labor market has been unexpectedly tight. The question of this paper then is to understand the effect of the tight post-pandemic labor market on labor market competition. The textbook model of perfect competition is static, where wages automatically adjust to the marginal product of labor. However, empirical evidence suggests that employers don’t face a perfectly elastic labor supply curve. This means that similar workers get paid different wages. It is important to make a distinction between the notion of labor market tightness under perfect competition vs. under imperfect competition. Under perfect competition, increases in tightness result from a shifting out of the labor demand curve relative to the labor supply curve (or a shifting in of the latter relative to the former). This moves the labor market from one Pareto-efficient equilibrium to another. It has no normative implications. Under imperfect competition, however, tightness can cause the labor supply curve to become more elastic. The latter implies a reduction in employer power in the labor market and a reallocation of workers from less productive to more productive firms – an increase in efficiency.
[13:14] Some unexpected facts. Labor market participation and employment rates plummeted during the pandemic, but they have almost fully rebounded; this is true across education and wage levels. Low-wage, low-education workers experienced the largest drops in LFP and employment; but, they have also had the steepest recovery. There has been substantial real wage growth over the last 36 months, particularly below the median, but in the last 12 months, real wage growth only occurs for the bottom 15% of the distribution. Real wages in the 10th percentile of the wage distribution have grown faster than wages in the 50th or 90th percentiles since the onset of the pandemic, leading to a compression of the wage distribution. This has come with a fall in the Black/Hispanic wage penalty and stronger wage growth among younger workers. The strongest post-pandemic wage gains have come from younger, high-school educated workers
[22:40] Distinguishing rising demand from increasing competition: conceptual model. Using a basic labor supply and demand model, in a perfectly competitive market, labor supply to the firm is perfectly elastic, so when the labor supply curve shifts upward, the firm raises wages and their employment falls. In an imperfectly competitive market where firms face somewhat elastic labor supply, the supply curve rotates becoming more elastic which increases wages. How this affects employment at the firm depends on the wage policy of the firm. At low-wage firms, a rotation of the supply curve will decrease employment whereas at high-wage firms, employment can  increase. The implication of this model is that a more elastic labor supply curve can lead to a reallocation of workers from low-wage to high-wage employers. There are several potential explanations for why the labor supply curve may have become more elastic: involuntary separations during the pandemic reduced worker-firm attachment; greater household liquidity facilitates more job changes by allowing workers to absorb temporary income fluctuations; seeing coworkers and friends find better jobs increased belief that better jobs are available; and, finally, formal theory derived from the canonical job ladder model. This model predicts that as we see an increase in demand or a lower unemployment rate, employment-to-employment (EE) separations increase, and specifically increase more at the bottom of the wage distribution. This implies that an increase in tightness can change the elasticity of labor supply employers face.
[36:56] Distinguishing rising demand from increasing competition: evidence. Overall monthly job-to-job transition rates have been higher post-pandemic for young, high school-educated workers, while they have remained relatively stable for older workers and workers with a college degree. In order to analyze the relationship between tightness and wage growth, tightness is defined as a function of EE separation rates and the unemployment rate. Both components of this measure increased sharply post-pandemic. Wage Phillips curves, estimated leveraging state-level variation in tightness, suggest that wages for workers in the first quartile as well as those of young, high school educated workers increased the most in response to increased tightness in the post-pandemic period. Separation elasticity estimates tell a similar story – separation elasticities have increased disproportionately among young, low-skilled workers. Wage gains are much larger among those who are changing jobs compared to those who stay at their current job. The increase in wages of young high school workers are a function of both increased rates of switching jobs and increased wage gains from switching. Suggestive evidence indicates that this wage growth is driven by an increase in the likelihood of young, high school educated workers to leave low-wage jobs.
[1:03:05] How much does wage pressure contribute to inflation? Price Phillips curve estimates imply that labor market tightness contributed to a 1 percentage point increase in post pandemic inflation. This is about the same effect of tightness on average wage growth, although tightness is associated with much larger wage growth for young, low-skilled workers.
[1:07:33] Conclusions. For the first time in decades, wage inequality is falling. Real wages are rising among young, low-skilled workers and workers at the bottom of the wage distribution. While it is tempting to attribute the change to tighter labor markets, this may be an oversimplification. Evidence suggests that competition has intensified, and rising competition means higher wages that better reflect productivity and higher aggregate productivity – that workers are reallocating to better employers.