LP #43: Exit, Voice, Loyalty, and Labor
How do we make sure that workers get a fair shake? People are often confident they know the answer to this question, but there are more ways to answer it than most realize.
I was thinking about this question as I read about the Biden administration’s move to ban noncompete contracts. Though I have criticized a number of other Biden administration policies, I think this is one their strongest moves yet. Generally speaking, these contracts between Company X and one of its employees say that the worker, for a given period of time and often in a given geographic area, may not leave for one of Company X’s competitors or start their own business that competes with Company X. These are plainly anti-competitive; they are literally called “noncompetes.” These agreements hold down pay (why give a worker a pay increase if their ability to lead is strongly constrained?), protect incumbent firms from new startups, and profoundly limit millions of workers’ economic liberty. They are prevalent in the American economy; roughly 15 percent of all workers and more than one in ten low-wage workers is constrained by a noncompete. While there may be some very special niche cases where they make sense, that benefit pales in comparison to the damage they cause. Studies have shown that they do in fact limit worker mobility (that’s kind of the point). They throttle start-up formation and they have negative impacts on entrepreneurship and employment growth. They hold down wages; when Oregon stopped enforcing noncompetes, wages for the workers that had been constrained by them rose between 14 and 21 percent and overall wages rose 2-3 percent. In short, when it comes to noncompetes, there’s a molecule of baby and an ocean of toxic bathwater; we should be glad to see them thrown out.
As great as the move to ban them is on its own, what I actually want to talk about here is how the banning of noncompetes points to a labor policy orientation that is pro-worker while being markedly different from the labor union worldview or the sectoral bargaining model common in parts of Europe. In this essay, I’m going to propose, borrowing from Hirschman (and modifying his terms a bit), that there are three different ways of thinking about labor policy based around exit, voice, and loyalty and I’ll argue that, at least in the U.S. context, an exit-based approach is more workable than and superior to voice and loyalty-based approaches.
Loyalty
To understand the context most American workers find themselves in, it pays to first understand some of what IPE scholars refer to as the Varieties of Capitalism research literature as pioneered by Peter Hall and David Soskice is their pathbreaking work “Varieties of Capital: The Institutional Foundations of Comparative Advantage.” Rather than citing every sentence, let me just say here that the rest of this section draws on their work and subsequent research that builds on it.
In particular, we should look at how employment and training get done in the coordinated market economies (CMEs) common in Europe. There, they have what’s known as sectoral bargaining. In sectoral bargaining, firms and unions come together to negotiate a set wage for workers at different levels of different occupations, so a master widget-maker might make 34 euros an hour while a junior wrench turner might make 13 euros an hour and so forth. What is important to realize is that that wage is set across the national economy. If you are a master widget-maker, your employer must pay you 34 euros an hour but, importantly, no one is allowed to pay you more than 34 euros an hour. There’s no poaching. No matter how much Company X might want to hire Company Y’s widget maker, they cannot come along and offer him or her more than that set wage of 34 euros per hour.
If you’re used to thinking about labor markets in the American context, or really any context without sectoral bargaining, this can be somewhat jarring conceptually the first time you think about, but it has all kinds of important implications. First, and this is arguably the biggest benefit of sectoral bargaining, firms have much stronger incentives to train-up their workers than they do in contexts where there is no sectoral bargaining. Poaching is why firms can be reluctant to do a lot of training. Why invest all these resources into training up a worker if another business can come along and offer that worker a bit more money and steal them away? If there’s no poaching, they don’t have to worry about that. Having been trained up within the company (and having no prospects for being poached away), the worker has fewer reasons to leave the firm. The firm and the worker are bound to each other quite tightly in this system. For this and other reasons, labor unions in coordinated market economies tend to be much more collaborative with management. Meanwhile, the education system focuses more on vocational training and giving people very specific skills and features more publicly subsidized apprenticeships. It is worth noting that CMEs seem to be especially good for people in the bottom third of the academic skill distribution (Hall and Soskice 156).
I would argue that this system is one that attempts to gives workers a fair shake via Loyalty. The firm is incentivized to be loyal to the worker, the worker is discouraged from being disloyal to the firm after having been trained, the labor unions and the state act to cement these loyalties further.
That’s a coordinated market economy. We don’t have that in the United States. We, along with other Anglo-Saxon countries like Canada, the UK, and Australia, have liberal market economies (LMEs). We do not do sectoral bargaining. There are all kinds of historical reasons for that and it is important to recognize that there are also drawbacks to the CME approach. For starters, compared to liberal market economies, CMEs with sectoral bargaining have less fluid labor markets and have less radical innovation (though they tend to have higher incremental innovation). Because there is a lot less movement of workers, for know-how to spread, they need more inter-firm relations. That in turn promote product differentiation and niche production over direct competition. CMEs, in all kinds of ways, are more collaborative and less competitive systems. Liberal market economies (LMEs) without sectoral bargaining feature more agile firms with more switchable assets and so get more innovation. There’s a reason Google emerged in an LME. They also meaningfully curtail the economic freedoms of individual workers, particularly those who are the most skilled and ambitious. The lack of poaching may have other benefits, but it’s an iron ceiling on strivers and abandons the ideals of upward social mobility that are at the heart of the American Dream. Just as, if you’re toward the lower end of academic talent you’d rather be in a CME, if you’re toward the upper end, you’d probably rather be in an LME. CMEs are better at making sure everyone can contribute; LMEs are better at unleashing the talents and ambitions of the most talented and ambitious. Which system a person thinks is “better” is less an empirical question than a normative one.
Voice
To transition from being an LME to being a CME would require enormous, even revolutionary, changes in the American economy. Short of some incredible societal trauma creating a blank slate (and we should not want that), it is safe to assume that the United States will be an LME for the foreseeable future. So, if we the United States are not going to have a coordinated market economy with sectoral bargaining, collaborative labor unions, and the state playing an organizing role, what then?
The answer that labor advocates gave for most of America’s history was to say that we had to find a way to amplify workers’ voices. This view has been heavily influenced by social class-oriented thinking. In this view, the auto CEO is more powerful and will exploit the auto factory line worker if allowed to do so. Thus, it is up to some entity, in practice labor unions and governments, to ensure that the line worker can stand up to capital and obtain their fair share.
From the Gilded Age to roughly the 1960s, there was some logic to this. The United States did not have that Loyalty-based CME system and capital and labor were both often immobile. Capital was immobile because it was usually physical. Once built, the auto factory was where it was. To the extent that labor could organize sufficiently and prevent, or threaten to prevent, that capital from being used, they had considerable leverage, i.e. Voice. And they badly needed that voice because labor too, at least locally, was immobile. People often worked in company towns, and so at least locally, there was nowhere else to work. They had no Exit option. With no Loyalty-system and no Exit-Option, Voice was their only hope.
That intellectual framework continues to exert significant pull today but, whether its proponents want to accept this or not, it has a lot of problems. First, it simply isn’t workable anymore now that capital is mobile (and there are no feasible prospects for making it immobile). From the 1970s to the 1990s, the movement away from capital control and the Bretton Woods system, technological improvements, the increasing importance of services that do not require as much physical capital, and financial liberalization all made it so that capital had a much easier time moving around. Sometimes this was overseas, sometimes it was within countries such as from mandatory union states in the U.S. north to right-to-work states in the U.S. south. But the important thing to recognize is that capital is mobile now and there is zero chance of it being made immobile. To want to go back to the 1950s in that regard is like wanting to go back to a time when a Coke cost a nickel. Wish all you want, it won’t make it true. So capital has an Exit option. That is the first and possibly most important reason to lean into an intellectual posture that drives at making sure labor has Exit options too.
Second, it is built on a zero-sum class antagonism that misunderstands the nature of the firm and that poisons our politics. The social class view of firms is that they are the means by which management and shareholders extract value from workers. A better way to think about firms is the sectoral view that sees firms as the intersection of workers, management, suppliers, shareholders, and customers that have interests that overlap, they aren’t perfectly aligned but neither are the automatically antagonistic. In this view, a lot of questions revolve around how firms go about trying to succeed in the market and so it no longer emphasizes the divisions between the CEO and line worker but thinks of them both as part of Team Toyota. After all, if Toyota does well, they both win.
These two different ways of seeing the capital-labor relationship tend to lead to strikingly different views on the role of government, the morality of capitalism, which economic identities deserve political sympathy, and what the best ways to help workers are. The class perspective sees a need for government involvement from the outset. Otherwise, labor gets hosed. The sectoral perspective understands the need for some regulations (you can’t have child labor for example) but it doesn’t assume as much need for government from the start. The sectoral view is much more amenable to private-public distinctions, i.e. private property and the private sector as distinct from public property and the public sector. Class analysis thinks that’s a weird and false distinction since economic activity in the ‘private’ realm will have public consequences. The sectoral view fits much more easily with classical liberalism and the pro-market progressivism that characterize so much of this essay series. If you see capital and labor as mostly complementary, being pro-capital is being pro-labor.
The sectoral perspective thus sees businesses as the sites where people with capital and people with labor come together to produce goods and services consumers want. So for them Romney’s ‘corporations are people’ is an uncontroversial statement of fact. The class perspective sees capital as antagonistic to labor so being pro-capital is being anti-labor and so they see businesses as the sites where capital exploits labor. Thus, for them, Romney’s ‘corporations are people’ line is a galling, offensive, Orwellian lie.
Following from all this, for the sectoral view, every economic identity connected to firms has value, including managers, shareholders, and consumers. The class view, because it sees firms as exploiting workers, has a less sympathy for those non-worker economic identities. The class view sees helping workers as about constraining capital and/or moving things away from market logics. This is why Gøsta Esping-Andersen’s seminal book on the welfare state “The Three Worlds of Welfare Capitalism” uses terms like decommodification and why Mike Konczal’s book is titled “Freedom from the Market.” The sectoral view sees the welfare state as complementing capitalism. That’s why we talk about the pre-market welfare state (education, training, kids’ health) and post-market welfare state (taxes/transfers). Capitalism is great but not perfect. The welfare state fills in the gaps. Sectoral thinkers can come across as ideologically incoherent and class incoherent for good reason, left-right ideology and social class aren’t what drives our thinking. Concurrent with this, people with a sectoral view think a lot about the varieties of capitalism scholarly literature because we see that literature as particularly insightful as far as how to make labor and capital work together in different ways.
The two perspectives think very differently about how to help workers. The class view thinks in terms of labor share, level of unionization, state interventions in the market designed to give labor more leverage over capital, etc. A sectoral perspective takes what I view as a more pragmatic approach and asks ‘how do we help workers have more mobility?’ ‘What barriers are in workers’ way?’ ‘What costs are shrinking workers’ purchasing power?’ ‘Where is government hurting more than helping?’ None of this is to say that capital and labor are always complementary or always have aligned interests (see: noncompetes) and that’s why exit options are so important but neither are they destined to be enemies in a forever long class struggle either. It would be good for those with more sectoral views to be a bit louder and clearer that we are in fact pro-worker and we’re not hostile to the welfare state, but it would also be very good for people with the class view to understand where people with a sectoral view are coming from. We’re not anti-labor. Nor are we selfish jerks. We just have a very different way of looking at the capital-labor relationship.
As importantly, this social class orientation poisons our politics by turning everything into a zero-sum fight. We should not want a society where the poor get no sympathy from the other social classes, where the working class stews in resentments toward the professional class, where the professional class looks up jealously at the rich while using zoning to ensure no working class people can live next to them, where the rich are convinced that any tax increase is nothing more than confiscatory populism and the first step toward tumbrels and guillotines.
Moreover, lots of people move social classes over their lifetime and that’s a good thing. One of the central pillars of the American Dream is being able to climb up the ladder. Rather than critiquing the ways in which rungs on that ladder have been allowed to fall into disrepair, the social class viewpoint implicitly tells people that they are forever stuck on that rung and all that they can hope for is to make the best of that situation. That’s a betrayal of the upward mobility narrative and that narrative is perhaps the single greatest thing about the United States. It is why we attract immigrants from all over the world. That labor unions have generally been anti-immigrant is another tip-off that the climbing the ladder narrative and economic freedom more generally are concepts they are disinterested in.
Another way that you can see this disinterest is that labor unions and their political allies are almost always the one pushing for more regulatory constraints on independent contracting and franchises despite the fact that most people in these jobs like them and despite the fact that these jobs are particularly helpful for low-income people and minorities. And then on top of that, labor unions are amongst the most politically protectionist blocs in American politics, which drives up costs for everyone and which especially hurts the poor. Progressives should note too that trade liberalization advances racial equity and so support for labor unions runs directly counter to the anti-racism that progressives prize. Likewise, they have fought the consumer welfare standard even though there’s a strong progressive case to be made for that too. And this is before we’ve even touched the issue of police unions and qualified immunity. There’s a lot about unions that should give progressives pause.
The Voice option as represented by labor unions has even more problems beyond these. They don’t help non-unionized workers and so leave most workers out in the cold. Just 12 percent of workers belong to a labor union. Even in 1983, which was forty years ago, union membership was only at 20 percent. Of those workers who are not union members, more than half (58%) say they are not at all interested in joining a union and only about one in ten (11%) say they are extremely interested.
Labor unions limit individual workers’ economic liberties, and people understand this, which is why there is so much political support for right-to-work laws. You wouldn’t know it from Twitter discourse but right-to-work is popular. 71 percent of poll respondents support labor unions, but 71 percent also support right-to-work, including 65 percent of Democrats. In Michigan, a historically pro-union state, right to work laws have majority support even among Democrats and among workers who currently belong to a union. There is good reason for this. Right-to-work laws are associated with higher employment, faster population growth, higher labor force participation, lower childhood poverty, more socioeconomic mobility, and less disability (notably without lowering wages).
So what then? If the Loyalty-based CME system isn’t going to happen in the United States and the Voice-based labor union approach has all kinds of problems, how do we make sure workers get a fair shake?
Exit
Some of the anger at “neoliberalism” is that capital got mobile and so could leave places where it didn’t like the deal it was getting. These critics then want to find some way to immobilize capital, but that’s economically inefficient and a pipe dream to boot. The better answer is to give everyone everywhere that kind of freedom of mobility, those kinds of exit options. When places and businesses have to compete hard to attract workers, that’s a super pro-labor environment. We should want employers to have to compete for workers, not the other way around. We should want workers to be able to leave jobs they dislike, to be able to say to management “oh, you don’t want to give me sick time, well I’ll just go work at different business down the street that will give me sick time and two weeks paid vacation.”
How do we do that?
1) More job training, especially mid-career. This is easier said than done but it would help a lot. Denmark’s flexicurity approach where they have very flexible labor markets but provide generous unemployment insurance and lots of job training is a model here.
2) Housing abundance. The more geographic mobility people have, the more exit options at work they have. Some people are rooted where they are and that’s fine, but we shouldn’t want housing costs to make anyone feel stuck in a place where they cannot prosper.
3) Work-from-home. The more that work is remote, the more options people have, both geographically and in terms of who they work for.
4) More vocational training and apprenticeships. When people have marketable skills, they have exit options.
5) Allow people to buy in to Medicare. Health insurance can create job lock. A public option, or something like it, would reduce that.
6) Reduce existing regulatory barriers, and certainly don’t create any new ones, on independent contracting, gig work, home-based businesses
7) Provide better public transportation.
8) Create a public childcare system. We already have public schools go down to age 5. It is not a huge conceptual leap to take it further down the age range.
9) Reduce occupational licensing.
10) Ban noncompetes.
There are whole chapters on some of these ideas in a great new book out from the Cato Institute, Empowering the New American Worker, edited by Scott Lincicome.
This Exit-based approach to helping labor sometimes asks government to do more and sometimes asks government to do less, in particular it advances a theory of government that I call the Sandwich State which puts greater effort into building a more robust pre-market welfare state, maintain our already fairly robust post-market welfare state programs like Social Security, Medicare, and Medicaid, but adopt a light-touch regulatory state in the middle. This is a very un-populist idea. Whereas populism argues that tradeoffs can be dismissed if we the people just punch some ‘elite’ hard enough, the idea of the Sandwich State insists that citizens recognize that we get what we pay for in terms of building a better, more socioeconomically dynamic society. If we are going to have a society where ambitious people’s dreams can flourish regardless of the circumstances of their birth, where upward social mobility is so commonplace that people take it for granted, and where workers consistently get a fair shake, we have to build that. What we have now is almost the opposite. Having a threadbare pre-market welfare state but over-involved regulatory state comes from wanting that better society but trying to foist the bill onto businesses via ever-increasing mounds of red tape. That doesn’t work. It slows growth, strangles supply, worsens inflation, constrains workers, impedes innovation, undermines people’s retirement plans, harms consumers, and makes our society both less open and less free. We can do better than that, and banning noncompetes is a step in that direction.
As John Lettieri, co-founder of the Economic Innovation Group, put it: “Workers should be free to seek better jobs and compete in the labor market without permission from their former employers. Employers should be rewarded for winning the competition for talent—not for holding workers hostage. And policymakers should be relentlessly focused on encouraging competition, healthy risk-taking, and worker mobility.”
That’s it. That’s the goal. That’s how me make sure American workers get a fair shake in the 21st century.