Stansbury-Summers: On the Link between US Pay and Productivity [feedly]

On the Link between US Pay and Productivity
http://economistsview.typepad.com/economistsview/2018/02/on-the-link-between-us-pay-and-productivity.html

Anna Stansbury and Lawrence Summers at VoxEU:

On the link between US pay and productivity, by Anna Stansbury and Lawrence Summers, VoxEU: Pay growth for middle class workers in the US has been abysmal over recent decades – in real terms, median hourly compensation rose only 11% between 1973 and 2016.¹ At the same time, hourly labour productivity has grown steadily, rising by 75%.

This divergence between productivity and the typical worker's pay is a relatively recent phenomenon. Using production/nonsupervisory compensation as a proxy for median compensation (since there are no data on the median before 1973), Bivens and Mishel (2015) show that typical compensation and productivity grew at the same rate over 1948-1973, and only began to diverge in 1973 (see Figure 1).

Figure 1 Labour productivity, average compensation, and production/nonsupervisory compensation 1948-2016

Notes: Labour productivity: total economy real output per hour (constructed from BLS and BEA data). Average compensation: total economy compensation per hour (constructed from BLS data). Production/nonsupervisory compensation: real compensation per hour, production and nonsupervisory workers (Economic Policy Institute).

What does this stark divergence imply about the relationship between productivity and typical compensation? Since productivity growth has been so much faster than median pay growth, the question is how much does productivity growth benefit the typical worker?²

A number of authors have raised these questions in recent years. Harold Meyerson, for example, wrote in American Prospect in 2014 that "for the vast majority of American workers, the link between their productivity and their compensation no longer exists", and the Economist wrote in 2013 that "unless you are rich, GDP growth isn't doing much to raise your income anymore". Bernstein (2015) raises the concern that "[f]aster productivity growth would be great. I'm just not at all sure we can count on it to lift middle-class incomes." Bivens and Mishel (2015) write "although boosting productivity growth is an important long-run goal, this will not lead to broad-based wage gains unless we pursue policies that reconnect productivity growth and the pay of the vast majority".

Has typical compensation delinked from productivity?

Figure 1 appears to suggest that a one-to-one relationship between productivity and typical compensation existed before 1973, and that this relationship broke down after 1973. On the other hand, just as two time series apparently growing in tandem does not mean that one causes the other, two series diverging may not mean that the causal link between the two has broken down. Rather, other factors may have come into play which appear to have severed the connection between productivity and typical compensation.

As such there is a spectrum of possibilities for the true underlying relationship between productivity and typical compensation. On one end of the spectrum – which we call 'strong delinkage' – it's possible that factors are blocking the transmission mechanism from productivity to typical compensation, such that increases in productivity don't feed through to pay. At the opposite end of the spectrum – which we call 'strong linkage' – it's possible that productivity growth translates fully into increases in typical workers' pay, but even as productivity growth has been acting to raise pay, other factors (orthogonal to productivity) have been acting to reduce it. Between these two ends of the spectrum is a range of possibilities where some degree of linkage or delinkage exists between productivity and typical compensation.

In a recent paper, we estimate which point on this linkage-delinkage spectrum best describes the productivity-typical compensation relationship (Stansbury and Summers 2017). Using medium-term fluctuations in productivity growth, we test the relationship between productivity growth and two key measures of typical compensation growth: median compensation, and average compensation for production and nonsupervisory workers.

Simply plotting the annual growth rates of productivity and our two measures of typical compensation (Figure 2) suggests support for quite substantial linkage – the series seem to move together, although typical compensation growth is almost always lower.

Figure 2 Change in log productivity and typical compensation, three-year moving average

Notes: Data from BLS, BEA and Economic Policy Institute. Series are three-year backward-looking moving averages of change in log variable.

Making use of the high frequency changes in productivity growth over one- to five-year periods, we run a series of regressions to test this link more rigorously. We find that periods of higher productivity growth are associated with substantially higher growth in median and production/nonsupervisory worker compensation – even during the period since 1973, where productivity and typical compensation have diverged so much in levels. A one percentage point increase in the growth rate of productivity has been associated with between two-thirds and one percentage point higher growth in median worker compensation in the period since 1973, and with between 0.4 and 0.7 percentage points higher growth in production/nonsupervisory worker compensation. These results suggest that there is substantial linkage between productivity and median compensation (even the strong linkage view cannot be rejected), and that there is a significant degree of linkage between productivity and production/nonsupervisory worker compensation.

How is it possible to find this relationship when productivity has clearly grown so much faster than median workers' pay? Our findings imply that even as productivity growth has been acting to push workers' pay up, other factors not associated with productivity growth have acted to push workers' pay down. So while it may appear on first glance that productivity growth has not benefited typical workers much, our findings imply that if productivity growth had been lower, typical workers would have likely done substantially worse.

If the link between productivity and pay hasn't broken, what has happened?

The productivity-median compensation divergence can be broken down into two aspects of rising inequality: the rise in top-half income inequality (divergence between mean and median compensation) which began around 1973, and the fall in the labour share (divergence between productivity and mean compensation) which began around 2000.

For both of these phenomena, technological change is often invoked as the primary cause. Computerisation and automation have been put forward as causes of rising mean-median income inequality (e.g. Autor et al. 1998, Acemoglu and Restrepo 2017); and automation, falling prices of investment goods, and rapid labour-augmenting technological change have been put forward as causes of the fall in the labour share (e.g. Karabarbounis and Neiman 2014, Acemoglu and Restrepo 2016, Brynjolffson and McAfee 2014, Lawrence 2015).

At the same time, non-purely technological hypotheses for rising mean-median inequality include the race between education and technology (Goldin and Katz 2007), declining unionisation (Freeman et al. 2016), globalisation (Autor et al. 2013), immigration (Borjas 2003), and the 'superstar effect' (Rosen 1981, Gabaix et al. 2016). Non-technological hypotheses for the falling labour share include labour market institutions (Levy and Temin 2007, Mishel and Bivens 2015), market structure and monopoly power (Autor et al. 2017, Barkai 2017), capital accumulation (Piketty 2014, Piketty and Zucman 2014), and the productivity slowdown itself (Grossman et al. 2017).

While we do not analyse these theories in detail, a simple empirical test can help distinguish the relative importance of these two categories of explanation – purely technology-based or not – for rising mean-median inequality and the falling labour share. More rapid technological progress should cause faster productivity growth – so, if some aspect of faster technological progress has caused inequality, we should see periods of faster productivity growth come alongside more rapid growth in inequality.

We find very little evidence for this. Our regressions find no significant relationship between productivity growth and changes in mean-median inequality, and very little relationship between productivity growth and changes in the labour share. In addition, as Table 1 shows, the two periods of slower productivity growth (1973-1996 and 2003-2014) were associated with faster growth in inequality (an increasing mean/median ratio and a falling labour share).

Taken together, this evidence casts doubt on the idea that more rapid technological progress alone has been the primary driver of rising inequality over recent decades, and tends to lend support to more institutional and structural explanations.

Table 1 Average annual growth rates of productivity, the labour share and the mean/median ratio during the US' productivity booms and productivity slowdowns

Note: Data from BLS, Penn World Tables, EPI Data Library.

Policy implications

The slow growth in median workers' pay and the large and persistent rise in inequality are extremely concerning on grounds of both welfare and equity. There are important ongoing debates about the factors responsible for this phenomenon, and what must be done to reverse it.

Our contribution to these debates is, we believe, to demonstrate that productivity growth still matters substantially for middle income Americans. If productivity accelerates for reasons relating to technology or to policy, the likely impact will be increased pay growth for the typical worker.

We can use our estimates to calculate a rough counterfactual. If the ratio of the mean to median worker's hourly compensation in 2016 had been the same as it was in 1973, and mean compensation remained at its 2016 level, the median worker's pay would have been around 33% higher. If the ratio of labour productivity to mean compensation in 2016 had been the same as it was in 1973 (i.e. the labour share had not fallen), the average and median worker would both have had 4-8% more hourly compensation all else constant. Assuming our estimated relationship between compensation and productivity holds, if productivity growth had been as fast over 1973-2016 as it was over 1949-1973, median and mean compensation would have been around 41% higher in 2016, holding other factors constant.

This suggests that the potential effect of raising productivity growth on the average American's pay may be as great as the effect of policies to reverse trends in income inequality – and that a continued productivity slowdown should be a major concern for those hoping for increases in real compensation for middle income workers.

This does not mean that policy should ignore questions of redistribution or labour market intervention – the evidence of the past four decades demonstrates that productivity growth alone is not necessarily enough to raise real incomes substantially, particularly in the face of strong downward pressures on pay. However it does mean that policy should not focus on these issues to the exclusion of productivity growth – strategies that focus both on productivity growth and on policies to promote inclusion are likely to have the greatest impact on the living standards of middle-income Americans.

References

Acemoglu, D and P Restrepo (2017), "Robots and jobs: Evidence from US labour markets", NBER Working Paper 23285.

Acemoglu, D and P Restrepo (2016), "The race between machine and man: Implications of technology for growth, factor shares and employment", NBER, Working Paper 22252.

Autor, D, D Dorn, L F Katz, C Patterson and J Van Reenen (2017), "The fall of the labour share and the rise of superstar firms", CEPR Discussion Paper 12041.

Autor, D, D Dorn and G H Hanson (2013), "The China syndrome: Local labour market effects of import competition in the United States", American Economic Review 103(6): 2121-2168.

Autor, D, L F Katz and A B Krueger (1998), "Computing inequality: Have computers changed the labour market?"  Quarterly Journal of Economics 113(4): 1169-1213.

Barkai, S (2016), "Declining labour and capital shares", Stigler Center for the Study of the Economy and the State, New Working Paper Series 2.

Bernstein, J (2015), "Faster productivity growth would be great. I'm just not sure we can count on it to lift middle class incomes", On the Economy Blog, 21 April.

Bivens, J and L Mishel (2015), "Understanding the historic divergence between productivity and a typical worker's pay: Why it matters and why it's real", Economic Policy Institute, Washington DC.

Borjas, G J (2003), "The labour demand curve is downward sloping: Reexamining the impact of immigration on the labour market", Quarterly Journal of Economics 118(4): 1335-1374.

Brynjolfsson, E and A McAfee (2014), The second machine age: Work, progress, and prosperity in a time of brilliant technologies, WW Norton & Company.

The Economist (2015), "Inequality: A defining issue – for poor people", Economist Blog – Democracy in America, 16 December.

Elsby, M, B Hobijn and A Şahin (2013), "The decline of the US labour share", Brookings Papers on Economic Activity 2013(2): 1-63.

Feldstein, M (2008), "Did wages reflect growth in productivity?" Journal of Policy Modeling 30(4): 591-594.

Freeman, R B, E Han, B Duke, D Madland (2016), "How does declining unionism affect the American middle class and inter-generational mobility?", Federal Reserve Bank, 2015 Community Development Research Conference Publication.

Gabaix, X, J‐M Lasry, P‐L Lions and B Moll (2016), "The dynamics of inequality", Econometrica 84(6): 2071-2111.

Goldin, C D, and L F Katz (2009), The race between education and technology, Harvard University Press.

Grossman, G M, E Helpman, E Oberfield and T Sampson (2017), "The productivity slowdown and the declining labour share: A neoclassical exploration", NBER, Working Paper No 23853.

Karabarbounis, L and B Neiman (2014), "The global decline of the labour share", Quarterly Journal of Economics 129(1): 61-103.

Lawrence, R Z (2015), "Recent declines in labour's share in US income: A preliminary neoclassical account", NBER Working Paper No w21296.

Lawrence, R Z (2016), "Does productivity still determine worker compensation? Domestic and international evidence", in The US Labour Market: Questions and Challenges for Public Policy, American Enterprise Institute Press.

Levy, F and P Temin (2007), "Inequality and institutions in 20th century America", NBER Working Paper 13106

Meyerson, H (2014), "How to raise Americans' wages", The American Prospect, 18 March.

Piketty, T (2014), Capital in the Twenty-First Century, Cambridge, MA: Belknap Press.

Piketty, T and G Zucman (2014), "Capital is back: Wealth-income ratios in rich countries 1700–2010", Quarterly Journal of Economics 129(3): 1255–1310.

Stansbury, A and L Summers (2017), "Productivity and pay: Is the link broken?", NBER, Working Paper 24165.

Endnotes

[1] As measured using the CPI-U-RS consumer price deflator. Using the PCE consumer price deflator, median compensation has risen by about 26% over the period rather than 12%. We use the Economic Policy Institute's measure of median compensation, which they calculate from median wages (BLS) and the average wage-total compensation ratio (BEA NIPA).

[2] Note that we focus in this column on the divergence of median or typical pay from average productivity. The divergence of average compensation from average productivity – equivalent to the declining labour share – has been smaller and more recent. Analyses of the average compensation-average productivity divergence can be found in Feldstein (2008), Lawrence (2016) and our recent paper (Stansbury and Summers 2017).

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Free Riding, Unions, and "Right-to-Work"

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Free Riding, Unions, and "Right-to-Work" // Grasping Reality with Both Hands: The Semi-Daily Journal Economist Brad DeLong
http://www.bradford-delong.com/2018/01/free-riding-unions-and-right-to-work.html

Amici Curiae in Janus v. AFSCME: No. 16-1466 :: In the Supreme Court of the United States :: MARK JANUS, Petitioner, v. AMERICAN FEDERATION OF STATE, COUNTY, AND MUNICIPAL EMPLOYEES, COUNCIL 31, ET AL., Respondents. On Writ of Certiorari to the United States Court of Appeals for the Seventh Circuit:

Henry J. Aaron, Katharine G. Abraham, Daron Acemoglu, David Autor, Ian Ayres, Alan S. Blinder, David Card, Kenneth G. Dau-Schmidt, Angus Stewart Deaton, Bradford DeLong, John J. Donohue III, Ronald G. Ehrenberg, Henry S. Farber, Robert H. Frank, Richard B. Freeman, Claudia Goldin, Robert J. Gordon, Oliver Hart, David A. Hoffman, Lawrence F. Katz, Thomas A. Kochan, Alan Krueger, David Lewin, Ray Marshall, Alexandre Mas, Eric S. Maskin, Alison D. Morantz, J.J. Prescott, Jesse Rothstein, Cecilia Elena Rouse, Jeffrey D. Sachs, Stewart J. Schwab, J.H. Verkerke, Paula B. Voos, David Weil: BRIEF OF AMICI CURIAE ECONOMISTS AND PROFESSORS OF LAW AND ECONOMICS IN SUPPORT OF RESPONDENTS:

INTRODUCTION: Amici curiae are leading economists, including three Nobel laureates, along with distinguished professors of law and economics, who submit this brief to discuss the free-rider problem this Court identified in Abood v. Detroit Board of Education, 431 U.S. 209 (1977).1 In Abood, the Court declined to interfere with legislative decisions that collecting fees from employees who are covered by union agreements, but are not union members, helps "distribute fairly" the costs of union representation "among those who benefit." Id. at 222. Fair-share fees counteract "the incentive that employees might otherwise have to become 'free riders'—to refuse to contribute to the union while obtaining benefits of union representation that necessarily accrue to all employees." Id.

Petitioner seeks to overturn Abood by arguing that nonmembers who are required to pay fair-share fees are "forced riders." Pet. Br. 53. According to Petitioner, employees who believe they benefit from the union will join it and pay their dues, whereas nonmembers seek to avoid paying fair-share fees based on their alleged "beliefs that they do not benefit from a union's advocacy." Id. at 52. Petitioner asserts that those purported beliefs "cannot be second guessed." Id.

If nonmembers' beliefs cannot be second guessed, however, they also cannot be presumed without any evidentiary basis, especially not as a pretext for overturning forty years of precedent; interfering with states' legislative decisions; and, under the guise of the First Amendment, presumptuously attributing beliefs to millions of people who do not actually hold those beliefs. Petitioner has not provided any evidence to support his assumptions about nonmembers' allegedly common beliefs and motivations with regard to unions and their fees. That evidentiary failure should be fatal because Petitioner's assumptions contradict decades, if not centuries, of economic theory and empirical evidence. As Mancur Olson demonstrated, a rational employee motivated solely by economic self-interest will withhold union dues or fair-share fees if he can do so without incurring countervailing costs—even if he benefits from the union, believes he benefits, and agrees with the union's actions on his behalf— because his fees "alone would not perceptibly strengthen the union, and since he would get the benefits of any union achievements whether or not he supported the union." Mancur Olson, The Logic of Collective Action 88 (2d ed. 1971).

The existence of such free-rider problems is well established, including among conservative economists. See, e.g., Milton Friedman, Capitalism and Freedom 23 (1962); Thomas Sowell, Basic Economics 433-36 (4th ed. 2011); Walter J. Wessels, Economics 536-37 (4th ed. 2006). Free-rider problems, and collective-action problems more generally, "are not mere curiosities, paradoxes, or aberrations of otherwise efficient markets. They underlie every aspect of human activity and have profound political and economic consequences." Marek M. Kaminski, The Collective Action Problems of Political Consolidation: Evidence from Poland, in Collective Choice 71, 71 (Jac C. Heckelman & Dennis Coates eds., 2003).

Indeed, free-rider problems were nearly fatal to the Union under the Articles of Confederation, as Alexander Hamilton observed. The notion "that a sense of common interest would preside over the conduct of the respective members, and would beget a full compliance with all the constitutional requisitions of the Union," was disproven by "that best oracle of wisdom, experience," as contrary to "the true springs by which human conduct is actuated." The Federalist No. 15, at 110 (Alexander Hamilton) (Clinton Rossiter ed., 1961). Despite their common interests, each member "yielding to the persuasive voice of immediate interest or convenience has successively withdrawn its support, till the frail and tottering edifice seems ready to fall upon our heads and to crush us beneath its ruins." Id. at 112-13.

What was true of the Union is also true of unions. Unless ameliorated by fair-share fees, the free-rider problem will leave unions weaker than employees (union members and nonmembers alike) would choose. Where fair-share fees are eliminated, in so-called Right to Work ("RTW") jurisdictions, nonmembers' withholding of financial support does not imply antipathy to unions. Instead, it follows from individual self-interest and the collective nature of the benefits unions provide, even in the absence of any disagreement about those benefits. That is the essence of the free-rider problem.

 

SUMMARY OF THE ARGUMENT: Petitioner's assertion that fair-share fees are unnecessary, and his assumption that employees seek to avoid paying fair-share fees because of commonly-held "beliefs that they do not benefit from a union's advocacy," Pet. Br. 52, are incorrect and unfounded. In fact, "rational, self-interested individuals" often "will not act to achieve their common or group interests," even when they agree about those common interests and how to achieve them. Olson, supra, at 2 (emphasis in original). This is not only well established in economic theory, it is also confirmed by empirical data—including the results of recent union-recertification elections.

 

ARGUMENT: I. Early discussions of free-rider problems: Mancur Olson's work on free-rider problems is seminal because he analyzed them using the formal tools of modern economics, but such problems were well recognized long before 1965, when Olson first published The Logic of Collective Action. In 1738, for example, David Hume observed that two neighbors might easily agree to work together to drain a meadow, but "it is very difficult, and indeed impossible, that a thousand persons should agree in any such action," because each would seek "a pretext to free himself of the trouble and expence, and would lay the whole burden on others." David Hume, A Treatise of Human Nature 366 (Cavalier Classics 2015) (1738). "Here then is the origin of civil government and society. Men are not able radically to cure, either in themselves or others, that narrowness of soul," but may agree to provide "security" against each others' "weakness and passion, as well as against their own," through government, which "forces them to seek their own advantage, by a concurrence in some common end or purpose." Id. at 365.

As already mentioned, Alexander Hamilton discussed the free-rider problems the states faced under the Articles of Confederation. See The Federalist No. 15 (Alexander Hamilton). Likewise, James Madison argued that "the radical infirmity of the 'Articles of Confederation' was the dependence of Congress on the voluntary and simultaneous compliance with its requisitions by so many independent communities, each consulting more or less its particular interests and convenience, and distrusting the compliance of the others." 2 Papers of James Madison 692 (Henry D. Gilpin, ed., 1840). Madison "came to view free-riding as the central vice of the Confederation," and his reasoning is remarkably similar to that of "modern public goods theorists, such as Mancur Olson." Keith L. Dougherty, Madison's Theory of Public Goods, in James Madison 41, 43, 57 (Samuel Kernell, ed., 2003); see also Keith L. Dougherty, Collective Action under the Articles of Confederation (2001).

John Stuart Mill also recognized that the "interference of law" is sometimes required, "not to overrule the judgment of individuals respecting their own interest, but to give effect to that judgment." John Stuart Mill, Principles of Political Economy Books IV and V 329 (Penguin Classics 1985) (1848). Suppose factory workers, bargaining collectively, could limit the length of their workday without a significant reduction in wages. "If this would be the result, and if the operatives generally are convinced that it would, the limitation, some may say, will be adopted spontaneously." Id. But "it will not be adopted unless the body of operatives bind themselves to one another to abide by it," because however convinced a worker may be that "it is the interest of the class to work short time, it is contrary to his own interest to set the example, unless he is well assured that all or most others will follow it." Id. Thus, "there might be no means of attaining this object but by converting their supposed mutual agreement into an engagement under penalty, by consenting to have it enforced by law." Id. at 330.

More recently—but still a few years before Olson published The Logic of Collective Action—Milton Friedman explained that "I cannot get the amount of national defense I want and you, a different amount. With respect to such indivisible matters we can discuss, and argue, and vote. But having decided, we must conform." Friedman, supra, at 23.

 

II. The Logic of Collective Action: Olson began The Logic of Collective Action with the observation that it is "often taken for granted, at least where economic objectives are involved, that groups of individuals with common interests usually attempt to further those common interests." Olson, supra, at 1. It is likewise often assumed, as Petitioner assumes here, that if a member of a group does not act to further the group's interests, he or she must not agree with the group. See id. at 85. These assumptions not only underlie Petitioner's brief, they also underlie Marxism, anarchism, and pluralism, as Olson explained. See id. at 102-31. But the shared assumption of these disparate theories— that rational individuals voluntarily advance collective interests—is often false. For example, "despite the force of patriotism, the appeal of the national ideology, the bond of a common culture, and the indispensability of the system of law and order, no major state in modern history has been able to support itself through voluntary dues or contributions." Id. at 13.

Olson defined a collective good (also referred to as a common or public good) as one that, if consumed by anyone in a group, "cannot feasibly be withheld from the others in the group." Id. at 14. Olson showed that the "larger a group is, the farther it will fall short of obtaining an optimal supply of any collective good, and the less likely that it will act to obtain even a minimal amount of such a good." Id. at 36.2 Collective goods are more likely to be provided in small groups because it is more likely that some individual will conclude that his personal benefits exceed his personal costs, but even then, the amount of the public good will be sub-optimal, and "there is a systematic tendency for 'exploitation'" by free riders. Id. at 29 (emphasis in original).3

A collective good may be provided if there is some quantity of it that "can be obtained at a cost sufficiently low in relation to its benefit that some one person in the relevant group would gain for providing that good all by himself." Id. at 22. By definition, however, that person will not be able to prevent others from consuming the collective good. "Since an individual member thus gets only part of the benefit of any expenditure he makes to obtain more of the collective good, he will discontinue his purchase of the collective good before the optimal amount for the group as a whole has been obtained." Id. at 35. And "the amounts of the collective good that a member of the group receives free from other members will further reduce his incentive to provide more of that good at his own expense." Id. The result is sub-optimal levels of the collective good, and exploitation of anyone who provides it by those who benefit without paying—i.e., free riders. See id.

Olson showed how his analysis applies to unions, which provide collective goods. "A labor union works primarily to get higher wages, better working conditions, legislation favorable to workers, and the like; these things by their very nature ordinarily cannot be withheld from any particular worker in the group represented by the union." Id. at 76. Moreover, union benefits that were already collective goods de facto were made so de jure when the "Wagner Act made collective bargaining a goal of public policy, and stipulated that whenever the majority of the employees in a bargaining unit voted for a particular union in a representation election, the employer must bargain collectively with that union about all the employees in that bargaining unit." Id. at 79 (emphases in original).

Despite the benefits unions provided, however, they commonly suffered from lack of participation and financial support. See id. at 85. "Those opposed to unions could argue that this proves that the union shop forces men who do not agree with the policies of the union to remain in the organization, and is evidence that the workers do not really favor unions, much less compulsory membership." Id. But that argument "stumbles over the fact that impartially conducted elections have shown again and again that unionized workers support union-shop provisions." Id. In elections held under the Taft- Hartley Act, the proponents of which "apparently thought that workers would often throw off union- shop provisions in free elections," unions instead "won all but four out of the 664 union-shop elections held" in the first four months after the Act passed, "with more than 90 percent of the employees voting for compulsory union membership. In the first four years, 44,795 union shops were authorized in such elections; 97 percent of the elections were won by the unions." Id. As discussed below, union-recertification elections held in Iowa in October 2017 show similar results. See Section IV, infra.

The results of such elections may seem paradoxical. "Over 90 per cent will not attend meetings or participate in union affairs; yet over 90 per cent will vote to force themselves to belong to the union and make considerable dues payments to it." Olson, supra, at 86 (emphasis in original). But there is no paradox. Voting for a union yet failing to support it with one's own time and money is "a model of rationality," because, although workers overwhelmingly believe they benefit from strong unions, each individual "will get the benefits of the union's achievements" whether he contributes or not, "and will probably not by himself be able to add noticeably to those achievements." Id. (emphasis in original).

Workers who vote for unions yet do not contribute to them are like citizens who vote for taxes yet "usually strive to contribute as little as the tax laws allow (and on occasion even less)." Id. at 87. Indeed, there "is no less infringement of 'rights' through taxation for the support of a police force or a judicial system than there is in a union shop. . . . To be consistent, those who base their case against the union shop solely on 'right to work' grounds must also advocate the 'unanimous consent' approach to taxation." Id. at 88-89. But that approach is generally (and quite rightly) dismissed as absurd. "Collective bargaining, war, and the basic governmental services are alike in that the 'benefits' of all three go to everyone in the relevant group, whether or not he has supported the union, served in the military, or paid the taxes. Compulsion is involved in all three, and has to be," because the "union member, like the individual taxpayer, has no incentive to sacrifice any more than he is forced to sacrifice," id. at 90-91, even if "there is perfect consensus" about the value of the union, id. at 60 (emphasis in original).

 

III. Theoretical and empirical studies of free riding after The Logic of Collective Action: Like any seminal work—and "few books in economics have achieved the wide-ranging, lasting, and profound impact of The Logic of Collective Action"—Olson's book "paved the way for new insights, applications, and the need for still further refinements." Sandler, supra, at 1, 200. For example, research in behavioral economics helps refine Olson's analysis by recognizing that individuals do not uniformly behave like the wealth maximizers generally assumed in economic theory.

Although "between 20 and 30 percent of the subjects" in experiments "behave completely selfishly," others behave reciprocally—that is, they will cooperate if they believe others are doing the same, but will punish free riding, even if the costs of doing so are greater than a person motivated solely by profit would be willing to incur. Ernst Fehr & Simon Gächter, Fairness and Retaliation: The Economics of Reciprocity, 14 J. Econ. Perspectives 159, 162 (2000). "The stability of reciprocal behavior suggests that it has deep evolutionary roots." Id. at 163 n.2.

Reciprocal behavior can sustain cooperation, up to a point, despite free riding—which helps explain why unions in RTW jurisdictions do not disappear overnight.4 But if free riding cannot be prohibited, it is contagious. The "self-interested types choose to free ride because they are self-interested, and reciprocal types free ride because they observe others free riding." Id. at 164. The end result, "in the absence of a punishment opportunity," is that "average cooperation converges to very low levels in the later periods." Id. at 165; see also, e.g., Dan M. Kahan, The Logic of Reciprocity: Trust, Collective Action, and Law, 102 Mich. L. Rev. 71, 79 (2003) (explaining the importance of "trust and reciprocity," as opposed to mere wealth maximization, while observing that "some coercive mechanism remains necessary" to counteract free riding).

Theoretical and empirical research continues to confirm that "the existence of free-riding or noncooperative behavior should be considered not as an aberration but rather as something to be expected in groups with more than two members." Molander, supra, at 768. Free riding has been observed and analyzed in all sorts of situations, by all sorts of economists—left, right, and center. Conservative economist Thomas Sowell, for example, explained that even if "everyone agrees that the benefits of mud flaps greatly exceed their costs, there is no feasible way of buying these benefits in a free market, since you receive no benefits from the mud flaps that you buy and put on your own car, but only from mud flaps that other people buy and put on their cars and trucks." Sowell, supra, at 433-34. The solution is to pass laws "requiring all cars and trucks to have mud flaps on them." Id. at 434.

Sowell also emphasized that the free-rider problem can emerge even when there is overwhelming agreement about the value of collective benefits. Consider national defense:

Given the indivisibility of the benefits, even some citizens who fully appreciate the military dangers, and who consider the costs of meeting those dangers to be fully justified by the benefits, might still feel no need to spend their own money for military purposes, since their individual contribution would have no serious effect on their own individual security, which would depend primarily on how much others contributed. In such a situation, it is entirely possible to end up with inadequate military defense, even if everyone understands the cost of effective defense and considers the benefits to be worth it.

Id. National defense is a prototypical example of the potential for free riding, but the phenomenon is ubiquitous, occurring not only in connection with union fees, but also church donations,5 deficits,6 NATO contributions,7 vaccinations,8 and in countless other contexts. See, e.g., Sandler, supra, at 95-192.

In sum, it is well established that free riding follows from individual economic self-interest in the context of collective goods, even when everyone agrees that they benefit from those goods. If individuals are not required to contribute, many who undisputedly benefit will nevertheless withhold their contributions out of simple self-interest, and others will withhold their contributions to avoid being taken advantage of by the free riders. A committed core may be able to sustain itself and provide some amount of the collective good, but even if some contributors persevere, the amount of the collective good will be sub-optimal, and will tend to decrease further and further below the optimum as the contagion of free riding spreads, resulting in increasing exploitation of the dwindling contributors.

 

IV. Economic theory and empirical evidence refute the arguments of Petitioner and his amici regarding free riders: Despite established economic theory and empirical evidence, Petitioner and his amici assert that eliminating fair-share fees will have little effect on union membership and collective bargaining, and will not increase free riding, but instead will merely liberate "forced riders." See, e.g., Pet. Br. 51-53; Br. Amici Curiae Buckeye Inst. for Pub. Pol'y Sols. et al. ("Buckeye Br."). Those assertions are incorrect.

The contention that overruling Abood and outlawing fair-share fees for public unions "is unlikely to cause a significant decline in union membership or spending," Buckeye Br. 5, is both false and disingenuous.9 As the Congressional Research Service found, in a study on which the Buckeye Institute itself relies, "the union membership rate in union security states," which allow fair-share fees, "is nearly three times that of RTW states," which do not. Benjamin Collins, Cong. Research Serv., R42575, Right to Work Laws: Legislative Background and Empirical Research 7 (2014). Although some researchers have posited that "RTW laws reflect a state's preexisting opposition to unions," id. at 8, studies that control for "underlying attitudes about unionization" show that "RTW laws exert an independent and strongly negative effect on union" membership, Raymond Hogler et al., Right- to-Work Legislation, Social Capital, and Variations in State Union Density, 34 Rev. Regional Stud. 95, 96, 109 (2004).

RTW laws "reduce the ability of unions to organize workers and to develop workplace institutions conducive to collective bargaining." Id. at 109. This is "not an artifact of underlying anti- union attitudes." Id.; see also, e.g., Ozkan Eren & Serkan Ozbeklik, What Do Right-to-Work Laws Do? Evidence from a Synthetic Control Method Analysis, 35 J. Pol'y Analysis & Mgmt. 173, 193 (2016) ("Our results indicate that the passage of RTW laws in Oklahoma significantly decreased private sector unionization rates."); Robert Bruno et al., The Economic Effects of Adopting a Right-to-Work Law: Implications for Illinois, 40 Lab. Stud. J. 319, 325 (2015) ("One area where there is a general consensus among researchers is on the negative effects that RTW laws have on union membership and union power."). Anti-union sentiment is "not a compelling explanation" for the significant reduction in union organization and membership in RTW jurisdictions. Casey Ichniowski & Jeffrey S. Zax, Right-to-Work Laws, Free Riders, and Unionization in the Local Public Sector, 9 J. Lab. Econ. 255, 273 (1991). Olson's explanation remains the most compelling. "Free riders protected by right-to-work laws substantially reduce union membership and collective bargaining." Id. at 273-74.

Furthermore, Petitioner's contention that nonmembers who pay fair-share fees are "forced riders" is dramatically refuted by the results of recent recertification elections in Iowa. Under Iowa's new collective-bargaining law, public-sector unions must be recertified every time they face a new contract negotiation—typically every two or three years. See Brianne Pfannenstiel, In biggest vote since new law, Iowa public unions overwhelmingly choose to recertify, Des Moines Reg., Oct. 25, 2017. They also must win approval from a majority of all employees covered by their collective-bargaining agreements; not just a majority of those who vote in the election. See id.; Iowa Code § 20.15(2)(b).

The election results for AFSCME Iowa Council 61 show that eighty-three percent of all employees covered by the union's collective-bargaining agreements affirmatively voted to recertify the union. Only fifteen percent failed to vote. And only two percent voted against the union.10 Yet seventy- one percent of the employees are free riders, in the sense that they are covered by union agreements, but are not members of the union, and do not pay fair-share fees because Iowa is an RTW state. Thus, a mere twenty-nine percent of employees (the union members) pay all of the costs of collective bargaining that the vast majority of employees agree they benefit from, and affirmatively voted for, yet decline to contribute to because RTW laws allow employees to obtain those benefits without paying for them.

Even the two percent of employees who voted against the union and (presumably) do not contribute to it are "free riders whom the law requires the union to carry—indeed, requires the union to go out of its way to benefit, even at the expense of its other interests." Lehnert v. Ferris Faculty Ass'n, 500 U.S. 507, 556 (1991) (Scalia, J., concurring in the judgment in part and dissenting in part) (emphases in original); see also id. at 562 (Kennedy, J., joining this part of Justice Scalia's opinion). And of the remaining ninety-eight percent, those who accept union benefits without payment or objection are certainly free riders.11

Moreover, employees who are covered by collective-bargaining agreements but do not contribute to the union are free riders whom the law requires not only the union, but individual union members to subsidize. Legislatures are right to establish fair-share fees to offset what would otherwise be a forced subsidy from union members to nonmembers. The First Amendment does not preclude this "elimination of the inequity that would otherwise arise from mandated free-ridership." Id. at 556 (Scalia, J., concurring in the judgment in part and dissenting in part).

 

CONCLUSION: Thus, the Court should not overturn Abood. Respectfully submitted,

DAN JACKSON
Counsel of Record
KEKER, VAN NEST & PETERS, LLP 633 Battery Street
San Francisco, CA 94111
(415) 391-5400 djackson@keker.com

Counsel for Amici Curiae

DATED: January 18, 2018

1 The parties have filed blanket consents to the filing of amicus curiae briefs. No party or counsel for any party authored any part of this brief, nor funded its preparation or submission.

2 Olson provided a formal proof, but its details are omitted here. For discussion of those details, and more sophisticated mathematical models, see, e.g., Todd Sandler, Collective Action 19-94 (1992); and Per Molander, The Prevalence of Free Riding, 36 J. Conflict Resol. 756 (1992).

3 As Olson noted, the "moral overtones of the word 'exploitation' are unfortunate; no general moral conclusions can follow from a purely logical analysis. Since the word 'exploitation' is, however, commonly used to describe situations where there is a disproportion between the benefits and sacrifices of different people, it would be pedantic to use a different word here." Olson, supra, at 29 n.47. The same is true of the term "free rider." It may sound like a moral criticism, but it describes perfectly rational behavior. See, e.g., id. at 76-91.

4 Studies of reciprocal behavior also support the conclusion that fair-share fees help preserve labor peace, and serve employers' interests, by obviating disruptive manifestations of the "powerful motives [that] drive the punishment of free riders." Ernst Fehr & Simon Gächter, Cooperation and Punishment in Public Goods Experiments, 90 Am. Econ. Rev. 980, 980 (2000).

5 See Brooks B. Hull et al., Free Riding, Market Structure, and Church Member Donations in South Carolina, 52 Rev. Religious Res. 172 (2010).

6 See Winfried Horstmann & Friedrich Schnieder, Deficits, Bailouts and Free Riders: Fiscal Elements of a European Constitution, 47 KYKLOS 355 (1994).

7 See Sandler, supra, at 99-106.

8 See Yoko Ibuka et al., Free-Riding Behavior in Vaccination Decisions: An Experimental Study, 9 PLoS One 1 (2014).

9 Common sense and the statements of Petitioner's own amici leave no doubt that Petitioner brought this case, and his amici support it, precisely because overruling Abood will decimate union membership and finances. As one of Petitioner's amici told its supporters, if this Court overturns Abood, "millions" of public employees "will opt out" of paying dues or fees, with disastrous effects for public unions across the country. Freedom Foundation Fundraising Letter, Oct. 2017.

10 Note, moreover, that even those who voted against recertification do not necessarily oppose union representation; they may desire such representation, only by a different union.

11 The Buckeye Institute relies heavily on an article hypothesizing that the proportion of "true free riders" is closer to thirty percent. See Russel S. Sobel, Empirical Evidence on the Union Free-Rider Problem: Do Right-to-Work Laws Matter?, 16 J. Lab. Res. 347 (1995). But Sobel derives that percentage from a theoretical analysis "based on the assumption that the current covered nonmembers could costlessly switch to identical nonunion jobs." Id. at 361 (emphasis added). Sobel estimates that seventy percent of nonmembers would switch to an identical nonunion job if they could do so costlessly and thereby avoid paying union dues. He calls these individuals "induced riders," but they are simply free riders who are somewhat less attached to their union job than the other thirty percent. As Sobel makes clear, none of them are motivated by any ideological disagreement with the union. See id. at 353-55. They simply weigh their marginal economic benefits against their marginal costs, and conclude that if they can obtain identical benefits without paying union dues, they will. See id. at 353-55, 361. All of them are free riders in the classic sense.


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JANUARY 19, 2018

More on distinguishing ideas and interests -- an exchange with Peter Hall

My recent post on ideas versus interests elicited some comments from Peter Hall, my Harvard colleague who has done probably more thinking on this issue than any other scholar I know. With his permission, I am attaching these comments below, along with the brief subsequent exchange we have had.

________________________________

Dani,

A few quick thoughts inspired by your recent blog post on ideas and interests.  As you know, this is a topic that has long interested me.  These are rather cryptic thoughts (ars longa, vitae brevis) but I pass them along in case they are stimulating.

You are, of course, right to observe that interests are always interpreted (by ideas), i.e. they do not arise unambiguously from the material world.  And I think you are on the right track when you contrast the 'ex ante' account from interests with an ideas account of outcomes. 

But one might put even more emphasis (than I gather you do?) on the implication, which is that people always act based on both their ideas and their interests.  That is to say it is impossible to have perceptions of interest without ideas (and it is those perceptions of interest rather than the interests in themselves that motivate actors). 

Thus, claims that people are acting on their 'interest' are, in effect, claims that they are acting in line with some conventional set of ideas about what those interests are.  The classic example would be analyses that attribute to actors a set of interests that a conventional understanding of neoclassical economics would ascribe to anyone in their socioeconomic position.  The implicit claim of such analyses must be that those actors understand their position in that way, i.e. in line with these conventional ideas.

On my reading, this is what you mean when you associate interest-based arguments with a 'parsimonious' account of the attributes of the actors.  I do wonder whether parsimonious is the correct characteristic to highlight here (ie thinness vs thickness) since the ideas that underpin such action can be rather 'thick' (in the sense of depending on a relatively elaborate worldview).  The more important point, I think, is that these actors operate out of a worldview that can readily be seen as 'conventional' (in the sense of that term that it is widely-accepted as orthodox).

Now, there may be small sets of actors who in certain circumstances act against their 'interests' in the sense that they realize, by virtue of the ideas they hold, that they will lose something they value (material goods, power, etc.) by so acting.  And those actors might do that as a result of holding (other) sets of ideas, eg. of the sort associated with some sort of 'altruism'.  Soldiers who sacrifice themselves in battle might fall into that category.  However, I suspect that this is a very small category of people and, in many instances, as your argument intuits, such people could be said to have an unconventional view of their interest which dictates their action.

To continue then with the main account, if my view is correct, it becomes interesting to inquire about the role of ideas when there is (some kind of) contestation about precisely what is in the interest of the actors.  In your terms, these are cases in which ideas become salient to action And it turns out that is a relatively-common occurrence.  Thus, ideas often have influence over action, and the key problem is to explain (make claims about) why some ideas become influential in specific contexts while others do not.

With regard to that problem, it must surely be the case that a specific set of ideas (relative to other ideas) are more likely to become influential when they bear directly on the interests of the actors (understood as gains/losses of power or goods that the actor values).  Actors usually gravitate toward ideas that seem to them to serve their interests, understood in this stripped-down fashion. This is why interests and ideas typically bear together on action. 

What sorts of implications follow from this?

• The Germans are probably not acting out of 'interest' independently of ideas. They are influenced by (Hayekian) ideas that tell them that their current posture is in the national interest as they construe it.  And, if we want to think of the latter as some sort of stripped-down 'material' interest, we have to bear in mind, first, that this conception of material interest is itself underpinned by an explicit set of ideas and, second, that there are other ways to interpret national interest and even material national interest.  For instance, policies that provoke a second Euro crisis might not ultimately be in that interest.  In other words, your initial point that all 'interests' must be interpreted by 'ideas' means that we cannot claim that interests trump ideas in instances such as this.

• Although ideas are, on this view, important in all cases, we can detect, as you argue, instances that are distinctive by virtue of something about the prominence of the role that ideas play in them, such as the case of the Reagan tax cut. The issue is: what is distinctive about such instances?  I would argue it is not that ideas are somehow more important than interests in such instances.  After all, making the tax cuts was very much in the political interest of the Reagan administration.  What is distinctive is that there was contestation, with significant numbers of partisans on each side, about how to interpret (in this case) the economic interests of the populace.  It is the presence of contestation, rather than the importance of ideas, that distinguishes this case.

• My bottom line is that the analytical way forward is not to ask: 'can we distinguish cases in which ideas were more important or influential from cases in which they were not?' but rather to ask: 'how might we best distinguish between situations in which ideas play a somewhat different role in the interaction between interests and ideas that underpins all action?'.

Don't hold me to this.  These are difficult issues and I find my views on them changing over time.  But I hope this is stimulating.

Peter

____________________________

Dear Peter

Thank you very much for this. It is incredibly helpful, and I agree with much of it.

I am all for pursuing the agenda you set out at the very end – tracing out the different ways in which ideas affect interests and their interaction with prevailing ideational environment. But I would like to resist the formulation where interests are always subservient to ideas, which this approach presumes. There is a sense in which this is true, and you put it very well yourself in your note. A statement of the form, "the industry pursued its interest" must have some meaning, even though at the end of the day what we really mean to say is "the industry pursued its interest, as it perceived its interest to be."

We are often concerned with explaining changes. Why did an actor change its behavior? There is substantive difference, it seems to me, between two sort of explanations:

• an explanation that relies on behavior in the context of an unchanged understanding of what the actor's interests are. The actor's utility function and its understanding of how the world works stay the same, but there are changes in the world it confronts. For example, the constraints it faces are altered.
• An explanation that relies on a change in the actor's understanding of what its interests are. The actor's utility function changes or its understanding of how the world works is altered.

The distinction I would like to make is that case (a) is what many realists have in mind in IR or rational choice political economists tend to focus on. And I think it is OK to call these cases interest-driven cases.

Case (b) would fall in my ideational category.

Just like you, I am not sure about any of this. But we should try to figure out a way of thinking these issues more.

Best

Dani

______________________________

Dani,

What you say makes excellent sense.  Focusing on cases of change is very promising.  And the distinction you draw between (a) and (b) a compelling one.  I agree that ideas do not trump interests.  The latter are just as important to be sure.

Of course, some of the most interesting cases are ones with features of both (a) and (b), i.e. constraints/opportunities in the world change and (partly by virtue of that) there is consideration, albeit not always adoption, of new ideas.  But the distinction strikes me as an excellent starting point.

Peter

 

 

 

Posted at 11:32 AM | Permalink

COMMENTS

Aren't you focussing far too much on (explaining) behaviour of individual actors and failing to take into account that collective behaviour is complex (i.e. results from interactions between too many -agency imbued- actors to be analysable in that way) in which causality is not necessarily more important than intentionality, narrratives and competing discourses and in which path dependence makes analysis of behaviour being categorically caused by either x or y or both futile?
Agreeing on behaviour being driven by interests and/or ideas primarily implies agreement on a language and a perspective, that will subsequently performatively create social reality in its likeness.
If economists convince people that they act in accordance with ideas (and when they have a positive image of themselves: ideals) society will improve.
If economists convince people that they act in accordance with interests (and that serving one's own interest is only natural) society will deteriorate.
Let us please take our responsibility as economists to improve society!
Please see my "Economics as meant" presentation of a year ago in Leuven: https://www.linkedin.com/pulse/economics-meant-normative-discipline-wim-nusselder/

Posted by: WimNusselder | January 20, 2018 at 06:48 AM

I confess I'm at something of a loss in understanding the intensity of this exchange. It seems as though the two of you are both striving for an account framed in terms of "ideas" and "interests" as unitary terms, but surely there are very important distinctions we would want to make.

First, let's distinguish between ideas about what is in our interest from other ideas about what is right, advisable or entailed apart from our personal interest. If I believe it is in my personal interest to cheat you financially, we wouldn't want to conflate my idea about this interest with my idea about the rightness or advisability of carrying out the action, would we?

Second, the theory of ideology directs us to distinctions among ideas along a spectrum (or even multiple dimensions) of interest-impactedness. Even when people are acting, or claim to be acting, according to ideas other than those of their personal interests, they may be doing so indirectly to the extent they are attracted to these noble notions due to their interestedness. This is a complex, tangled topic, so I won't go further except to put in a reminder that the theory of ideology is about belief, not truth value. (Contemporary standpoint theory is utterly muddled about this.)

What about Germany? German political figures, pundits, the majority of the Council of Economic Experts, etc. generally justify their economic policies on the basis of ideas of the general good, not just what's good for Germany. In that sense, they pass the first filter: their ostensible motivating ideas are not narrowly ideas of their own national self-interest. The important question is whether they pass the second: to what extent is the current embrace of ordoliberalism reflective of the national interest of Germany given its reliance on current account surpluses and its position in the Eurozone? That's an important question, ultimately one that has to be explored empirically.

My own hypothesis, for what it's worth, is that structurally surplus countries generally display ideological predispositions for economic theories that stress saving and fiscal restraint. That's part of what it means to be a structurally surplus country.

Posted by: Peter Dorman | January 23, 2018 at 04:20 PM

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