Wage Gap Series-2

September 28, 2003

Hobson's Choice Wage Gap Series 1, 2 Links updated 3 September '05

[ Alas A Blog Wage Gap: part 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 ]

Trish Wilson addresses the same subject here.
US Census Data on Income: released Sep '03.

In a segmented labor market, the firm is one of a very small number of employers. Even thought the employer may have no desire to exploit the worker, there will be any number of social relations that will decide who gets hired and why. At the same time, it's unlikely anyone while have any idea how much the employer is actually worth. This leads us to a critique of the snazzy little charts I posted in the previous entry.

Charts like this are supposed to predict what sorts of pressures will be brought to bear on wages. I decided to post it to show that, even with classical economic theory, there's no reason to assume that the market will end discrimination. In the real world, of course, there's a little ambiguity. If a monopoly, for example, has rents which are above a certain level then consumers will work a little harder to find substitutes, and eventually they are bound to succeed. Monopolies, therefore, practice price discrimination. Safeway Club Card, anyone? After Albertsons introduced the Preferred Card in my neighborhood—i.e., after it bought out Luckys—prices on most goods began an absolutely stunning increase. Or rather, they did on the East 18th Street location. At the one on Mountain Blvd in the toney Montclair District, I seem to recall they refurbished the store but prices rose more gradually. Shoppers on East 18th Street are mostly lower income and less likely to drive up the hill to take advantage of the lower prices.

But this is a digression. About half the items I buy at Albertsons are discounted on the Preferred Card. This, of course, softens the blow of the massive price hikes of the late 90's. The price card enables Albertsons or Safeway to practice a system of price discrimination. In the end, of course, the consumer loses—it's impossible for an ordinary person to comparison shop when the pricing is so capricious. The cards enable Safeway and Albertsons to behave like monopolies even where they're only oligopolies.

The labor market is much the same. Part of the landscape in labor markets is minimum wage laws and payroll taxes. Payroll taxes are mercifully low in the USA, but constitute almost half of state revenue in some EU member states (this tends to offset somewhat their progressive credentials). A common strategy involves the loophole for very high tax rates. In a segmented labor market, the monopoloid (or imperfectly competitive) character of the markets appear as a very high cost of leaving the market for a better deal. For people who are very mobile, that hurdle is easily overcome.

In his posting on the topic, Ampersand points out the importance of this. Consider the case of a married couple. It is highly probable that the couple will locate in a way to accommodate the one who makes more money. This will certainly ensure that the one who does make more money, will continue to do so in the future. The gap between their incomes will grow because only one spouse will be able to relocate (thereby escaping a monopoloid, or segmented market). In the vast majority of cases, the couple will relocate to accommodate the man's employer.

It has been argued by one of this writer's college professors that monopolies cannot exist because substitutes exist for everything. Similarly, it has been argued, women tend to wind up in sectors which pay less; they excel in fields which tend to be less reliably funded (e.g., education rather than national defense); they are more likely to be employed seasonally; they are more likely to be on "the mommy track"; they are more likely to be employed as contract workers. They are less likely to be employed in industry or in trades.

The same professors who maintain that ordinary, entry-level employees are free to chase down optimal opportunities—if they would only apply themselves—also contend that government regulations pose an intolerable burden for large firms with professional bureacrats. Hobson's Choice prefers to avoid making associations between unrelated opinions, but in this case the two ideas are very closely related: employment regulations impose constraints on firms in order to free workers. These constraints are not always well designed, but welfare economists are at least one particular group which has been consistently guilty of ignoring the burden segmented labor markets impose on workers (especially women), while professing outrage at the compliance burdens faced by firms. Yet firms are consistently more empowered to maximize their utilities in competitve markets than employees are.

The effects of the segmented market, of course, are that the equilibrium wage will be very low; yet there will be economic rents which must be maintained. These rents tend to be a common guarantor of the firm's survival, even if it is badly managed. The wages may indeed have little to do with the actual value added by the employee; wages may indeed be part of a larger, complex social matrix that involves the disposal of the economic rents that a monopoly enjoys.¹ Rents tend to be arbitrary in their distribution, even under classical economic theory. Land rents are assumed to be fungible, but within a firm monopoly rents are something that the firm must decide how to distribute.

My personal observation is that monopoloid rents tend to shrink to a "ambient rent." For example, a company with a monopoly on gasoline distribution in an urban area will either have to be cautious lest another distributor muscle into its territory, or lest it strangle the economic development of the town. If the rent is phenomenally high, then the town could eventually stop growing; or else various parties who are locked out of the profits could defect, leading to a duopoly with lower rents. In some cases the area "served" by a monopoly will develop substitutes. Finally—by far the most common scenario—the firm enjoying the monopoly becomes so inefficient that there are no rents.

The forces that allow a monopoly to survive are ultimately political—the politics of the firm itself. One way to maintain rents is through "efficiency wages." (These actually are used to ensure that the capital is utilized efficiently, not to maintain rents; but in Third World countries, "para-statals" often regard their special role as something requiring efficiency wages") Here, the wages act to create a stable caste of workers who have a stake in the firm's survival. In order to motivate some workers, a reliable system of promotion is put in place. This can lead to junior employees who work incredibly hard, accompanied by slacker middle managers. The slacker middle managers may contribute nothing but an incentive to the lower levels.

Another example of this is in the case of the Industrial Revolution. Ironically, while economists like Ricardo and Mill were developing theories of wages based on diminishing maginal returns, the new industries were scrambling to develop standards of gender roles on the production floors. From the very first, the textile mills in New England and the English Midlands insisted on creating strictly segregated sex roles on factory floors. I would argue that the first factories were operating under efficiency wage conditions, especially in New England (although management was often barbarically incompetent; in the case of women employees, working conditions were often prison-like); but after urban labor became chiefly industrial, conditions were driven by confrontationally segmented labor markets, in which bitter animosities between rival ethnic groups enforced monopoly rents and crowded labor markets.

Further reading: Here is a study on women's working conditions in England during the early years of the Industrial Revolution. There is a copious amount of detail, although I found some of the reasoning implausible. Here is another history of women's occupations in the early period of the industrial revoution—this time, in West Virginia. Here is a paper from Northwestern University on the emergence of sexually segregated occupations in the UK and France, which takes yet another view of how these segregated roles emerged. (Skimming through these and other essays in encyclopedia, I am beginning to realize I might as well have posted about "life" in this entry!)

FOOTNOTE: 1 Economists use the term "rent" to refer to factor income greater than what is required to bring that factor to the market, such as the income from land near the imperial palace in Tokyo. To be sure, land near the palace can be subdivided into millions of units which are owned separately, but the supply of land near the palace cannot be reproduced. Similarly, it was common in Medieval Europe or Asia for the sovereign to grant a patent to a merchant, under which that merchant had the unique right to manufacture a commodity like ale. The patent allowed the merchant to charge a much higher price for the product than would ordinarily have been the case, while paying less for inputs. These monopolies were granted in exchange for a share of the extra-normal, or "economic" profits that the merchant made from his unique ability to supply the good. These profits are also called "rents."

The other big example of "rents" is in the oil industry. Countries such as Iraq have oil which can be recovered at very low cost. Venezuela has abundant supplies of oil as well, but at customary prices, the cost of recovery tends to eat up most of the revenue from Venezuelan oil (This is also true of the North American oil industry). Suppose there is an oil shortage and the price of oil goes up to US$40 per barrel. Suppose, moreover, that it remains at this price for several years. This will cause production to begin in places where it is very expensive to recover oil, like the Sea of Japan. Eventually the marginal cost of oil recovery will be US$40/barrel. But the cost of recovery will not increase significantly in Iraq. No, whoever has control of Iraqi oil recovery will stand to make an economic profit (or rent) of about $31 per barrel. As it happens the cost of production is so low that it is worthwhile recovering Iraqi oil when the price is $9/barrel! This is an irreproducible attribute of Iraqi oil which makes for high rents.