Noah Smith on Worker Compensation, Co-determination, and Market Power

Episode Summary

Executive Summary: Russ Roberts and Noah Smith discuss whether corporate governance should change to address short-termism, stagnating wage growth, and rising market power. Smith is skeptical but open to evidence that concentrated firms, co-determination, and temp staffing arrangements may shift income from labor to capital; Roberts presses on data interpretation and market mechanisms. They agree the evidence is mixed and that better cross-field research is needed.

Main Topics: Corporate governance and short-termism (Priority: 5/5): The conversation opens with concerns that public markets push managers toward quarterly thinking, discouraging long-term investment. Smith argues stock prices can be overly volatile and may not fully reflect long-horizon value, while Roberts questions whether markets already discount future outcomes appropriately. Wage growth slowdown and compensation measurement (Priority: 5/5): They debate whether U.S. wages are stagnant or merely growing more slowly. Smith says multiple wage series show a slowdown since 2000, while Roberts concedes slowing growth but rejects claims of literal stagnation or that all gains went only to the rich. Co-determination and worker representation on boards (Priority: 4/5): They examine German-style co-determination, where workers have board representation. Smith reviews evidence that worker representation may lower stock valuations, raise productivity, or improve worker input, but emphasizes that the causal evidence is mixed and suggests experimentation via subsidies or nudges. Monopoly power, concentration, and labor share (Priority: 5/5): A major section tests the claim that rising concentration explains higher profits and wage stagnation. Smith cites evidence on rising concentration, rising markups, and lower labor shares in more concentrated industries; Roberts argues local labor markets and firm efficiencies may explain outcomes without implying exploitation. Local labor markets and monopsony concerns (Priority: 4/5): Smith argues workers often face limited nearby employer options, so concentration can reduce bargaining power even if national markets remain competitive. Roberts pushes back that workers can switch industries, locations, or firm types, making the labor market less rigid than monopsony stories imply. Temp staffing agencies and hidden wedges in labor markets (Priority: 4/5): Roberts highlights temp staffing as an underexplored phenomenon where employers pay agencies far more than temps receive, suggesting a potentially important structural inefficiency or labor-market distortion. Smith agrees it is strange and under-researched. Field-level disagreement between industrial organization and macro/labor research (Priority: 3/5): Smith argues the monopoly debate has created a culture clash: IO economists focus on firm-level mergers and markets, while macro, labor, and public finance researchers examine economy-wide trends. He calls for more dialogue between these camps.

Key Arguments: Public corporations may underinvest because managers and investors are incentivized to focus on short-term stock price movements rather than long-run fundamentals. Stock prices are highly volatile relative to earnings/dividends, which supports the claim that markets may not perfectly enforce long-term discipline. Privately held and founder-run firms appear to invest more and may perform better over the long term, though causality is unclear. German-style co-determination might improve worker voice and productivity, but the evidence is mixed and not strong enough to justify sweeping mandates. Rising concentration and markups across many sectors correlate with lower labor shares and may indicate that large firms are extracting more value from workers, consumers, or suppliers. Roberts argues that many wage and profit trends can be explained by technology, measurement problems, industry mix, or labor-market mobility rather than monopoly alone. The tech sector is high profile but too small an employment share to explain economy-wide wage trends by itself. Temp staffing agencies represent a puzzling institutional wedge that may reveal more serious labor-market frictions than standard competitive models allow. The monopoly debate should not be confined to merger-level IO analysis; macro trends may reveal economy-wide effects missed by micro studies.

Data Points: Date of episode: September 7, 2018 - Opening introduction to the EconTalk episode U.S. corporate tax cut: Recent cut to corporate tax rates - Roberts notes taxes can raise corporate profits in the short run, complicating interpretation of profit growth Divergence in profits and compensation: Around 2001 - Roberts says the chart of compensation versus corporate profits diverged dramatically around this time Wage-growth slowdown period: Since the turn of the century (~17 years of data as discussed) - Smith argues wage growth slowed materially after 2000 Stock ownership concentration: Top 10% of Americans own most stock - Used to argue stock market gains are not a broad measure of household welfare Germany population size: About one quarter of U.S. population - Smith cites Germany as a useful co-determination model because it is a substantial country, not a tiny case U.S. employment share of tech: Relatively small slice of employment and revenue - Smith argues tech market power cannot explain economy-wide wage stagnation by itself Local market scope: Within a mile or two of a worker’s house - Smith emphasizes that nearby employer concentration matters for labor bargaining power Monopoly-era wage effects: Lower wages and higher prices in locally concentrated markets - Smith summarizes papers linking concentration to wages and prices Labor-cost share claim: About 60% of costs - Roberts argues firms can lower other costs, but labor is often the largest component

Pivotal Quotes: "We don't want to tell people, let them eat the Dow Jones Industrial Average." — Russ Roberts: On why stock market performance is not the same as broad economic welfare "You see stock prices bounce around a lot... and then you look and you see that earnings never did the same." — Noah Smith: Explaining excess volatility and why short-term market prices may not track fundamentals well "The real issue is about distribution." — Russ Roberts: Transitioning from short-termism to the wage-and-income distribution debate

Implications: The episode suggests corporate governance reform should be cautious and experimental, not ideological. The strongest unresolved questions concern market power, labor bargaining, and hidden labor-market frictions; better causal evidence is needed before imposing broad policy changes.