Big Tech, Jobs and Cass Sunstein’s Nirvana

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In a short Bloomberg column titled “A New View of Antitrust Law That Favors Workers”, Professor Cass Sunstein warns that “Many labor markets are not competitive“, and that antitrust’s narrow focus on consumer welfare (CW) is not up to the predicament.

Sunstein’s opinion is based on research by Eric Posner, Glen Weyl and  Suresh Naidu, a group dubbed the “New Chicago School“.

Their work suggests that because wages are artificially low, qualified workers refuse to take jobs. Instead they “exit the workforce and rely on government benefits“. On some markets this problem is caused by “barriers to competition” and excessive “market concentration“, in plain words a small number of hirers. So far, so good.

But the low wage argument breaks down a sentence after when of all possible examples of monopsony power in american labor markets, Sunstein singles out the tech industry.  In tech, writes Sunstein, “only a few employers can survive, perhaps because of “network effects,” which arise when the value of a good or a service increases if a lot of people use it” think of Google or Facebook). And we are yet to understand how “big companies (like Apple or Google) might use their market power to hurt employees“.

This is incorrect as a matter of economics, law and logic. Let us start with the economics. In the past decade, the large tech industry has added more jobs to the US economy than any other sector.  The graph above shows the year over year employee headcount at each of the FAANG (including Microsoft) v job creation of the US economy. This data is orders of magnitude inconsistent with a theory of monopsony power. Anyone with basic economics knowledge understands that this would require a correlative decrease in labor participation at the FAANG. Moreover, there is every reason to believe that the FAANG did not only create new jobs for wealthy computer scientists. Amazon (blue line), the largest employer of all FAANG, has been predominantly adding jobs in warehousing. And Apple has essentially grown its workforce in retailing.

Perhaps more suprising is that Cass Sunstein turns a blind eye on several legal developments which show that the state of nature in tech is one of intense competition for talents. How else can one explain cases like US. v. Adobe Systems, Inc., et al., where the DoJ prosecuted several large technology firms – including Google, Apple, Intel, Pixar, Intuit and Adobe –  who had unlawfully agreed to refrain from soliciting, cold calling, recruiting or otherwise competing for each others’ computer engineers and scientists? And what about the ongoing policy discussion on employment contracts in the tech sector, which are said to lock the mobility of knowledge behind barriers like non-compete clauses, contractual perks, stock option plans or simply high wages. If anything, the very existence of those contractual arrangements does not bespeak monopsony power in tech, just the very opposite.

Last, there is logic. Think of the points that we just made on the economics and the law. How can a tech firm be a monopsonist and meanwhile compete with other firms as an oligopsonist on the labor market? Admittedly, in their original study, the writers of the new Chicago School write that the “problem boils down to excessive merger activity, which has led to concentrated labor markets“. Again, big mergers are quite infrequent in tech. Most M&A transactions instead involve the “acqui-hiring” of successful startups, like FB/Instagram or Microsoft/Skype.  But those acquisitions represent low headcounts. And their occasionally astronomical valuations leans against the very idea of monopsony power.

The only way to do justice to Sunstein’s piece is to read it as follows: would tech firms be smaller, competition for jobs would be even stronger and wages even higher. This is an example of what economist Harold Demsetz once called the Nirvana fallacy, namely an idealized, unrealistic situation. However, one would then expect that Sunstein brings evidence that the grass could be greener in tech jobs. And perhaps even more importantly, this shrouded reading that we make of Sunstein’s piece squares poorly with the author’s proven ability to speak clear to the public opinion in the mainstream press.

 

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