Let’s make labor market institutions work for workers

Editor's note:

This article originally appeared on Real Clear Markets on June 13, 2017.

Fortunately for workers, businesses, and the economy, employment relationships are positive-sum: the value of the goods and services produced together is greater than the cost. However, to make work rewarding for firm and worker alike—to make markets truly competitive—requires at a minimum that the rules governing the employment relationship be fair and clear. Unfortunately, our labor markets sometimes fall short of this ideal.

Recently, there has been much discussion of worker bargaining power and the ways that some firms try to suppress it, thereby holding down wages. This should be a concern even for those who are not typically inclined to see workers as needing protection. In an effort to protect themselves from open competition, some firms are happy to use government power to their own advantage, but to the detriment of society overall. In a previous article, I discussed concerns regarding non-compete agreements, which can have exactly this effect by preventing workers from taking jobs at competing employers. Moreover, to the extent that firms are successful in reducing worker bargaining power, it may be the taxpayer who is called upon to make up the difference for low-wage workers.

Non-competes are far from the only legal tool subject to abuse. Another potentially problematic labor market institution is the so-called pre-dispute arbitration agreement. Under the Federal Arbitration Act, firms may require as a condition of employment that workers surrender their right to pursue grievances within the court system, instead submitting to binding arbitration.

To be sure, binding arbitration has a number of benefits. For the employer, arbitration promises a private forum for what could otherwise be an embarrassing public spectacle. There may also be benefits for society as a whole, given that speedy, inexpensive resolution of disputes is valuable to everyone. More speculatively, making it harder to legally fire workers has been linked with declining dynamism in the labor market, and binding arbitration could mitigate this problem.

But for workers, there are also some serious downsides. Arbitrators can be less sympathetic than a jury, for one thing. To the extent that arbitrators are chosen by the employer, there are obvious concerns: an arbitrator who tends to rule in favor of employers may be more likely to get repeat business. It is useful to contrast this with the situation that often exists in a collective bargaining context, where unions and employers jointly choose both arbitrators and the terms of arbitration.

To the extent that firms are successful in reducing worker bargaining power, it may be the taxpayer who is called upon to make up the difference for low-wage workers.

Finally, new hires are being asked to sign away their rights well before any dispute actually arises, and before they have an incentive to familiarize themselves with the terms of the mandatory arbitration agreement. As with non-compete agreements, it is likely that workers are ill-informed about both what they have signed up for and the extent to which it is even enforceable.

That enforceability is now under some close scrutiny. Earlier this year, the Supreme Court announced that it will rule on whether employment-related pre-dispute agreements can preclude worker participation in class-action lawsuits. Legislation has been recently introduced that would invalidate pre-disputeagreements in employment-related matters, while still allowing for workers and firms to agree to binding arbitration after a dispute has arisen.

As policy evolves—and with so many unresolved questions about the costs and benefits of pre-dispute employment arbitration—it is striking how little data there is to inform the debate. We do not have a clear sense of how widespread the agreements are, what their detailed provisions are, or how often they are enforced. Without this information, it will be difficult for policymakers to make sound decisions that benefit workers and the economy. Efforts should begin now to develop more reliable, comprehensive data about pre-dispute employment agreements, non-competes, and other labor market institutions that determine workers’ fates.