Jun 19 • 1HR 0M

Interview with Alan Manning, Professor at LSE

Discussions of monopsony, union wage premium, and his career

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Mixtape: the Podcasts are interviews conducted between Scott Cunningham (Professor of Economics at Baylor University) and mostly economists, their collaborators, and people in adjacent fields.
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Alan Manning has worked as a labor economist going back to the mid 1980s. He completed a DPhil in economics from Oxford in 1984, and has been at London School of Economics for most of his career. But as he says in this interview, he’s never taken a labor class. His advisor at Oxford was the Nobel laureate James Mirrlees who shared it with Vickrey for work on information, and not surprisingly Alan originally wrote on theoretical topics like that. But he was always pulled to labor from the start and even his theoretical work early on was about topics relevant to labor, like sequential bargaining.

The topic I mostly associate with Alan Manning is that of monopsony and imperfect competition. The theory of monopsony dates back at least to Joan Robinson and as can be seen below it has enjoyed periods of popularity as well as sometimes viewed as borderline heterodox. Robinson was an economic theorist involved in the rich and sometimes contentious early to mid 20th century debates that we sometimes associated with Keynes and his writings, particularly as it related to employment. Robinson developed a theory of monopsony in a 1933 book and it bears close similarities to classic modeling of monopoly power. When a single firm is the only employer, they can pay workers less than their marginal product to maximize profits. The implications of monopsony are interesting; not only can it lead to inefficient wages, but just as price controls can lead to monopolists expanding output, minimum wages can lead to increased employment. It’s traditionally just one reason given as to why in Card and Krueger’s 1994 classic minimum wage study finding a positive effect of minimum wages on employment.

Manning was, like Card and Krueger, someone who wrote on the sorts of topics you typically associated with imperfections in the labor market. Topics like minimum wages, unions, bargaining power, and incomplete information. He, along with longtime collaborator Stephen Machin, were among those active labor economists writing in the mid 1990s writing on the “new economics of the minimum wage” reporting little to no support for the negative employment effects we often associate with minimum wage arguments. Such findings are often treated with disdain outside of labor. And while the null results are intensely debated to this day by labor economists, too, labor economists at least know that it is not illogical that minimum wages may have null or even positive effects on employment.

The null effect of the minimum wage on employment can be traced back to monopsony and imperfect labor markets. In such environments, minimum wages will cause expansions in employment (see picture below). This is intuitive when you work through the model, just as the effect of price controls on monopoly output is intuitive when you work through the model, but it is not intuitive when one questions whether in fact labor markets are indeed imperfect. Monopsony involves a small number of firms hiring; at the extreme it involves one firm. But in the space of minimum wage paying jobs, it would seem that there are many firms competing for low wage workers’ time. Simply drive around where I live, Waco, and there are endless Whataburger and tex mex restaurants hiring teenagers by the truckload to flip burgers and pour queso, so in what sense is imperfect competition, while theoretically a possibility, a real description of most labor markets?

Insert Alan Manning’s work when you seek to find answers to that question. Manning in his 1996 book, Monopsony in Motion, elaborates on this question by explaining the theoretical nuances of imperfect labor markets by drawing on not only Robinson but also work in bargaining, search and information, as well as provides a wealth of empirical evidence that indeed monopsony is not merely a theoretically possibility; it seems to be an important lens by which we think of contemporary labor markets.

Market perfection is a spectrum along which markets can perform well or poorly as the number of firms change in the market. We can go from a monopoly environment to a perfectly competitive one by increasing the number of firms. Sometimes the tipping point by which monopoly markup pricing happens in some models almost instantly, and sometimes in other models much more slowly, but in the limit our models mostly recognize that prices will be set to marginal cost as a function of competition between the large number of firms. The same logic applies to labor markets. The theoretical problems associated with imperfect labor markets are resolved to some degree as competition between firms grows. This is the context in which to read a new paper in the JHR by Manning, along with three coauthors Hirsch, Jahn, and Oberfichtner. The article is entitled “The Urban Wage Premium in Imperfect Labor Markets” and it appeared in a special issue of the JHR on monopsony, edited by Card, Ashenfelter, Farber and Random.

The study documents a wage premium earned by German workers in urban areas. The documenting of an urban wage premium is not new. Moretti has suggested that it may be a result of spatial agglomerations that enhance worker productivity. Manning and others have suggested, though, that while that may be true, there is an additional reason and that’s traced back to his longtime research agenda on imperfect labor markets. Urban areas, they show, are denser with more competition in firms for workers and that in and of itself appears to be at least partially responsible for the wage premium, net of any spatial agglomeration related factor productivity improvements. Their support is summarized here:

“We also show that the urban wage and wage-growth premium are considerably lower once we condition on our measures of labor market competitiveness. Our estimates suggest that the urban wage-level premium falls by about 40 percent when controlling for differences in labor market competition, and the cumulated urban wage-growth premium after 20 years of experience is about halved.”

They conclude that a substantial part of the urban wage premium is caused, not by factor productivity enhancements from concentration but rather competition itself due to thicker labor markets. Workers, in their view, earn higher wages in denser areas both because of whatever impact proximity has on worker productivity but also simply due to increased competition.

I will conclude by simply admitting a fact about myself. I have studied sex workers most of my career. I do not necessarily consider myself a labor economist, but I do have the deepest admiration for them as a group. Most of us buy goods and services through labor income, not capital. Most of us live paycheck to paycheck even. If we lost our job, we might find another one, but the job loss experience itself could be deeply difficult, tumultuous, even traumatizing. I moved from my small idyllic childhood home of Mississippi to large a suburb of Memphis as an 8th grader when my dad’s economic opportunities withered in my old hometown. It was a life changing event, and while I would not change it, I also did not like it. I have had two jobs since graduating college, the second one I have now. I think about money constantly: will I have enough money for the girls to do what they want? Will I have enough money to pay for my family’s expenses? How will I handle unexpected shocks? I think about bargaining with my employer and how Baylor is the only firm that can hire me in Waco all the time. I think about inflation, particularly housing costs and rent, and about the families in my community who do not have the same opportunities I have and worry about their emotional health, about the parents who once the kids are asleep go back through the days expenses, and count the days until their next paycheck. We buy “goods and services” at market prices using labor income and sort through the challenges of that on a regular basis, almost to the point of it being an unhealthy preoccupation.

The labor economists as a group in my mind are therefore a special group of workers within the field of economics, and people like Alan Manning hold special places for me. Steady scientists who, paper after paper, book after book, speech after speech, mentoring students and through their collaborations, continue pushing forward on topics that in reality get to the core of life on this planet — survival. I am a romantic, I do look up to the labor economists, I am appreciative of their steadfast commitment to the same topics, deep disentangling of myth from reality through the construction and deconstruction of theoretical models and careful parsing of patterns found in better and better data sources.

Imperfect competition and monopsony has not always been a popular topic. It has gone through waves of interest. Sometimes it has been extremely interesting to people; sometimes it has seemed borderline absurd. Alan Manning has been a straight line through these waves. It was a real joy to talk to him. I enjoy learning from him and hope you found the interview with him as delightful as I did.