Friday, June 4, 2010

eminent domain in labor law - an explanation

I was intentionally not clear in a recent comment I made on an Acemoglu and Wolitzky paper about the economics of labor coercion. I wanted to elicit first reactions, comments, "flames" of all kind. I didn't receive any of that! So I'm going to elaborate on my point, because I do think it's an interesting one -- if somewhat "out there". Maybe you'll get angrier, or agree with me even more, once you hear me out.

I'm separating out two arguments: one concerning property law and the other concerning labor law. My argument is that the two are remarkably similar in their implications for a story of social definition of property and economic growth.

Property law

Historically, under various reasonable use criteria, canal development was given a green light to infringe on the rights small mill owners had over the use of water power from local streams to power their mills. Canals were a diversion of water from these sources and caused much property damage to these mill owners in the process.

In these cases, voluntary Coasean bargaining between the canal projects and the mill owners broke down, but not because transactions costs were too high. Voluntary bargaining broke down because the legal system had developed an ideology that was fundamentally in favor of larger-scale property development in the interests of the community.

Coasean models of eminent domain argue that this rule leads to property values that are lower than the market value of surrounding properties. The reason is that if property rights are unclear for the original owner of the property, there is less incentive to develop your own property, and more of an incentive to develop in outside regions. In other words, you have a misallocation of resources leading to socially suboptimal arrangements.

Labor law

Imagine for a moment a spectrum of potential wages given to a worker. On the lower end of the spectrum, you have the least amount of money a worker is willing to accept at a job. Call this a reservation wage. Between that reservation wage and the actual wage of the worker, the contract wage, you have a gap. That gap has been interpreted by some to be roughly the amount the worker "has to lose" in their job -- if you increase the gap, the worker may be more obedient. Nevertheless, it's clear in such an analysis that many variables are affecting the worker's property in his or herself -- his or her labor power. How to increase the gap?

Keep the spectrum in your mind again. On the left is reservation wage, the right is the contract wage. If you increase the gap by raising the contract wage, the incentives align and you may elicit more effort out of the worker. That expands the gap from the right. However, you can also increase the gap by lowering the reservation wage. Expand the gap from the left. You might do that by threatening various things if the worker leaves. Deny him or her compensation for the time he or she did work. Or if he or she gets hurt on the job, make it difficult to gain compensation for this as well.

Whatever the method, it's clear that the legal system can actually affect productivity in an extremely active way, and that this was accomplished by altering the value of labor power to match the interests of development. Basically, eminent domain for labor law.

What do you think?


  1. I think that in the spectrum of labor law the reservation wage and what a worker is earning (the contract wage) are both far more fluid concepts than you have presented here.

    You can make the case for an absolute in reservation wage...a wage below which a worker would be unable to reproduce their labor power, however is it also possible that workers will under certain circumstances accept a falling of their reproductive ability if they have savings and really like their job? Many other possibilities for working a well liked job below a reservation wage are also possible (including the decision to bow out of the material rat race that is American society.

    In terms of the difference between the contract wage and the reservation wage as it relates to effort I hate the argument that this will make workers more productive by giving them more to lose.
    More pay will change nothing, or even make a worker less efficient if the worker feels they deserve the pay raise (and it was overdue). It is only by raising the wage above a level where the workers feels like they are being "over-paid" that this kind of analysis holds. This is not the case with most raises given.

    The legal system can alter the value of labor power without doubt, but I think it is a far more complicated road to affecting productivity (extremely active or otherwise) than just changing the underlying minimum to reproduce labor power.
    If your (policy) goal is to try to match the "interests of development" as you see them it would take far more effort than just a law shift (cultural shift as well, both in and out of the workplace).

  2. James -

    Thanks for the comments.

    Think about the extreme case of slavery in the American south. We must seriously consider the question of how productivity growth was so remarkable in that economy. Under the standard assumptions of economic theory, the fact that you have little-to-no property in your labor should give you little incentive to work. All I'm saying is that there are models out there that give a better explanation.

    For example, all of this is not to ignore the various political problems here, for example the extreme state suppression of slave revolts and the feudal criminal system. But I really think that when it comes to trying to understand the micro-mechanics behind _productivity_ growth of a worker you need to understand 1. the amount the worker is currently making; 2. the various legal, political, and cultural instruments defining their second, outside option.

    What, in your opinion, are the main explanatory factors behind productivity growth?

    By the way, I'm not convinced about the cultural shifts required for development. Up until the middle of the last millenium China was the most "advanced" society in the world by current development standards.