Market power is monotone with the size of the choice set

Inspired by this old blog post, particularly this quote:

What keeps my wages high (and yours) is our alternatives. Is there any evidence that workers have fewer alternatives than they once had? If anything, workers are more mobile today than ever. What sets workers wages are the wages of those alternatives. That depends, generally, on our skills, our knowledge and our drive and discipline—human capital and how well we are able to apply it. Workers are better educated than ever. That is why I believe that compensation, properly measured, is higher than it was five or ten or twenty or thirty years ago.

Russ Roberts really captures the essence of market power here, and in doing so captures the essence (better than I ever could have) of what I think is missing in the current debate over skills-biased technological change (SBTC).

I’m not convinced that workers’ alternatives are generally as numerous as Roberts claims. Moreover, I’m not sure that the availability of job choice sets, partially ordered by set containment, is supermodular as a function of human capital; that is, increasing the absolute quantity of human capital might not increase the size of the choice set as Roberts suggests. Two unignorable cases are overqualification and job-specificity of skills.

Skill-biased technological change could be increasing skills specificity, as laid out in Unchecked and Unbalanced by Arnold Kling. Without some countervailing force in the economy, this could actually shrink individuals’ choice sets, reducing their market power even as their human capital grows. I believe this mechanism has a role to play in the recent concerns of income inequality and I have not heard of any studies on it.

Roberts wrote his post before the Great Recession, but people are amazingly still comfortable talking like this in 2013. To me, it is inexcusable to ignore this mechanism when studying SBTC and related models.

edit: I said nothing in this post about the level of wages in one’s alternative set. I realize now that I was more properly referring to the subset of the alternative set that is weakly preferred to the current job.


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