'Big is bad' narrative is simply untrue in high-tech sector

'Big is bad' narrative is simply untrue in high-tech sector
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The May jobs report came in with good news for employment growth. Some members of the economics profession, however, have been busy bashing big firms for their destructive effects on American workers.

Scholars from the so-called the “New Chicago School” claim that large firms increasingly act as labor market monopsonists in the U.S. economy, i.e., the only demanders of labor in specific markets. They suppress wages and fuel income inequality.

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In the neo-Chicagoan “big is bad” philippic, the colossus FAANG (Facebook, Apple, Amazon, Netflix, Google) takes much of the heat. A recent Bloomberg column by Harvard professor Cass Sunstein suggests that “big companies (like Apple and Google) might use their market power to hurt employees” by paying low wages.

 

The traditional Chicago School is largely credited — and sometimes criticized — for its role in reshaping economics as an applied science. A basic principle of applied science is that scholars back their claims with evidence. Are the data supportive of accusations of FAANG’s negative impact on employment and wages?

If the tech giants were monopolizing the labor market, one would expect to see: falling employment by the monopsonist’s competitors, declining wages and increasing job tenure, since there are fewer competing job opportunities.

Yet, no such picture emerges from the available data. To the contrary, U.S. Bureau of Labor Statistics (BLS) studies estimate total private high-tech sector employment at more than 12 million; employment at FAANG plus Microsoft and Intel totals around 1 million — surely, a large number of employees, but, by no means, competition-threatening.

Similarly, Securities and Exchange Commission (SEC) filings show that job growth in FAANG has approximated job growth in the high-tech sector over the past few years. This does not portend labor market concentration.

The BLS also recently reported that high-tech workers are paid well above those not engaged in high tech. This percolates through all employee ranks. Not only are engineers paid more, but sales reps, managers and administrative staff earn wage premiums of between 8 and 48 percent.

Last, but not least, data show that employees at Amazon and Google have among the lowest job tenures of Fortune 500 companies, indicating the job churn that characterizes a vibrant, competitive industry.

Doubtful as a matter of economics, the arguments against the FAANG monopsonists also fall flat as a matter of law. Legal developments illustrate that the state of nature in tech is one of intense competition for talent.

In U.S. v. Adobe Systems, Inc., et al., the Department of Justice prosecuted several large technology firms, including Google, Apple, Intel, Pixar, Intuit and Adobe, and found they had unlawfully agreed to refrain from soliciting, cold calling, recruiting or otherwise competing for each other’s computer engineers and scientists.

Moreover, the laws of several states, including California, dictate that contractual restrictions on employee mobility (known as noncompetes) are nonenforceable. Hence, the incumbent firm’s ability to prevent lateral hires by rivals is weakened, as seen recently with Apple’s spectacular poaching of Google’s AI chief John Giannandrea.

Even if the firms can mimic noncompetes with financial incentives and other perks, this cuts against the claim that monopsony power restricts wages. Last, there is logic. How can a tech firm be said to enjoy a monopoly on labor inputs, yet be fearful of its employees’ job mobility?

Some from the New Chicago School write that the “problem boils down to excessive merger activity, which has led to concentrated labor markets.” But big mergers are quite infrequent in tech. Most mergers and acquisitions, instead, involve the “acqui-hiring” of successful startups, for example Facebook-Instagram and Apple-Shazam.

Those acquisitions represent low head counts, and their astronomical valuations lean against the very idea of monopoly power. Perhaps competition for jobs in the tech sector could be stronger and wages higher. But this is an example of what economist Harold Demsetz once called the “Nirvana fallacy,” namely, an idealized, unrealistic situation.

The FAANG monopsonist naysayers have not brought proof that smaller tech firms would improve competitiveness in labor markets. What matters is the consumer welfare generated by firms, regardless of their size.

If large tech companies make our lives better by putting people to work at good wages and by innovating and creating higher quality products, they should be acknowledged for their role in the economic recovery and their contributions to society’s well-being. They should not be vilified by unsupported claims that the grass could be greener.

Richard Sousa is a research fellow at the Hoover Institution at Stanford University where he specializes in K–12 education, labor economics, discrimination issues and intellectual property. Nicolas Petit is a visiting fellow at the Hoover Institution.