Always guaranteed to be economically well-grounded and thought-provoking, his popular works tear down conventional wisdoms that lead to anti-market thinking. He is unafraid to focus on the thorniest of thorny subjects where misguided economic ideas result in immense social harm. His new book, Labor Econ Versus the World, is true to form, bringing together some of his best blog writing against the “central tenets of our secular religion” of anti-marketism in relation to work, education, and immigration.
Combating misperceptions / The book begins by republishing a 2015 piece outlining eight common misconceptions about labor economics. Is the main reason that workers are richer these days because of government interventions? No, says Caplan; rising worker productivity, coupled with the competition for labor between firms, is the secret sauce to the past century of rising pay. Does keeping out low-skilled migrants prevent poverty or inequality, as commonly believed? Not one bit, he explains. Restrictions on movement keep the poorest in the world poorer by locking out foreigners from opportunities for betterment here, worsening global inequality. Americans, meanwhile, are also made worse off without the specialization that comes from a deeper labor market of more people.
If those two topics do not pique your interest, Caplan outlines six more faulty yet widely held opinions, including the belief that education is a key driver of economic health and the view that government regulation is necessary to curb discrimination. Large parts of the book debunk each claim, with the re-published blogs split into sections addressing labor market policy, immigration, education, and poverty. As a collection, the essays cover a much broader range of topics and ideas that permeate our public discourse.
One of Caplan’s strengths is highlighting the flaws of conventional wisdom using analogies. Take unpaid internships. The U.S. Department for Labor outlines rules about their permissibility, which include the requirement that “the employer that provides the training derives no immediate advantage from the activities of the intern.” That is absurd when you think about it. Why would companies provide unpaid internships if they are to derive no benefit from doing so? What the rule really reflects is a common impulse that unpaid internships are exploitative and should be de facto banned. That is a clearly hypocritical position given what internships really are: vocational education. Caplan asks, “If schools can educate students in exchange for their tuition, why can’t businesses educate students in exchange for their labor?” It’s a question deserving of an answer.
Another example of his effective use of analogy occurs when he compares the labor market practice of at-will employment with the world of dating. Conventional wisdom says that because of “inequalities in bargaining power” between employers and employees and differences in each group’s knowledge of risks, we shouldn’t accept a job market that tells workers, “If you don’t like it, quit.” This supposed market failure is used to justify government regulation to protect people from alleged exploitation. But this line of thinking isn’t extended to the world of dating, even though the theoretical bargaining and information problems are arguably much, much worse in the market for a mate. Massive inequalities of bargaining power exist between certain good-looking people with decent prospects and unattractive people with bad prospects. People also keep all sorts of secrets about their past and behavioral traits hidden from potential (or actual) partners. Yet, nobody — or at least very few people — advocate for extending government regulation of who we “go out” with. We accept the principle “If you don’t like it, quit” as perfectly reasonable advice when it comes to dating.
Keynesian inconsistencies / If Caplan deploys analogy with aplomb, he is equally as effective at spelling out the logical implications of conventional theories.
Keynesian models of the macroeconomy are predicated on nominal wage rigidity, the idea that because of workers’ reluctance to accept reductions in money wages, contractionary shocks to demand produce unemployment. Yet, for some reason, Keynesian economists don’t tend to be at the forefront of efforts to make labor markets more flexible to prevent this, nor do they explicitly spell out the implications of their theses about how best to get to full employment: wages must fall!
In pointing this out, Caplan has proven prescient. No prominent Keynesian demanded wage restraint in the early period of the COVID-19 pandemic when demand collapsed. Instead, they were all about pumping up aggregate demand via expansive macroeconomic policy, which in a supply-constrained economy brought the predicted consequence of high inflation. Now, real wages are falling. Yet, few claim this as a feature of their model; it is presented as an unforeseen bug.
Another example of failing to think through the implications of a model occurs in the labor market. Many commentators and even economists simultaneously think that minimum wage hikes do not kill jobs while also believing that low-skilled immigration has no effect on wage rates. A lot of robust studies of migrant flows do indeed suggest that the net effect of immigration on wages is weak for low-skilled workers. This implies the demand curve for their labor is fairly elastic. But if this is indeed the case, then theory suggests that minimum wages applied above market-clearing levels for this group will lead to highly significant unemployment effects. And yet, the conventional wisdom of many, particularly on the left, is to presume minimum wage hikes have no effect on employment levels, while also thinking that migration has little effect on low-skilled workers’ wages. Caplan skewers the inconsistency.
Caplan applies the remorseless logic of economic analysis to a range of other interesting topics throughout the book. He explains how the costs of COVID-19 lockdowns indicate the destructive consequences of immigration restrictions. He highlights why finding evidence of “corporate greed” would predict less discrimination in a market economy, not more. And he’s not afraid to take libertarian economists to task on why unemployment is something that should animate them more as a public policy issue, even if he agrees that the best solutions remain pro-market ones.
The book’s range and piercing clarity on all this would make it a worthy addition to labor market syllabuses — not to mention a good read for anyone curious about how economics can inform public policy. The focus on popular economic errors makes it all the more fruitful as an educational tool.
Countering culture? / Does the book have any misfires? Caplan’s Mason colleague Tyler Cowen has praised it but suggests that Caplan is too quick to write off the prevalence of phenomena such as discrimination in labor markets. True, markets might disincentivize acting on prejudice, Cowen suggests, but disparate outcomes can still reflect huge inequities caused by our broader cultural environment that shapes labor markets downstream. To hammer that point home, Cowen contends that Caplan downplays important cultural considerations that make immigration and education policy concerns messier than a stylized analysis of the market economics would suggest. In just focusing on the end market, in other words, Caplan neglects some forces that might dominate everything else and make us think differently about the role for government.
There is obviously truth to the observation that culture shapes decisions and, by extension, labor market outcomes. And yet, does it matter? Without getting into Caplan’s mind, I’d imagine that he’d argue his book is not about culture and that, when it comes to public policy, we pretty much are resigned to taking cultural factors as given. The question then is which policies or regulations produce better outcomes conditional on any given culture. The answer surely is open markets, as Caplan’s analysis implies.
The problem with “culture” as an explanation for why we might want policy to be more interventionist is that it’s extremely difficult to show what the effects of cultural realities are, or to even work out what we’d expect labor market outcomes to be in some undefined culturally pure or neutral world.
Do market outcomes that fail to comply with our values automatically imply some societal flaw that requires government correction? That seems to be the logic behind the complaints we see about, say, the existence of a gender pay gap. Yet, in countries that have passed extensive regulations to equalize opportunities between men and women, gender-based disparities remain or are even heightened. How, then, would we know if we have corrected or accounted for cultural factors? The possibilities for mischief, once you allow for culture as a get-out-of-jail-free card for bad policies, are endless.
Caplan ponders a final important question related to all this. Why does the public have such a glowing view of government’s role in labor markets in particular? He believes that the vaguely defined nature of what is being traded (work), the heterogeneity of the product (different workers), and the centrality of jobs to our identities mean that it’s inevitable there will be more resentment over labor market outcomes than, say, in the market for consumer products. When grievance is felt at work, it’s natural to look toward the government for salvation or imagine that life would be far worse without the body of state regulation that already exists to “protect” us.
In making this point, he compares labor market economics with that of industrial organization. The self-evident consumer benefits that big business must provide us to attract our patronage, coupled with the rise of internet reviews, mean people are usually willing to scrutinize sellers’ reputations when buying products rather than demanding government protection against being ripped off. “What modern consumer fears Amazon or Starbucks?” Caplan asks.
Well, the recent panic about “big tech” firms suggests that at least some do fear big business, although Caplan is no doubt right that the demand for security from consumers is far less strong than that of workers. But that the rot has seeped into debates about markets where the consumer welfare benefits of innovation are so evidently large perhaps suggests anti-market sentiment lies deeper in our psyche, even if it is more likely to be triggered in considerations of our labor. We should just be thankful to have Caplan’s excellent book as a means of pushing back against our worst instincts.
