America Works: Thoughts on an Exceptional U.S. Labor Market

CHAPTER 1. The U.S. Market-Driven Labor System

 CHAPTER 1  THE U.S. MARKET-DRIVEN LABOR SYSTEM Mirror, mirror on the wall, whose labor system is the most market-driven of all? Queen, among the major advanced economies, one stands apart from all the rest. The United States has the most market-driven wage and employment system by far. More than any other advanced country, the United States relies on the competitive labor market to determine the well-being of workers and the living standards of their families. The collective bargaining institutions, government regulations, and social safety nets that capitalist economies use to constrain market forces and ensure a minimal level of economic well-being are weaker in the United States than in other high-income countries. As a result, working in this country is more important to the economic life of individuals than it is in the European Union (EU), Japan, or even America’s kissing cousin, Canada. With limited unemployment insurance and other social protections, American workers cannot afford long spells of unemployment. With no national health insurance , American workers have to find an employer that offers insurance, have a spouse who is covered, or purchase insurance individually at costs far above those available to employees. With no national wage or benefit negotiations and limited union or other group activities in their workplaces, American workers have to find a job with an employer who pays decent wages and treats workers well. In this chapter, I document that the United States is truly exceptional in its reliance on the labor market in determining economic outcomes. I do this by comparing quantitative measures of how the 7 United States and other advanced countries determine pay, provide social support, and regulate the labor market. Because all countries enact labor laws to protect workers, I focus on differences in how they implement these laws as well as on the de jure rules. Some readers may view the quantification as excessive. Why not just trust the mirror on the wall? Surely no one believes that the United States is less market-driven than the European Union? But quantification is necessary to assess whether the U.S. labor market stands apart by enough to explain the unique American employment and wage experiences , or whether we have to look more broadly at other societal differences. Exceptional in Wage Setting and Social Insurance The Fraser Institute in Vancouver, Canada, is a right-wing think tank devoted to market economics. Since the 1980s, the institute has produced “indices of economic freedom” for countries based on metrics for “personal choice, voluntary exchange coordinated by markets, freedom to enter and compete, and protection of persons and their property.”1 The Fraser index scales economies from 1 to 10, with higher scores reflecting greater dependence on markets as opposed to institutions. The index is made up of a set of sub-indices : for the government, legal structure, monetary policy, and free trade and for regulation of the labor market, credit markets, and business, taken separately. The conservative orientation of the Fraser Institute affects how it defines economic freedom. It codes legal protection of property as a positive factor in economic freedom but codes legal protection of labor as a negative factor in economic freedom on the grounds that this restricts the ability of businesses to make decisions.2 It regards government regulations and welfare state spending as lowering economic freedom, although these activities can limit monopoly power and expand the economic freedom of disadvantaged groups. The institute’s measure is thus more of an index of the leeway that societies give to markets and business or capital than a broad measure of economic freedom. But nomenclature aside, the institute’s America Works 8 indices are just the kind of measures to test the principal claim of this chapter. Figure 1.1 shows the score of the United States and other advanced countries in two of the Fraser Institute’s sub-indices of economic freedom: regulation of the labor market (along the vertical axis) and the role of the government in the economy (along the horizontal axis). A high score on an index means that the country is more market-oriented. The United States lies on the upper righthand side of the figure. It has the highest score on the labor market U.S. Market-Driven Labor System 9 Figure 1.1 Advanced Countries Rated by Fraser Institute Indices of Labor Market...