Ioana Marinescu - Why Workers Are Underpaid, and What We Could Do About It

What would you earn if the labor market were perfectly competitive? According to very interesting research from Ioana Marinescu, it's a lot more than you're making now. Ioana is a professor of economics at Penn, whose work on labor market competition and basic income is reshaping how we think about worker power.

Here's our talk.

Welcome to The Economics of Work. I'm excited to welcome Ioanna Maranescu, professor at Penn and someone who is always pushing the boundaries of labor economics and doing interesting topical work. So Ioanna, welcome to the show.

Thank you so much. It's great to be here.

So let me ask you, let's say we had a perfectly competitive labor market. How would that look different than the labor market we have today?

So traditionally, when we think about a perfectly competitive labor market, what's really important for people to understand is that in such a market, people would be paid their what we call marginal productivity, but essentially the amount that they contribute to their company's bottom line. And in the real world, typically people are paid less than that. And one key reason is that there is a lack of competition in the labor market. That is, you know, you don't have infinitely many employers who are vying to hire you, who are bidding up your wage. But rather, most people only have a few choices and that limits their ability to earn what their true worth is, so to speak. So how do

we know that? Like, you know, we hypothesize that there is some market concentration among firms, but not market concentration among workers. But how do we know that that is very different from where we are today? And how different? Do we have a sense of magnitude?

Yes. All of the things being fixed, workers might make between 20% and 50% more if they were paid according to their current productivity. Of course, I just want to outline for the readers that that is a heroic assumption because there's many other things that would need to change and so on. But it sort of gives you the upper bound that you think that this could contribute to holding wages down. That seems

very, very high. I mean, so

if we were to think

that this like 20 to 50% premium from competition, like how much of that is really, you know, what we'd get from competition versus what we'd get from kind of like a more even split of economic rents? Or do you think that's a part of it?

There are different ways of looking at this problem. But essentially, you know, in a perfectly competitive market, of course, there are no rents to be shut, very importantly. And therefore, you know, everybody, including the owners of capital, is paid like exactly what they're contributing. And in that sense, you know, there are no rents to be had. And so, again, it's perfect competition. There's no rents. And so then there is a question of when there are rents, like, how does the rent sharing work? And, you know, there's actually active research on that. And, you know, and therefore some of these measurements that I'm talking about here might look different if in fact, for example, employers might be willing or, you know, are sharing some of the rents, for example, because there's unions. And actually