How labor laws lead to empty titles.
Have you noticed there seem to be a lot of managers nowadays? It’s not just you. Professors at the Harvard Business Review estimate there is one manager for every 4.7 employees and claim this excessive amount of paper-pushers leads to a total loss of $3 trillion dollars per year in the US.
This amount of waste is staggering, but, as an economist, I’m quite skeptical of this. Business owners have a goal of making money. Although it’s possible there are other motivations in the market, the self-interest of pursuing higher profits is the most basic motivation for business. So why would business owners waste trillions of dollars a year on superfluous managers?
Some may argue they are incompetent, but this also seems unlikely. If it were the case that businesses were wasting so much money, anyone who realized this would be able to dominate an industry by cutting back on management. Waste is incompatible with success in a free market.
Instead, a recent paper out of the National Bureau of Economic Research by Lauren Cohen, Umit Gurun & N. Bugra Ozel provides a more plausible explanation. The staggering number of managers in our economy is not evidence of private sector waste. Rather, it’s a response to public sector interference in the labor market.
The argument of the paper revolves around the Federal Labor Standards Act (FSLA) which is a Federal Law that regulates multiple parts of the labor market, including...
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