Labor Market Traps

Abstract

Some products, notably but not only platforms, increase in value for users as the number of other users increases. These interaction or network effects can result in “product market traps” (Bursztyn et al., 2023) where people who use the product would be better off if they all stopped using it and switched to another product, but cannot because of coordination problems. A parallel but overlooked phenomenon is the labor market trap, where employees would be better off if they collectively left an employer, job, or profession, but cannot because of the difficulty of coordination. Product market and labor market traps pose a challenge to public policy because of the complexity of people’s behavior in networks, but can be mitigated in some cases with relatively simple taxes and regulatory interventions