Google, eBay and collusion

Megan McArdle

Major technology companies are under fire for colluding to suppress competition in their labor market - which is a fancy way of saying that they seem to have had some sort of gentleman’s agreement not to poach one another’s staff. A post on Pando Daily last week suggested that the scope of the collusion was much greater than previously thought.

I have two thoughts on this, one obvious and one perhaps not so obvious.

The obvious thought is that this is illegal, for good reason, and that if the facts are as stated in the article, the companies deserve the whopping fines to which they’ll probably be subject.

The less obvious thought is that it isn’t quite as simple as saying that these companies are colluding to suppress wages. Collusion does have that effect, and that’s why it is, and should be, against the law. But the collusion alleged in this story actually seems more complex than greedy bosses rubbing their hands together over a chance to hold their wages down. The problem seems to have been as much sociological as economic. The article asserts that in 2005, Eric Schmidt, then Google’s chief executive officer, received a call from an angry Meg Whitman, then the CEO at eBay, who complained that Google was driving up salaries across the industry. In response, Schmidt allegedly sent an internal email that read, in part, “This was a rough call from a good friend. We need to get this fixed.”

The article says that Google later placed restrictions on its recruitment of eBay employees. If true, Google did this voluntarily, even though they would have been the obvious beneficiaries of an all-out bidding war. And the email doesn’t even mention the cost to Google of bidding up salaries.

Why would Google do this? Well, it’s actually not that unusual for companies to exercise this sort of restraint, although not usually in such a formal manner. When I was in consulting, I observed that most companies in the business had a de facto ban on hiring from their clients, and most clients had a somewhat less strict ban on hiring from their consulting firms, especially if there was a long-standing relationship. I probably don’t have to explain why no one was willing to jeopardize a valuable relationship to poach an employee or two.

Silicon Valley is a place where the line between competitors, customers and business partners isn’t always that clear. This may have played a role in what allegedly happened - as did Google’s rather magnanimous willingness to keep their hands off of talent at companies they were close to. (Google, along with five other companies, came to a settlement with the U.S. Justice Department over similar allegations in 2010. A lawsuit filed by workers in the industry is headed to court in May.)

It’s telling that in 2008, when the tables were turned, Google allegedly insisted that Facebook extend them the same courtesy - and possibly even more telling that Sheryl Sandberg, Facebook’s COO, says that she turned them down because she thought the no-poaching rule only applied to companies with which they shared board members.

This doesn’t change my mind about the remedy: If they were colluding to not recruit, then they should quite properly be fined. But it seems worth mentioning because of a conversation that I recently had with professor Steven Teles, at Johns Hopkins University, whose class on policy failures I’m taking this semester.

We were talking about the fact that people often confuse the effect of something with its purpose. For example, the increasing premium on a college degree - and particularly on an elite college degree - has the effect of making it harder than ever for poor kids to overcome educational disadvantage. It’s no longer enough to be sharp and hard working; you also need to be academically gifted and adroit enough to negotiate our strange and demanding university system without help. That’s a very high hurdle. And you can make a good argument that the middle class is basically protecting itself by erecting that hurdle, which makes it hard to join them - and, therefore, harder for their kids to fall out of their comfortable class.

But you occasionally hear people take this argument much further, and contend that the middle class has done this consciously and deliberately. I’m quite sympathetic to the former, weaker version of this critique. The stronger version, however, is nonsense.

This matters quite a bit, because structural critiques that assume intent may imply very different remedies than structural critiques that assume that our basically healthy instincts - a reverence for learning and the desire to give our children the tools they need to enter the labor force - may be producing very unhealthy results. Moreover, when you accuse someone of deliberately sabotaging the American dream, they’re apt to get a bit testy and stop listening to what you’re saying.

So too in this case. I reiterate that it’s appropriate for the government to step in and stop illegal collusion. But while that might suffice to stop people who are simply trying to make a little extra cash, it might not be enough if people are less worried about the cash than they are about offending their friends.

*The author is a Bloomberg View columnist.

By Megan McArdle