On the Bargaining Power of Workers

By Alex Tabarrok of Marginal Revolution.

"Over at Econlog Bryan Caplan responds to a Scott Alexander post (written several years ago under another name thus a pseudonym of a nom de plume) on the bargaining power of workers. Bryan makes excellent points. I want to focus on two larger issues. Many people look at big firms and little workers and they see an imbalance and can’t imagine how the firms are not in control. Even framing the issue as the bargaining power of workers makes it seem like a David and Goliath battle.

The firm v. worker framing focuses attention on the threat to the worker of unemployment. From this perspective it seems as if the firm can “bargain” the worker down to the least the worker is willing to accept and, given the threat of unemployment, that isn’t much.

The firm versus worker framing, however, obscures a point that Tyler and I make in Modern Principles: Buyers don’t compete against sellers, buyers compete against other buyers (and sellers compete against other sellers). Firms buy labor and they are competing primarily not against workers but against other firms. Firms versus Firms! Now that is a real battle!

When firms are thinking about wages what they are thinking about is the threat from other firms. When a firm is hiring it knows it must pay the worker at least as much as other firms are willing to pay.

The other-firm threat is very real. In fact, more often that not when a worker-firm match breaks up, it’s the worker who leaves, usually for another firm (the hot, young startup?), rather than the firm who leaves the worker with a layoff. The figure below shows data on quits divided by layoffs. Most of the time quits exceed layoffs (even during some recessions) with only brief windows during severe recessions when quits are fewer than layoffs.



Using the firms versus firms frame it becomes clear that rather than a battle between firms and workers, firms are a worker’s best friend. To be sure, it’s the firms that the workers don’t work for who are their best friend not necessarily the firm they do work for! Indeed, another problem with the firm versus worker frame is that in their eagerness to win the “battle” with their firm workers sometimes support policies which harm all firms, including their friends. A case of cutting off the nose to spite the face. Remember, firms are buyers and sellers benefit when there are lots of rich, successful buyers.
Hat tip: Justin Merrill.

Addendum: Bargaining can be important when the hiring firm is willing to pay the worker considerably more than are other firms–this can happen for highly-skilled workers with specific talents and unique firm-complementarities. Note that in these cases it’s more a case of the worker “bargaining up” to grab surplus than the firm bargaining down. For workers as a group, this kind of surplus is gravy. But there’s nothing wrong with gravy so if this applies to you do read Getting to Yes and learn to bargain well."