NEWARK, NJ – June 2, 2021 – As the nation begins to emerge from the pandemic and the economy improves, it may behoove us to reflect on the so-called ‘natural’ process of determining wages. According to the neoclassical model of competitive markets, a market equilibrium wage is achieved when the demand for labor is exactly equal to the supply of labor. Therefore, unemployment does not exist, because wages rise or fall until the demand for labor is exactly equal to the supply.
At the wage at which demand equals supply, all who are willing to work at that wage will be employed. If more people are willing to work, wages will fall further, prompting companies to hire more workers, so that labor supply again matches demand. A minimum wage, such as a mandatory minimum wage, prevents the cost of labor from falling below the minimum. This means that the worker has the power to accept lower wages so as not to be unemployed. And yet it totally lacks a power dynamic that most neoclassical economists choose to ignore.
The assumption is that employers and workers are equal in their ability to negotiate the employment contract, which includes wages, benefits and working conditions. But in reality, they are not equal because there is an asymmetric power imbalance between them. While businesses are traders of needs, workers are traders of needs. The needs trader is forced to accept a job regardless of the salary offered for eating. Businesses, and particularly large ones, may defer hiring workers until there is an available pool of workers willing to accept the wages offered.
Due to power dynamics, the only ability of workers to negotiate is to accept or reject a job offer. This effectively makes the employment contract somewhat exploitative. This is even more the case for low-skilled workers who have nothing to offer in return for higher wages. The neoclassical economist will essentially defend the low wages offered to the low-skilled worker on the basis of the supply and demand curve. The more low-skilled workers there are in the labor market, the lower the wages will be.
This also does not capture the reality of the labor market as there are multiple supply and demand curves for multiple labor markets in which there are different skill levels and / or educational attainment. That is, the more skills a worker has, the more a worker can demand higher wages. A shortage of skilled workers in a skilled labor market will increase wages in that market. Again, the worker has the power to demand higher wages because he has the ability to acquire the required skills. Of course, this may exaggerate the case of workers who are relegated to the low-paid and low-skilled labor market because they lack natural endowments.
Yet employers enjoy market power and can drive down wages in skilled labor markets simply by increasing their size and becoming labor monopsonies. A classic case is that of the nursing labor market, where hospitals which have been absorbed by larger hospital corporations are able to exert downward pressure on their wages because they are the main buyers of nursing force. work of nurses.
The supreme irony in the neoclassical model is that many of its adherents who praise Adam Smith overlook what Smith had to say about it. Smith acknowledged that companies could and would agree to cut wages. For this reason, he also understood why workers might be inclined to react by forming unions to gain a measure of bargaining power. In neither case would the market work naturally. As much as unions artificially inflate wages, collusion between employers would artificially suppress wages.
While there is nothing in the Wealth of Nations to suggest that Smith supported minimum wages, Smith is clear that the power of government should be used to break monopolies because they prevent the market from being fully. competitive. For Smith, the invisible hand of competition would help maintain a fair market where all players – producers, consumers and workers – could thrive. It must be remembered that Smith was less an economist than a moral philosopher.
Obviously, the same logic can be applied to the labor market. A monopoly threatens competitive markets because it can raise prices beyond the natural value of goods, leaving consumers with no choice but to pay those prices. A monopsony, however, threatens the ability of workers to negotiate wages, even skilled workers, because as the main buyer of their labor services, it can exert downward pressure on below-par wages. value of these workers. And again, the workers, because they are traders of needs, have no other choice but to accept them.
The goal of any economic policy aimed at growth and greater prosperity should be to see everyone’s wages rise. And yet, much of corporate profitability and increased shareholder value rests on paying low wages through measures that control workers and break their wage rigidity. In the global market, this has been easily accomplished through divestment and capital mobility. Workers are undoubtedly punished when their jobs are relocated elsewhere.
Because there is a power dynamic that undermines the so-called natural wage-setting process, there are clearly ways to level the playing field and give workers a measure of market power. The most obvious are to strengthen labor market institutions like unions and minimum wages. At the same time, more pro-worker appointments should be made to the National Labor Relations Board (NLRB), as well as this should be taken into account in future Supreme Court appointments.
The government could also enforce antitrust laws and break monopolies. These laws have not been enforced because in many cases they have been beneficial to consumers in the form of lower prices. Therefore, the courts applied the public interest standard. But they have not been good for the workers because of the monopsonies they become. The impact on workers and wages must be taken into account as much as the impact on consumers.
Yet there may be another approach that no one has really considered. Although the tax code should primarily aim to increase income rather than social engineering, it could nonetheless be used to encourage employers to increase wages. Raising taxes on corporations and the wealthy to pay for new programs is most likely counterproductive as the wealthy can evade taxes and corporations can not only offshor but pass them on to consumers through higher prices, these incentives can be offered on condition that workers are paid higher wages. There will be endless struggles over corporate tax rates, but only companies willing to pay higher wages to their workers should collect them. Otherwise, low-wage employers would have to continue paying higher taxes.
It is high time that the political class that pretends to care about the working class begins to address the asymmetric power imbalance in the labor market. There are tools available to help working people and strengthen the middle class, which don’t require massive public spending and huge tax increases that will ultimately fall on the middle class.
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Author of Restoring the Middle Class Through Wage Policy: Arguments for a Middle Class
Understand public policy in the United States.
The minimum wage: a reference manual
Wage policy, income distribution and democratic theory
The case of the minimum wage: competing political models
Oren M. Levin-Waldman is a faculty member in the School of Public Affairs and Administration at Rutgers University in Newark and a socioeconomic research fellow at the Global Institute for Sustainable Prosperity Research.
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Learn more on the professor’s website: https://www.econlabor.com/. Direct email to [email protected]
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Oren M. Levin-Waldman, Ph.D.
Office: (914) 629-6351