NEWARK, NJ – August 10, 2022 – With a lot of political talk surrounding social justice these days, one might be tempted to ask the obvious question of what a “fair” labor market might look like. A neoclassical model of competitive markets assumes that the labor market is fair when all market participants have been free to make choices about the transactions they were free to enter into. Any resulting outcomes are assumed to be fair because all market players were indeed free to make choices. Thus, in a race for life, two individuals end up in different places is not unfair, as both are presumed to have been equal to begin with and where they ended up based on the choices they were free to make. , but the question remains: are we all equal and free in our choices? Isn’t the labor market unfair if indeed some market actors are not free to make choices because of disadvantaged circumstances into which they may have been born? If we are not all born with the same natural gifts, are we all really equal to begin with? Most workers are forced to work for whatever salary they can get because they have no choice if they want to eat. To say they have a choice only mocks the choice if the alternative is to starve.
Workers in the neoclassical model are assumed to be equal to their employers in terms of bargaining power. In effect, they control whether they will be hired with the wages they demand, as they can always lower their wage demands to the point where there is a demand for their services. That social justice has even become a topic of discussion only reveals how flawed the neoclassical model really is.
Capitalist markets are by definition exploitative. The workers are perpetually disciplined by their need to work in exchange for a wage that allows them to subsist. As globalism has driven, and in fact required, lower wages to be competitive, and social programs must also be cut for business environments to be attractive for investment and economic growth, the effect does not was only to further discipline the workers. While it is true that exploited workers can always leave and take another job elsewhere, this is only true in a sluggish labor market. On the contrary, workers who have few survival options are simply forced to remain employed and effectively find themselves in a situation where they will continue to be exploited.
Workers are merchants who need to work because they need it. Employers, however, are eager traders, allowing themselves the luxury of waiting for conditions to be favorable to them. Therefore, the two are not equal and the power imbalance between them is asymmetrical. Those below are mostly needy traders and are forced to accept whatever terms are offered and the lowest wages because they lack the capacity to hold out for something better. Therefore, they do not enjoy the same freedom as those with more power.
Given the power imbalance between employers and workers and the fact that some are born into more privileged circumstances than others, thus affecting outcomes, it would be an overstatement to call the US economy a just economy, let alone of a fair labor market. What would a fair labor market look like then?
The first place to look for advice is, of course, A Theory of Justice by John Rawls. Rawls’ two guiding principles are justice as fairness and the priority of the right over the good. In justice as equity, individuals accept in advance the principle of equal freedom and they do so without any precise knowledge of their particular ends. This is because they are under a veil of ignorance where they know nothing of their attributes, resources, endowments and even preferences. It is this veil that leads to a priority of the good over the good. Because they are under this veil, they would choose a system of justice that would protect the rights of individuals against, say, a mob seeking to impose its own good.
If, for example, Person A does not know that his aspiration is to become an investment banker, he would also not be able to favor a tax code that actually favors the wealthy, i.e. low marginal rates and low capital gains, on the poor. Likewise, if she does not know that she might become an impoverished member of the underclass, she is unable to favor a progressive tax code to redistribute wealth and income to the poor.
Applied to the labor market, we do not know if we have the capacity to be scholars or if we could end up as low-skilled workers. Under a veil of ignorance, we may choose a set of institutions that provide workers with continuous opportunities to retrain and upgrade their skills as needed. We don’t even know if we are capable of acquiring the necessary skills to demand higher salaries. Moreover, we do not even know that the employers with whom we would negotiate as equals, as the neoclassical model suggests, would in fact negotiate in good faith.
Rawls introduces the principle of difference when he suggests that redistribution might be justified if it improves the situation of the less advantaged. Does this mean that the rich should be overtaxed to pay for programs that would benefit the poor? Or maybe it could mean that steps are taken to ensure that they have jobs and that institutions are in place to ensure that they have well-paying jobs. Nobel laureate Amartya Sen defines poverty as the deprivation of capabilities, by which he means human action.
A capacity is a type of freedom in that it allows people to be self-sufficient. If low wages place workers in an exploitative position where they are unable to fully perform their action, they are deprived of their capacities. Insofar as they are deprived of their abilities, are they not the same as wage slaves? A fair labor market must therefore be a market where workers can in fact improve their abilities.
For Sen, unemployment leads to social exclusion and a dramatic loss of freedom of choice. It is harmful in the long term insofar as the unemployed lose their capacities, their cognitive capacities and their motivation. It leads to the loss of human relationships and family cohesion. It also exacerbates racial and gender inequalities because women and racial minorities are overrepresented among the unemployed. Ultimately, this leads to the loss of social value and responsibility. And yet, the Fed’s response to rising inflation is to raise interest rates, which can only lead to more unemployment and loss of capacity.
A fair labor market would then be, at a minimum, a market in which workers can claim to belong to the middle class. It is a situation in which labor market institutions are in place to support wages, even in low-wage sectors of the economy, so that workers can be self-reliant and, in turn, develop their capabilities. A fair labor market must therefore be based on a large middle class and on policies that facilitate the maintenance of a large middle class. A fair labor market that strengthens the middle class is also a market where inequalities will be reduced.
The answer to inequality is not simple redistribution by overtaxing the rich in order to fund programs that benefit the poor. Rather, it is a country where labor market institutions are in place to support wages. Instead of programs, the focus should be on job creation. It may also be a country where policies are in place, perhaps through education and training, to facilitate transitions in a global economy. Otherwise, workers’ abilities deteriorate, thus perpetuating an unjust economy. Ultimately, the focus should be less on economic growth and more on economic development.
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Mr. Levin-Waldman is the author of the following published books.
Restoring the middle class through wage policy: arguments for a middle class
Understanding public policy in the United States.
The minimum wage: a reference manual
Wage policy, income distribution and democratic theory