On the Bargaining Power of Workers

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.


"...firms are a worker's best friend..." FOTFLMAO.

"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!"

This sentence is completely true. I've alternately been impressed by 1) how well one can do by bargaining with a prospective or current employer (and I don't think a particularly good negotiator), and 2) how many people apparentely don't do it.

In my experience having that second firm on the side gives a huge boost to one's willingness and ability to negotiate. Not that it's impossible otherwise (I have managed to "bluff" my way into higher pay at least once), but with a competing offer there's little risk and a lot reward to bargaining. It's also easy to pass on the information in a matter-of-fact manner that doesn't come across as combative.

Clay, you have to take into account the context. This whole post does not apply to people with IQ < 115 .

Why not? No one with an IQ<115 can learn to weld?

Why not? Fair enough, not every employee will be actively able to negotiate. However, even if we're talking about something like fruit picking the pickers are in better shape if a farm 2 comes in and lures a few workers from farm 1. That way farm 1 has to put some level of effort into keeping employees. Minimal perhaps, but not nonexistent -- which means farm 2 is the "friend" to workers of farm 1.

"Clay, you have to take into account the context. This whole post does not apply to people with IQ < 115 ."

LOL, that would describe half of my extended family. And that side all tend to be extremely shrewd negotiators. It might not apply to people with IQ < 85, but I'm not particularly confident even at that threshold.

People with IQ <85 should be sensible enough to take their smart uncle to the job interview to bargain for them.

Employment-at-will jobs, though, we'd expect to have less negotiation. Woudln't it often be easier to hire the worker, see how good he is, and then renegotiate? (or fire)

"...firms are a worker's best friend..." ROTFLMAO.

Well, this is a case where reading the entire sentence would help.

In particular about that part where other firms are the worker's friend, not the one he is employed in.

Why can't they compete against workers and other firms?

Read the article Jan. How do you compete against another firm who is trying to hire your workers or hire the workers you plan to hire?

A few years ago a local auto electronics firm hired low skill workers for assembly. The service businesses, hotels restaurants were required to increase their wages to be able to hire. They resented the manufacturer, as the pool of workers that they counted on at a lower price was not there.

The provincial labor laws and unionization arrangements fixed the problem. Facing union votes and the constant expenses of the various labor 'protection' laws, they moved the low skilled assembly to Mexico. The service businesses now have their choice of low cost workers.

Yes and there are examples where the supply of workers exceeds firms' demand. In those and other cases the firms are against the workers in a race to the bottom. Both situations can happen. Not really hard to understand.

Workers and firms are not fungible. There are always going to be employers who pay more or less or have a better or worse mix of amenities. Maybe you have to upgrade a skill or move to another location to get the better job but that competition by employers benefits the workers.

Moreover your comment is completely nonsensical. In every situation there is a market clearing price, above which you will have more applicants than job positions and below which you will have less applicants than open positions. This does not change the calculus at all. As Tabarrok says, firms copmete against firms for talent and workers compete against workers for the best jobs.

Perhaps it's just another anecdote but I've seen how workers doing the most backbreaking job in oil, prefer it over agriculture. Land owners paying lower salaries hate big oil for this.

The graph showing that there are usually more quits than layoffs has an implicit assumption that if the quits to layoffs ratio is about one to one, then that means that there's a healthy balance between employer bargaining power and employee bargaining power. But I think that in a health economy, there should be several quits for every layoff, i.e. the quits:layoff ratio should be 3:1 or 4:1.

The reason is because there will be many quits even when things are going well. People quit jobs not just because a different firm out-bargained their current firm for their services. Workers just out of college leave that first "burn-out" job to go back to school or to move up the ladder; the firms employing them actually expect them to leave. People quit jobs because they're moving. All kinds of reasons that have nothing to do with competition between firms for workers.

But layoffs are a sign of something going wrong -- the firm is in financial trouble. Usually. Except for stuff like seasonal work, or temporary stuff.

So, the implicit assumption that quits:layoffs = 1:1 is what we should expect, or a sign of employer-employee parity, doesn't hold.

The fact that people can quit their job to move or go back to school shows how much "bargaining power" they have.

The fact that people have to get another degree - especially the ridiculous MBA - to advance their careers shows how little power they have.

Talk sense bro

How many quits are really well managed layoffs?

Another indication of firm vs. firm competition. A good reference, even a phone call helps your competitor get the problem employee.

For example, a firm decides on a reduction in force; a year from now it wants to have 1,000 fewer employees. It doesn't send out 1,000 pink slips. It lets everyone know that it will be shedding workers, so they start looking for other jobs. It gives out some separation bonuses to move people along. Maybe by the end of the year, 800 employees have quit, and then 200 are laid off.

Or maybe the boss doesn't want a particular worker, but doesn't want an unemployment claim against the company. So the boss messes with the worker's shifts, reduces his hours, makes him want to leave.

My firm tried that. They lost a lot of top-notch workers. Now they are hysterically asserting that we have tons of new work coming in and we're hiring like crazy, so please get your friends to turn in resumes.

Correct, lay-offs remove worst workers, suggesting lay-offs are coming removes best workers. And since pay scales are compressed, employers derive surplus value from best workers, and negative value from worst workers. Reduces overall quality of the firm.

Not saying that this doesn't happen, it does, but...

Gota love managers that think people are a fungible commodity. I just wonder what they think they are managing.

This doesnt address bargaining power. Firms also compete with firms on cost of goods sold. This is a complex issue.

While I tend to agree, I'm not sure this (or indeed Caplan's response either) is responsive to Alexander's empirical points. To pick the most extreme example we do in fact observe that it is hirees rather than hirers who must pee in a cup upon hiring, and certainly not other, competing potential hirers being drug-tested, even though in theory each is contributing to the hiring decision that be erroneous. Nor do we see independent contractors drug-testing themselves or their clients, even though they presumably bear an even greater share of the relevant risks (if any) ameliorated by drug testing.

I think a more interesting question would center on the extent of asymmetric information, sensitivity to less-pecuniary costs like time, stress, and humiliation, and principle/agent problems. All predict that new and small firms should be more accommodating of workers, which we in fact observe, while large firms will be more openly awful to prospective employees, which I at least definitely observe in my occasional job searches.

All of which leads me to suspect that firm size is the relevant variable, which is similar to but not the same as Alexander's view (and can only very indirectly addressed through unionization, Alexander's preferred solution). I suspect (but do not have handy the numbers to back up) that this is similar to Tabarrok's view, insofar as large firms typically have fewer competitors for more workers with their preferred skillsets.

Once again TC describes the labor market in abstractions that bear little relation to what actually happens in firm-worker engagements.

Obviously these things vary tremendously from industry to industry, but in technology jobs there is often little value or negative value to having more than a few years of experience. Moreover specialization can be extremely valuable, but this value has a very short half life.

To put it differently, the guy who was employee of the year at Qualcomm in 2014 may well find himself fired and not in demand at all in 2015.

As an engineer you should recognize exactly what Alex is talking about. It is very easy to get multiple job offers in engineering/cs. Firms are constantly scrambling to acquire people.

Anyone who has been on either the hiring side or on the employee side should recognize what Alex is talking about here. This is exactly how it works.

As an engineer you should recognize exactly what Alex is talking about. It is very easy to get multiple job offers in engineering/cs. Firms are constantly scrambling to acquire people

You must be 27 years old.

Think of the Qualcomm example. QC is in the process of massive downsizing. Now imagine a guy who has worked on 20 years on chips for cellular communications. He will have difficulty getting hired for companies with products outside of his area of specialization. There are not many startups in his field these days, and startups do exist they will tend to prefer younger hires. He might have an opportunity at a Qualcomm competitor, but it may well be that he is too experienced to do the more junior work that the position requires. Or he might be perceived as threatening some other senior engineer at the competitor, or he might be perceived as too independent-minded to be manageable.

What I am describing is the "real" job market for senior tech people (at least some kinds). It bears little resemblance to the friction-free competitive universe that Alex describes.

Nope 27 years old. Don't I wish.

Quite senior and the market for senior software people is comically hot right now.

It is however, possible to specialize in a technology that goes into a downturn, however it is the exception other than the norm. The engineer needs to remain current on technology trends, it is a sad fact, but it is mostly true. If they do they are, generally, rewarded very handsomely.


Or to put things differently: you need to remain a generalist in order to stay employed. This is a paradox which economists should explore because obviously specialization is profitable in the short term and benefits the employer.

My take is that most guys who have been doing the same job for 20 years are average in terms of motivation, skill level, or both. There's a reason they haven't moved up or laterally in such a long time. They often have not stayed current on skills (this is not the same as being a generalist). I don't think this thought experiment is particularly at odds with Alex's take on things.

I do agree with you that there are costs and risks to staying in one position for a long time.

I'm more interested in how these arguments apply to the public sector.

This reminds me of a situation I was aware of back in the 70's. Computers were beginning to really impact oil exploration, and there was a huge shortage of geophysical engineers who knew how to make use of this game-changing new technology. I knew several engineers who were able to hop from one company to the next every six months or so, with up to a 40% pay bump with each hop. Since there were only a handful of companies who hired these folks, after a couple-three years, they had completed the circle, and got rehired by the first company they had worked for in the merry-go-round. Of course, the engineering schools started cranking graduates with the right skills, and this only lasted for a few years. But people earned some princely salaries in the meantime.

So, yes, it's companies competing against companies -- but this really works only when the supply of a skill set is scarce compared to the demand. When there's a glut of workers, companies are really not competing with each other, they are competing against the alternative of unemployment.

> So, yes, it’s companies competing against companies — but this really
> works only when the supply of a skill set is scarce compared to the
> demand. When there’s a glut of workers, companies are really not
> competing with each other, they are competing against the alternative of
> unemployment.

I've *never* seen a company, even during the downturns of the early 1990s, of the early 2000s, and of 2008, who didn't have a compensation committee which did surveys of employers in the area to help determine pay packages.

I'm sure it happens in some small rural locations where there is only one employer, and in that case the employer is competing with moving/very long commutes and they will extract some compensation for that negotiation position. However, within a large city my guess is that occurrences of employers have such market power are vanishingly small.

Something still feels off here, as it seems there are two different 'looking for work' modes. 1. When I'm shopping for a new job from my current job, I'm waiting for the best offer, the companies are ultimately bidding for me. 2. I'm unemployed, I'm taking the first reasonable offer. Tyler's discussion certainly applies to situation 1, but not so much to 2. Interestingly, I wonder if this explains the phenomena of "if you've got a partner, then romantic oppurtunities seem to multiply'. Parterned me is being bid for, unparterned me is desperate by definition.

Also, assuming non-full employment, there should generally be someone ready to underbid me, but in theory companies won't go below a certain point because they'll be bid out, and a crappy worker can spoil a work place pretty easily.

I would like to know more about the mysterious "Scott Alexander"




He's the only Old Jew among the third year residents! All the rest are New Jews!

This post is doxxing and should be deleted. It's fine if you know (I know) but Scott doesn't want the harassment and job loss that could come from officially linking the blog to his identity, so you should respect that.

The comment section here is no better than stormfront and the proprietors here do nothing but offer dog whistle fan service. I'm not surprised to see doxxing going on here.

If this post is doxxing, then why does Scott continue to keep his powerword on the raikoth site? It's not doxxing if it's publicly available info. It is literally impossible for anyone to doxx me with publicly available info. Go ahead, try. It's impossible. Keeping my powerword on my website is something I'd do only if I wanted to have it searched. I respect Scott's decision to keep his powerword on his website, so it can be searched.

Why does he have his real name in several places? To deal with earlier doxxings.

Strongly agree with Noumenon72. If he wanted everyone reading his Facebook or concerning themselves with his placement at school, he would have links directly on his blog. Instead, you dig into the metadata which makes him theoretically searchable.

You gleefully state how impossible it is to dox you, but then do it to others. Disgusting.

I want people to read all of my comments, but I don't have links to all of them on my blog. And it's not doxxing when the website you claim as yours says, with the utmost explicitness, "Why I Hate Your Freedom - [powerword]'s". It's not "digging" when your name is in the title of your website!

And he's posted his home address online (!) several times and has described his placement at school at several occasions. Doesn't exactly sound like the kind of guy who's concerned too much with separability of Real Life and online life.

Much like everyone knows who Orac is, it's not exactly a Great Mystery who Scott is. If it's publicly available information, and you're a public figure, it's not doxxing. It's all right for you to look for every comment I make, collect all of them, look for what I say about myself, and make guesses as to my full offline identity. I don't mind! But it's most likely going to be totally fruitless. Obviously, it's not all right for you to hack my email or anything.

"And he’s posted his home address online (!) several times and has described his placement at school at several occasions..."

OK OK, fair enough.

"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."

Which is all well and good assuming firm operations are stationary. The far more common situation is a race to the bottom in which firms seek out the cheapest available labor. Nothing wrong with that either, but don't pretend the situation is not more dynamic:

"We find that a country’s firms acquire more firms and
spend more on each acquisition in a country if that target
country has weaker labor regulations than the regulations
in the acquirer country. That is, firms find targets in countries
with weaker labor regulations more appealing than
similar targets in countries with comparatively strong labor
regulations. China, for example, has labor protections that
are average in our sample. About 67 percent of its crossborder
acquisitions flow to countries with weak labor protection
laws, while only 9 percent flow to countries with
strong labor protection laws. These results are consistent
with our core findings: acquiring firms enjoy larger CARs [cumulative abnormal stock returns]
and abnormal ROAs [return on assets] after a cross-border acquisition if the
target is in a country with weaker labor regulations than
the acquirer’s country."


Isn't the "far more common situation" the same situation described? "Race to the bottom" is just a euphemism for paying the market price, right?

I guess you have never heard of monopsony...the competition of the few buyers against the many sellers, nor have you ever heard about the agreement among Apple and other employers not to compete for each others employees. But, hey, if you assume perfect markets, you can say anything.

But, even in perfect markets, employees make firm specific investments in their human capital to benefit an employer, and may lock-in themselves to a neighborhood or school system so that they are unable to move to a more remunerative opportunity.

Another example of economists postulating the existence of an unreal and unrecognizable world.

The agreements are not to actively recruit (poach) eachother's employees. There's no bar on Google hiring an Apple employee if the employee applies for a job through Google's website.

Re: Your comment: "The agreements are not to actively recruit (poach) each other's employees."

A distinction without a difference.

Do you understand the difference between telling people "I'm not going to hire you because you work for Apple" and "I'll hire you but you have to actively seek out the job" ?

It appears not.

Hazel, Go take a course in economics. Or English. If you say you have an agreement with someone not to poach each others employees you are agreeing not to compete.

Do you understand the difference between an agreement and not having an agreement. Go back and read your comment: "The agreements are not to actively recruit (poach) each others employees". Do you understand what agreement means, and that you cannot agree not to compete, even if you call it poaching.

An agreement not to poach is NOT an agreement not to compete.

You appear to not understand the difference between not actively recruiting other people's employees, and refusing to hire one even if they apply for a job. there was never any agreement that Google would NEVER hire an Apple employee at all. They just wouldn't cold call Apple employees to try to recruit them away.


Despite your declaration that an agreement not to poach is not an agreement not to compete, please read this and also please inform yourself before you make such pronouncements:

From the Antitrust Division Website:

"Justice Department Requires eBay to End Anticompetitive “No Poach” Hiring Agreements

Settlement Preserves Competition for High Tech Employees

The Department of Justice announced today that it has reached a settlement with eBay Inc. that prevents the company from entering into or maintaining agreements with other companies restraining employee recruitment and hiring.

The department’s Antitrust Division filed the proposed settlement in the U.S. District Court for the Northern District of California in San Jose. If approved by the court, the settlement would resolve the department’s competitive concerns and the original lawsuit filed on Nov. 16, 2012."

Link is here: http://www.justice.gov/opa/pr/justice-department-requires-ebay-end-anticompetitive-no-poach-hiring-agreements

The $415M settlement approved just today shows the law does not agree with you. If anything, they got off lightly, and I speak as a tech employer in San Francisco desperately trying to fill engineering positions.

The flaw behind the article lies in treating workers as a single class. Engineers in the Bay Area have amazing bargaining power right now. Janitors or security guards, not so much. Skills matter, and it's not just a white-collar phenomenon: line cooks are in extremely short supply in San Francisco, just as during the Gold Rush it was cheaper to have your laundry shipped from SF to Manila for cleaning than having it done locally.

At the lower end of the pay scale, people making minimum wage, transaction costs, information asymmetry and opportunity costs are substantial. Someone working exhausting hours on two entry-level jobs just to make ends meet does not have the time or energy to be shopping around for new jobs.

"Someone working exhausting hours on two entry-level jobs just to make ends meet does not have the time or energy to be shopping around for new jobs."

It is a sad truth for millions of Americans. They could do much better, but don't know how to start figuring out how.

Someone working exhausting hours on two entry-level jobs just to make ends meet does not have the time or energy to be shopping around for new jobs.

Seriously one of the silliest statements I ever heard. Tech workers are extremely PRIVILEGED to have people cold calling them AT ALL. It's nearly uncheard of in other industries to get the sort of treatment from competing firms trying to lure workers away that tech people do. The idea that being deprived of having head hunters calling you to offer you a better wage is some sort of horrible deprivation of bargaining power is just ludicrous.

We're in a discussion about the bargaining power of workers, and you've just highlighted a prime example of an industry where workers have so much bargaining power that other companies literally call them to beg them to come work for them.

Hahah you bought up tech as a counter example! Haha.

Every tech company worth it's salts is continually doing market surveys to try to determine what the competition is paying so they they can set their wage scales.

Since, it really sounds like you are out to lunch, let me tell you how it works: every company does these surveys, then management decides what percentile of employers they want to be (eg: we are at the median of compensation, we are at the 90% percentile of compensation), and then the machines wheels crank through the process and wages are spit out.

That's how it works. In every tech company. I'm sure that there are companies, somewhere, that don't work like this, but I've never worked at them.

Ha, Ha to you. Tech often is the place where the problems of imperfect markets exist.

"If you think that the surveys you simply describe exhibit the workings of a competitive market, particularly in tech, then I suggest you read the following and go to their website:

You may be surprised to learn if you give a competitor your employee salary data, it could be interpreted under the law as fixing the price organizations pay for employee wages. Several TSG members have told me their lawyers have advised them not to exchange compensation data directly with any other organization.

Gone are the days when you could do a phone, group face to face or email survey with your colleagues to share salary data or a salary range for a position. Although this may not be the most exciting topic, I feel compelled this month to ensure all HR professionals (well, at least those who read this newsletter) are educated on the topic of compensation surveys and antitrust legislation. Read on to be sure you walk the straight and narrow!

David Weaver
President, The Survey Group"
Here is the link with a discussion of antitrust dos and don"ts" :


If you read further, you will see antitrust cases involving hospitals exchanging data to suppress nurses salaries, and chemical companies for doing the same for chemical engineers.

You will also see guidelines and safe harbors for aggregated exchange of data involving at least 5 participants with no participant having more than 25% of the relevant procurement market.

There are other ways to get to this information. The simplest one is to ask someone who did not accept your job offer which one they did, and what they are getting. Most candidates are forthcoming. There are industry-wide surveys like IEEE's, or sites like Glassdoor.com (although that one is skewed towards disgruntled employees on one hand, and employer shilling and intox on the other). Many VCs also maintain benchmarks across their portfolio companies.

Agreed with Fazal.

Now it is possible that some silly bureaucrat may be trying to make markets not work, since they know nothing, but market participants know what they have to do.

"so that they are unable to move to a more remunerative opportunity."

They can still move! They choose not to because it isn't worth the cost of selling a house, changing schools etcetera.

P, Of course they can move, but that involves a transaction cost, which you have to take into consideration when you assert the market is perfectly competitive and does not have elements of monopsony, as Alex only presumes but does not prove.

Does he presume that? Point me to the "assertion"

Cliff, Alex presumes it when he says that firms under monopsony or high transaction costs are competing. Here is the quote:
"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."

Not so real under the circumstance I posited but only real under the assumptions of competition and low transaction cost inhibiting labor mobility that he posited.

A true monopsony is when there's ONE buyer and many sellers, the best example in this thread being public employees, since there's only one federal government, state government and county government in any given location. That's why public employees should have to bid for their jobs, with the low bidder being hired, rather than being bought with tax payer-provided wages, health care and retirement benefits negotiated by elected officials who ultimately bear no personal responsibility for the costs.

What a wet dream that would be for anti-government people. First you hire the lowest bidders, and then wait for the data of utter incompetence to come in, thereby legitimizing the end of government services.

I think we want the best teachers and doctors, not the cheapest ones.

Like the old saying ... many economists know the price of everything and the value of nothing.

Don't incompetent public school teachers receive pretty much the same salary as the adequate ones? And what do doctors have to do with it? Ultimately, all public employees are replaced anyway and life under the suffocating bureaucracy goes on with an increase of frustration.

"Don’t incompetent public school teachers receive pretty much the same salary as the adequate ones?"

Fair enough. I wish there were better ways to evaluate teachers, but like teachers, I fear that "standardized tests" for teachers could be strongly abused to enforce ideological rigidity by fixing the tests. While the problem of incompetent teachers (perhaps a few percent of teachers) might be a problem, hiring the lowest bidder is certainly not going to fix that problem.

Nobody has mentioned one of the biggest downsides of unions with respect to employees: Since employees compete against other employees, in a union the individual employee is deprived of the bargaining power to compete for a higher wage against other employees by working harder or doing a better job. Scott Alexander (and others) seem to assume that the only thing the employee would compete for is job security, and so would always offer a lower wage and undercut other employees. But in practice, employees also compete for higher wages and promotions, and the union prevents them from doing that either.

You are arguing that the best labor market is farm work where pay is tied to performance.

Given you are reading and writing here, we can assume you are lazy because if you were a farm worker, you would be working hard picking to boost your pay.

Otherwise, you would be working as a farm worker where the worker has the most control over their income of any job in the US based on a pay for working hard basis.

Note, farm workers are almost entirely exempt from wage law, and mostly exempt from OSHA. Farm workers can be sprayed by chemicals that would get a white collar business shutdown if a teaspoon were spilled in the office.

This is a totally nonsensical comment.
It's entirely possible that the farm labor market is the closest to equilibrium, and yet still not be the one that is the highest paying, because it is a low-skilled occupation. Yes, I can linearly increase my income by picking more apples, but each apple isn't worth much and I happen to have skills that I can sell for a lot more than I can get for the number of apples I can pick in the same amount of time.

Farm labor isn't the only market where pay is tied to performance either. They have these things called performance reviews and annual raises in my industry.

It's true that union pay scales put a ceiling on individual wages but employees aware of their value to the company find ways to get around it. They might demand and receive a company car or truck, with fuel supplied, foreman's wages even though they don't supervise anyone, tool allowances, meals, etc.

Small potatoes compared to actual cash in pocket.

"Buyers don’t compete against sellers, buyers compete against other buyers (and sellers compete against other sellers)"

Maybe if you define "competition" in a certain way, but distribution of surpluses along a value chain is certainly an area where there are massive disputes between firms. This is also a frequent area of lobbying, legal fights, &c.

Imagine all firms were co-ops: owned by the employees. Then the firms would test the consumer's willingness to pay. To pay, say, 7% more to double Walmart wages and benefits. Walmart's sales might drop 7% (the prices had been set at some equilibrium like that) but the employees would be better off. The ultimate bargain is (or rather should be) between labor (together with capital of course) and the consumer -- the price sorted out with all three.

Don't forget the gold standard of labor market bargaining: centralized bargaining. Where all employees doing the same work (e.g., retail clerk) negotiate one common contract with all firms. Cannot go wrong -- it's the market -- if they charge too much the consumer wont pay. It's the market.

In any case employees should be ALLOWED TO ORGANIZE TO COLLECTIVELY BARGAIN IF THE WANT TO -- regardless of whether it is as good idea or efficient or whatever. It is a matter of simple freedom.
* * * * * * * * * *
My cross-posted comment from Economist's View this morning:
Just a thought for this morning: Want to cut Black unemployment? Make union busting a felony.

When 100,000 out of maybe 200,000 gang age, Chicago males are in street gangs (meaning usually not normally employed -- and only marginally when so, meaning sub-LBJ min wage) that is 50% true unemployment for starters. Add (subtract) 20% of the remaining 50% who are actually counted in unemployment figures (working or looking for work) and you get 60% unemployment for that cohort.

Why is their labor market not clearing? Not clearing -- think like an economist. I like to use the simplest, most plausible approach -- in this case by making a comparison with the disappearance from the labor market of American born taxi drivers (something well off whites can understand intuitively). American born employees of any color will not work for sub-LJB minimum wage or at least too low wages in the taxi job (where latter were never exactly excessive -- I can testify from driving in NYC, Chi, SF).

Quick answer to clearing the labor market for both examples above: 15 an hour minimum wage. Taxi fares will have to go up $1 or $1.50 a mile or their wont be any drivers (exclusively illegal from Bangladesh? -- Micky D partially resembles that now/no argument with illegals; Mexicans should be allowed free access to states).

Deeper answer: make union busting a felony (auto backed by state and fed RICO). Laws don't work on good will. In continental Europe the same labor relationships can work without sanctions because of the culture -- used to be the same way here. Not no more.

Politics don't work for those w/o money and org either -- unions only place average charlie gets that.

Of course, employees should be allowed to collectively bargain and employers should be allowed to fire them

And then employees go on strike and the govt calls in the police who shoot the strikers. Simple. Works every time.

"And then employees go on strike and the govt calls in the police who shoot the strikers."

Why would the business or government care if fired workers go on strike? As long as the former workers aren't violent or attempting to block public access, they can do what they want.

Because the millionaire/billionaire owners have the politicians on auto-dial after contributing so much to campaigns. If you read about cases of owner abuse of temporary workers, it is very common to read that local police will respond to requests of business owners to come by and intimidate workers who begin to speak out against various forms of mistreatment - of course there are laws against this, but the workers are too fearful for their jobs even in those cases where they ARE aware of their legal rights which is often not the case).

In Canada, both corporations and unions are not allowed to donate to political campaigns, and there are strong laws against many forms of third party advertising. If the USA were not so deeply corrupt then it would be easy to pass similar laws in the USA.

Thankfully, despite all the propaganda and lobbying, workers still get to vote, which thankfully makes it possible to counter some of the shenanigans alluded to in the first line of this post.

So what you are telling me is that you are perfectly happy with a market setup wherein labor cannot collectively bargain _effectively_ -- defined by me as being able to test for the maximum it can squeeze out of the ultimate consumer; just like capital.

Is there any moral line you will not cross? Slavery? :-)

Capital cannot bargain effectively either; it goes out of business sometimes due to being "fired" by consumers.

Labor can make market mistakes and put itself out of business just as well. Labor should nevertheless be free to bargain for as much as it hopes it can get from the ultimate consumer.

In other words, WalMart is where the very poor people shop and if WalMart worker pay is doubled, WalMart will immediately lose a million customers, the million WalMart workers, plus all the workers of all its suppliers and competitors in the labor market because tens of millions of workers will shop instead at Target, Macy's, Whole Food, etc., places that ignore the low wage workers as a customer base.

"American born employees of any color will not work for sub-LJB minimum wage or at least too low wages in the taxi job."

My uncle is a taxi driver in Miami. He makes a decent living.

Too bad I didn't know that while I was still driving.

This was even the case under Stalin. Despite extraordinarily draconian labor laws, including it being illegal to leave one's job, there was a labor shortage and so firms would illegally hire workers who turned up at their factories, and workers had a surprising amount of wage bargaining power.

Oh Tyler, I love how we ignore evidence in favor of abstractions. And that theses abstractions mysteriously always align with the interests of the Koch Brothers.

It's science that tells us everyone except the Koch brothers should grab ankles for public benefit. After all, freedom and all that.

ASSUME pink unicorn! QED!

Pink unicorn = monopsony.

Monopsony and firm specific human capital investment. The argument for tenure is that the professor will make all that firm specific investment in the institution leading up to the appointment that he needs to be guaranteed a payment of lifetime tenure to recoup it.

The argument for tenure is that the smartest people in the country cannot be bullied into shutting up when they have something important to say. It could prevent the Nazis, and a million other things. It also allows academics to explore outlandish ideas that they wouldn't dare to explore if they could get fired on a whim for exploring the "wrong" outlandish idea.

What a laughably stupid article; why does it seem like libertarians go out of their way to avoid empirical facts in favor of theoretical abstractions utterly divorced from complex on-the-ground realities?

The fact that Caplan thinks that the subjective conditions of an unemployed janitor and an unemployed corporate lawyer are the same should tell you all you need to know about in touch with modern society and the working class this guy is.

Odd comment given that this post included an interesting empirical fact on quits and layoffs.

Of course, "quit" in BLS terms means fired for not earning enough to pay to get to the job and thus is fired for not showing up.

The better "job" is "homeless beggar".

'Firms versus Firms! Now that is a real battle!'

41 comments, and the search 'cartel' returns no results.

Well, here is a taste of how that worked in the recent past - 'Confidential internal Google and Apple memos, buried within piles of court dockets and reviewed by PandoDaily, clearly show that what began as a secret cartel agreement between Apple’s Steve Jobs and Google’s Eric Schmidt to illegally fix the labor market for hi-tech workers, expanded within a few years to include companies ranging from Dell, IBM, eBay and Microsoft, to Comcast, Clear Channel, Dreamworks, and London-based public relations behemoth WPP. All told, the combined workforces of the companies involved totals well over a million employees.' https://pando.com/2014/03/22/revealed-apple-and-googles-wage-fixing-cartel-involved-dozens-more-companies-over-one-million-employees/

Thankfully, this remains the best satire site on the web.

That wasn't a cartel. They agreed not to cold-call (actively recruit, poach) one-another's employees. There was nothing preventing an unhappy employee from seeking out a job at another company, by calling them himself.

You understand the difference, no?

It's anti-competitive behavior. The only reason to stop other firms from contacting your employees is so that they can't use a competing offer to bargain for a higher salary, more benefits or different working conditions. An employer who pays more than the competition and treats its employees better has nothing to worry when it comes to "poaching."

This example simply illustrates the fact that bargaining power is a real phenomenon. Many firms go to considerable lengths to maintain information asymmetries -- as in this example -- to prevent employees from discovering how much they are worth on the labor market. Employers have access to not just their own payroll history but specialty reports from consulting firms about salaries in their industry. Employees have much less information, on average, not just about salaries in their industry but even the salary of the person sitting right next to them and doing the same job.

Yes, it's anti-competitive, but it's not a monopoly (or a cartel) on labor. The worker can still find out how much they are worth by actively contacting recruiters for other companies. Cold-calling other companies employees to try to poach them away is a phenomenon that is more or less unique to the tech industry, because of the high demand for talent. Most other industries is is rare or non-existent. Bans on cold-calling probably impacts employees bargaining power slightly, but it only brings it slightly closer to the norm in most other industries. It's not like tech workers aren't still in extremely high demand and can't get jobs in other companies.

I just came here to talk about my priors and whether this post agrees with them. Oh, and to mistake Alex for Tyler.

These comments are a race to the bottom.

Reminds me of stories of industries (often construction of manufacturing related) that need well-trained machine workers - the employer often requires the training to be completed already, and complains about the lack of qualified candidates. When asked why they don't train them, they claim another company will poach them and take all the training benefits. Which then raises the question - why not pay them enough to avoid poaching once their training is complete?

The old system was golden handcuffs.

Work for 90 days get free health benefits.
Work a year get two weeks paid vacation, and two weeks every year.
Work a year and a day and you now have a stake in a pension if you stay.
Work five years and you get 50% of the pension you have accrued, plus a sudden extra week of vacation, and now you get three weeks vacation per year.
Work ten years and you get 100% of your accrued pension, plus an extra week of vacation, and you you get four weeks vacation per week.

After five years to ten years, a new employer would need to offer a lot of cash to offset the value workers placed on the benefits already earned, or the employer needs to grant immediate vesting in a bunch of benefits which will potentially create ill will among existing employees who had to work for five to ten years to get the same benefits, and lower pay.

The reason for getting rid of pensions, etc, was the great idea of MBAs that workers are a commodity and can be replaced at will without any cost to production.

Typically employees fully vested in their 401(k) in 2-3 years. You move and you can roll it over. If you're not vested you only lose the employer matching funds. Points to 401(k) plans over traditional pensions.

Where I work, they simply have contracts saying you can't quit for 1-2 years if the company pays for something like relocation or (probably) college courses.

If you agree to train someone, it is easy to load large payments.bonuses towards the end of a relatively long time frame in order to ensure that the employee stays for a "fair" amount of time after the main training is complete. Paying them a competitive wage would also help.

If a job pays so poorly that the worker can't fix the car required to get to work, even calling the boss to explain that the car broke down, no one can provide a ride, and there is no affordable way to get to the job, the worker is counted as a quit.

From there the worker gets kicked out eventually from the apartment, and becomes homeless and carless.

Where is the worker's bargaining power?

When the worker gets public assistance, the claim is welfare benefits are so generous its better to be on welfare than work.

But the reason for welfare trumping working for many people is welfare costs far less than working in capital investment: the car required, the house with running water, the clothes, etc.

Just curious if the same data in that graph is available for people making, say, less than 25 dollars an hour. I only ask because I have never made more than that amount and I have seen maybe ten people get laid off/fired in my life compared to probably over a hundred who have quit. I'd actually just like to see what that ratio looks like at all levels of income.

The post assumes a competative labor market, while the workers vs. Firm argument postulates, following marxian schools, monopsonistic or at least that firms have some market power. Perhaps, the former fits markets for skilled workers and the later fits markets for the unskilled.

I agree that we should expect some segmentation between skill and unskilled.


Good link rayward. Thanks.

I mean, this is a great analysis of those in the labor force who:

1) work in sector with low levels of collusion / high number of competitive firms
2) have a particular expertise that makes them valuable enough to potentially be poached in the first place
3) the particularly expertise further needs to be rare enough that the advantage granted by an abundance of hirers is not mitigated (or outright lost) because of an equal or greater abundance in the amount of other laborers with this expertise
4) are not limited by the transaction and time costs of job shopping
5) not susceptible to information asymmetry problems such that the actual market value of your labor is known to them

Anyway, unless you - as a laborer - hit all the marks above, then this analysis really does not apply .. and, since I'd be willing to bet that only a small percentage of those in the labor force can meet this metric, it's hard to read the analysis as anything more than a sad reminder that most laborers just get the short end of the stick.

This is a great point and one that I also touch on in my recent post using Glassdoor data to map out networks of competition between firms:


to understand heterogeneity in the competitive environment that firms face.

Wow, data! Neat.

The ratio of quits to layoffs doesn't tell us much about bargaining power. First, as pointed out above, the distinction isn't always clear as an employee set for termination might be asked directly to resign or might be sent a clear message that they should think about resigning. Second, the vast majority of full-time employees above a certain age value wage growth and job security more than anything. If worker bargaining power was really that strong, we ought to see median wages increasing and more employees who are covered by legally enforceable employment contracts (for instance, of the sort that tenured university professors have) instead of in "at will" arrangements.

I observe a lot of people on this thread categorically rejecting numerous arguments/considerations which point out the difficulties of the working man. Rather than considering the partial validity of arguments, they claim that the others are out to lunch.

Now tell me who is being ideological.

If you have a highly demanded skill, as most posters on this thread presumably do, then you most likely have no clue whatsoever what it's like to be trying to negotiate with the millionaire farmer or MacDonalds franchisee when you've got rent to pay and kids to feed. It's hard to negotiate when you need money NOW, nevermind the fact that you don't have access (ability) to information that would tell you what you might get if you looked in a different geographical area of industry (assuming you can afford to wait another week).

Workers have a lot more legal protections than employers, but that's because they need them. Have we tilted too far in favour of workers? I don't think so.

And I am not swayed whatsoever by considerations that a tech engineer can leave his/her six figure job to demand tens of thousands more from a competitor. Good for them, but the bulk of the labour force is not in that sort of position.

I find this thread humorous in that there are a number of posters, who are in hiring positions, who say : yes, this is exactly how it works and then there are other posters who, I can only guess do not have jobs or perhaps work in the public sector, or perhaps are simply partisans who say 'whaaa' it isn't like this for some random reason.

A great post Alex to separate the wheat from the chaff.

I've been on both sides.

Again, we ought to see things like median real wages increasing, legally enforceable employment contracts, benefits that start from day 1, and other such things if employers are fiercely competing for workers. Of course, you will find these phenomena among highly-skilled, highly-paid workers which is probably the perspective from which many people here are commenting. It shouldn't be that difficult for people to understand that an engineer with 15 years of experience is going to have a different job-hunting experience than someone who worked as a cashier for Target for 2 years.

Another point: if firms are fiercely competing among each other for workers, why not put the salary in the job announcement? Instead, there is much secrecy surrounding salaries for the simple reason that, unless someone is highly in demand and has multiple offers, he or she can be low-balled. I remember the elaborate ritual around salary negotiation in my first job where I was told by the interviewer -- she, being an HR/recruiting professional at a 700+ person firm and, me, an entry level candidate -- that she didn't have a specific salary in mind to offer me and so I should give her a number instead. There is a huge information asymmetry in the non-elite part of the job market that employers milk for all they can.

"There is a huge information asymmetry in the non-elite part of the job market that employers milk for all they can."

I could hardly agree more strongly.

Having reviewed the thread, I wasn't able to find the posts you are referring to. The vast majority are theoretical arguments.

Also, the posters here are smart enough not to be making dumb uneconomic arguments like "I paid more for milk today, this means the official inflation rate is wrong." This is an area where economics is so far from lived experience that there's no way I can adjust my perspective to see it their way.

> I’ve been on both sides.

Ok, so let's hear it, how are wages determined at your firm? Is it magic? Or do you have to compete with other potential offers? It is possible that your firm is one of the lucky few to be suitated in a one company town and have monosopy power, if so congratulations.

> that she didn’t have a specific salary in mind to offer me and so I should give her a number instead.

Pretty standard technique. The interviewer is (a) attempting to get the employee at a discount and (b) trying to determine how sharpness of the employee, sharper employees will have done their homework and gotten a sense for the salary range.

> an engineer with 15 years of experience is going to have a different job-hunting experience than someone who worked as a cashier for Target for 2 years.

Of course, the numbers will be different, and overall experience will be somewhat different. However, both companies are competing against other firms to get the labor of the prospective employee. Target is competing against Walmart and/or costco, and the staples down the street.

I never disputed that some firms do indeed compete for some employees and said as much in my comment. At the same time, other employees are unlucky enough to not few or no firms competing over them (discouraged workers and the long-term unemployed, who number in the millions in the U.S. and other developed countries) and some firms do indeed have virtual or literal monopsony power. In between, there is a spectrum and that spectrum can be described in terms of relative bargaining power. Are you a firm able "to get the employee at a discount" as you phrased it? If so, you have bargaining power. If you are a pure wage-taker and are unable to negotiate discounts, then you don't.

This dynamic is what the phrase "bargaining power of workers" is intended to capture. It does not obscure the economics of labor markets at all and is captured quite well by any number of textbook treatments of imperfect competition and monopsony.

After some consideration of this issue, I think that I would consider as intellectually dishonest any research which does not admit the existence of the "spectrum", as you put it, even if for practical analytical purposes it may engage in much more simplified segmentation.

While there are some firms with monopsony, they are far and few between. Usually they exist in small towns. The vast majority of employers, however, do not have such good fortune. They are situated in locations where there are a vast array of potential employers for each employee (and similarity a vast array of potential employees for each employer).

The difference in our two arguments is that you are suggesting that there are 'some' firms who compete and that 'some' firms who have monopsony. This suggests that the two are about equal in frequency. I, and I am sure almost every economist, disagree: the vast, vast majority of firms compete for their labor, and the number of firms with monopsony is vanishingly small.

> how sharpness

Ugh, no more posting past 1am.

One can write it from the opposite point of view.. A worker is a firm's best friend. A worker is competing with another worker to get hired by the firm. And to counter unemployment/ undermployment or NAIRU one can coin up a word for firms which are "understaffed" in a natural state there is a natural rate of are "unstaffing or understaffing" instead of unemployment..... Just goes to show what an equal and comparable negotiating/ bargaining power both sides possess :)

Why does it have to be binary? Couldn't there be some truth to both frameworks?

For example, in the case of software developers and professional quarterbacks, the competition is very clearly between firms. In the case of a retail worker, however, a different dynamic applies. Quite obviously.

No, in the case of the retail worker exactly the mechanism applies. That is the point. The retail worker can walk over to Walmart from Target, and if Target provides a better deal then the worker is free to move. This forces Walmart to have a wage which is competitive.

Frameworks matter, and most commenters are applying a topsy-turvy framework. Employers and employees are not where the competition is.

The competition is really occurring between employers for employees. The key word is between employers. Similarly, employees, are actually competing with other employees.

The reason this competition isn't apparent is because it is out of sight. We see the discussion between employer and worker and assume this is where the real action is. It isn't.

It is like a contest where judges (employers) choose from competing contestants for limited slots. Yes the contestants are more nervous than the judges, but they all are nervous, thus no asymmetry issues. There competition isn't the judge it is the next contestant.

Average wages are set by supply and demand in competition between employers. Who gets the slots (wins the competition) is determined by competition between employees.

This is a cognitive bias or framing error, and Scott, the folks over at Econlog and most of the commenters here are all falling for it. Until you frame the issue properly it makes no sense.

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