Fostering More-Competitive Labor Markets
The commonsense statement that employers have power over their employees has long been heretical in the economics profession. For decades, economists and the policymakers they advise have assumed a competitive model of labor markets where the supply of wages is set to match the demand for labor.
The model looks like this: Workers are paid according to the value of their marginal contributions. All employers have to pay the same market wage for labor of a given quality, which is measured by the worker’s skill and education level. Executive salaries reflect managerial acumen. Shareholders receive a return equal to the cost of their capital. If a worker does not like her job, she can quit it with little consequence for herself or her family—she can find a similar job paying a similar wage elsewhere. No one has power to negotiate for a little more, and no employer has the power to exploit any worker. If the employer tried to do so, the worker would just up and leave, quickly finding another employer who would not be exploitive. In this model, the term “bargaining power” does not appear; indeed, neither does the term “market power.” The competitive marketplace sets all wages and prices, and buyers and sellers are all just price-takers.
About the Author
Initiative for Policy Dialogue (IPD)
Joseph E. Stiglitz is President of the Initiative for Policy Dialogue, and Chairman of the Committee on Global Thought at Columbia University. He is University Professor at Columbia, teaching in its Economics Department, its Business School, and its School of International and Public Affairs. He chaired the UN Commission of Experts on Reforms of the International Monetary and Financial System, created in the aftermath of the financial crisis by the President of the General Assembly. He is former Chief Economist and Senior Vice-President of the World Bank and Chairman of President Clinton’s Council of Economic Advisors. He was awarded the Nobel Memorial Prize in Economics in 2001.