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.