The unequal bargaining power between employer and employee

It should be obvious to anyone who has ever worked at a job that there is unequal bargaining power between employer and employee. This is because the employer has many employees: hundreds, thousands, or maybe even tens of thousands. The loss of a single employee to a big employer is only a slight annoyance and is, in fact, an anticipated cost of doing business.

But for the employee, his job is usually his only source of income. Losing his job means losing 100% of his income. Furthermore, because the typical American lives beyond his means, he has no backup savings to tide him over while he is out of work—this may be self-inflicted, but it also contributes to the unequal bargaining power of the employer-employee relationship.

It’s usually harder for the employee to find a new employer than vice versa. The last time I lost my job, I was out of work for several months. But whenever I had to fill a job, it never took more than a few weeks. And furthermore, being fired from a job tends to be a black mark upon the resume of the employee, but the fact that an employer has mistreated its employees in the past never seems to prevent it from finding new workers.

The only time when an employer feels the same pain as the employee is when the employees are in a union and the union goes on strike. There is no doubt that unions help to equalize the bargaining power with the employer. So it should come as no surprise that unionized workers earn significantly more money than their less fortunate non-unionized brethren. Here’s the proof.

This essay is not meant to be either an endorsement of unions or our current labor laws. Perhaps there is a legitimate argument to be made that for the good of society, employers need to be able to treat their employees like scum? However, I know that if I was ever faced with the choice to vote for unionization, I’d vote yes. It’s a simple matter of voting for higher pay for myself. What’s hard to understand is why so many workers vote against their own self-interest when the issue comes up. The anti-union movement obviously has the better propaganda.

This essay is meant to rebut the fallacious reasoning of the pure libertarians, for example this essay found at the Ludwig von Mises Institute website.

The labor market is not a true free market. (1) A great deal of effort is required for the employee to find a new job. Even the employer incurs significant costs in hiring a new employee. (2) The employer has insufficient knowledge of an employee’s true worth. I previously wrote a related essay: Do companies really want to hire the best employees? Similarly, the employee also jumps into the relationship blindly. (3) There is the unequal bargaining power problem, as discussed above.

Furthermore, the bigness of the employer is not a natural result of government non-intervention. Corporations are a creation of statutes passed by legislatures. Corporations are necessary to a modern economy because they allow many investors to pool their money in order to create a larger business that can take advantage of economies of scale. But let us not forget that they are creations of government, so I don’t see it as particularly horrible if the government also creates some laws to equalize the advantage it gave to the employers by allowing them to become so big.

This is why I previously argued that the laws should force employers to pay workers for overtime. And also why I support a sensible minimum wage. In both cases, reasonable government regulation leads to a more efficient allocation of resources, because the unequal bargaining power otherwise results in the employer undervaluing its employees’ labor.

Comments

[Michael A. Clem]

You raise many points that could be responded to, but let me try to cover what seem to be the main points. A major assumption seems to be that our current marketplace, labor and otherwise, is the result of a free market. In reality, the current marketplace has been distorted by government intervention for decades. If the relationship between employer and employee is skewed, it is because government has interfered, not in spite of it. Competition between businesses for labor is to the laborers' advantage, and such competition has been diminished by goverment regulations that favor big business and special interests.
As for corporations in particular, there are two important distinctions. One, a corporation is, as you recognize, a government-created entity that has certain privileges. Two, a corporation is a particular way of organizing a business that allows many investors to pool their money in the busines. What's important is that the special privileges granted by government are not necessary to have a corporate-organized structure. Instead of creating laws to compensate for their special privileges, we simply need to end the special privileges.
Finally, you've yet to address the economic consequences of a minimum wage. If a laborer's skills are worth less than MW, how do propose to force employers to hire such low-skill workers? "Reasonable" regulation isn't reasonable if it requires draconian law enforcement. Good intentions aren't enough to overcome bad government policies.

[Half Sigma]

I don't buy into the "minimum wage hurts the workers" argument, and one day I will blog about it.

[atcooper]

I applaud any reasoned consideration of labor law. The game is stacked in capital's hand.

Mr. Clem:

I am not convinced that there is any real competition between buisnesses, at least not to any appreciable standard. All the major buisness that might apply to such a maxim agree to price fixing. I gather they call them trade associations.

Which leads to your special privileges argument. Which of the special privileges do you think should be dismantled?

Anti-minimum wage arguments are hollow without reasonable answers to the prior questions. As the system is set up now, I can't imagine a minimum wage lower than eight dollars an hour.

Idealism is the stuff of dreams. People expire every day due to reality.

[Half Sigma]

I agree with atcooper, above, that large businesses often have a herd mentality type of behavior. They all tend to treat their employees in the same manner, once again limiting any freedom of choice that an employee might have, because he would only jump from one employer to another who treats him the exact same way.

How many businesses, for example, choose to pay all of their "exempt" employees overtime? It's rare.

[Michael A. Clem]

Since you don't "buy into" the argument, I look forward to one day seeing your counter-argument about the economic consequences or benefits of the minimum wage.
And at the risk of repeating myself, the game is rigged for alleged "capitalists" by the government, not by the nature of capitalism, so, yes, I agree that there is currently not as much competition in big businesses *today*. What I don't see is why the results of government regulation should be blamed on the free market.
Mr. Cooper, it seems to me that you have more of an argument with Half Sigma, since he's the one arguing that it is economically necessary to have government-created and privileged corporations at the expense of smaller businesses.
And yet, if such privileges have augmented the imbalance between employer and employee, doesn't it make more sense to remove such privileges, instead of trying to precariously counter-balance them with greater government micromanagement of business? The more that government is involved in how business is run, the more that business is based on political considerations, not economic considerations. This creates ever greater economic inefficiency, not efficiency, and more problems for government to deal with.

[anthonytcooper]

I am not sure I understand how a minimum wage would disproportionally impact small buisness. The whole range from small to giant-sized corporate buisness utilize mimimum wage workers.

I can appreciate to a point the libertarian ideal of a free market, but I have not seen enough evidence to conclude there has ever been one. The oil cartel is a perfect example of modern markets as I understand them. Regulation creates the entrance barrier that prevents competition, bottlenecking goods and services like OPEC does oil.

It is not in the interest of the industrialists and capatalists to have a genuine free market. The total deregulation of the markets is similar to that poor fool in greek hell always pushing the boulder, only to find it rolling down the other side. It will never happen.

A minimum wage raise can happen. It's additional regulation to balance the bargaining power between the boss/employee.

[Alex]

Mandating or increasing a mandated minimum wage makes it more expensive to hire people. Consequently, a) alternatives that don't involve hiring people at all become more attractive, and fewer people are hired, and b) the number of small businesses that simply don't have enough moeny to hire people increases. That's how a higher minimum wage hurts those at the bottom. To put it charitably, it turns their situation into much more of an all-or-nothing, death-or-glory proposition than it would be otherwise.

Similarly, unions, by driving up the price of labor beyond what it's actually worth in the market, make it more attractive to have as few employees as possible than it would be in a union-free world. Also, non-union people have an advantage in the labor market over union people because they'll do the EXACT SAME WORK for less money (and their loyalties are less suspect, to boot), and what employer could refuse a deal like that? So, in the end, unions also cause unemployment - for people who insist on unions, anyway. No company starting out today would, in its right mind, agree to be a union shop given the choice, and companies that are already union shops are at a disadvantage because they have to pay more for the exact same labor than non-union shops. Pretty simple.

In the end, the main effect of more government intervention driving up labor costs through regulation would be to necessitate even more government intervention as the unemployment rolls swell, which would necessitate an increase in taxes (or further devaluation of the dollar through public debt), which would make it more expensive for American companies to do business, which would lead to more unemployment, etc.