When employees have more bargaining power

As I've pointed out many times before, employers have more bargaining power than employees. The primary reason for the unequal bargaining power is that employees vastly outnumber employers.

But there are exceptions. Take baseball players, for example. Suppose there are five catchers who are the best in baseball, and there are no other good substitutes for their elite catching abilities. Because there are only five best catchers but thirty baseball teams, here is the unusual case where employers vastly outnumber the employees. What winds up happening is that the employees make huge salaries becaue they have more bargaining power.

I should point out that this is as unjust an economic result as when the employer has more power. In the normal case, the employer gets to make profits off of the employees' ability to produce economic value. In baseball, the opposite is the case. The reason why baseball makes so much money is not because of the players, but because of the guys who invented the sport a very long time ago and because of the huge amount of marketing capital and physical capital (in the form of baseball stadiums) invested into the sport. The best catcher or best first baseman doesn't deserve to make any more money than the best muggle-ball player. Muggle-ball would in fact be a much more entertaining sport, but no one has yet invented it and invested billions of dollars of capital into it.

Movie stars also seem to have more bargaining power than their employers. I often read the complaint that movies aren't "profitable." In fact they are very profitable for the movie stars. Every big budget movie that has "lost money" has actually made a lot of money for the highly paid movie stars. This is just another example of how most of an industry's profits go to the party with the most bargaining power. Nearly always that means profits disproportionately go to employers, but that's not always the case.

Comments

[bbartlog]

Do you have either a reference or a simple argument to support that idea that bargaining power is inversely related to the number of agents (when the number is > 1 on both sides)? I mean, in the case where both sides are allowed to form cartels, the coordination costs are going to be higher on the side with more agents; but if cartelization is disallowed, does the result still follow? It's not at all obvious to me. I was under the impression that the imbalance in negotiating power stemmed primarily from differences in the amount of information available to employers and employees.

[Half Sigma]

If a single company bought up all the baseball teams, then baseball salaries would fall down to the lowest the single company could get away with paying, which would be the salary at which baseball players wouldn't be able to do any better in a different job. I doubt that many baseball players could make more than $100,000/year in a different job, so all those multi-million dollar salaries would drop down to the five figure level.

[Douglas Knight]

I think baseball stars are a bad example. The goal of the owners of the team isn't to win, but to make money. Stars are highly paid not because of a winner-take-all market quality of play, but because of a separate winner-takes-all market converting quality of play to celebrity. The slight edge in play of hiring on the best catchers produces a slight increase in ticket sales (unless it really makes a pennant difference, but I don't think anyone really knows that), but hiring a celebrity might might make a big difference in ticket sales, without any effect in performance.

I'm ambivalent about the movie stars example. It seems less complicated, but I worry about celebrity.

I think there's a model of art that makes it winner-take-all without celebrity, and maybe that's why I'm happier about the movie star example, even though celebrity is obviously important.

[Brandon Berg]

"If a single company bought up all the baseball teams..."

Yes, but even a duopoly, assuming no collusion, is radically different from a monopoly.

Also, your catcher analogy is flawed. Each catcher can play for only one team. But businesses tend to keep adding employees until there is no more marginal profit in doing so. There's no reason a competitive labor market couldn't consist of only two companies.

[Peter]

If a single company bought up all the baseball teams, then baseball salaries would fall down to the lowest the single company could get away with paying, which would be the salary at which baseball players wouldn't be able to do any better in a different job. I doubt that many baseball players could make more than $100,000/year in a different job, so all those multi-million dollar salaries would drop down to the five figure level.

Exhibit A: the All American Football League. It's an 8-team league that hopes to start play next spring, playing in college stadiums during an April-to-June season that won't conflict with the NFL or NCAA. What makes things interesting is that although the teams will be under separate ownership, the players (and coaches) will be employees of the league - an obvious attempt to avoid costly bidding wars for top talent.