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A Note on Bargaining Power

Posted By Don Boudreaux On October 29, 2013 @ 5:29 pm In Competition,Seen and Unseen,Work | Comments Disabled

An e-mail correspondent today wrote that low-skilled workers have “lower bargaining power” because they have “fewer options” (presumably compared to higher-skilled workers).

I believe that this correspondent’s perception is the popular one.  I also believe it to be mistaken.  It’s tempting to infer inadequate bargaining power from lower-than-average wages.  Yet while inadequate bargaining power can indeed result in lower-than-average (and lower than appropriate) wages, it does not follow that lower-than-average (or lower-than-appropriate) wages are necessarily the result of inadequate bargaining power.

With one notable exception (that I’ll mention in a moment), I see no reason to believe that low-skilled workers in the U.S. today have inadequate bargaining power.  What matters for their (as with other workers’) bargaining power is the number of actual and potential employers bidding for their services.  In modern-day America, this number is huge, especially when it is recognized that even low-skilled workers can migrate from labor-market to labor-market – and in fact do so migrate.  (Indeed, low-skilled workers, having less job-specific skills, can often move more easily from job to job than can workers with higher yet more specific job skills.)

The typical low-skilled worker in the U.S. today can work at any of literally dozens of different jobs for any of countless different employers.  And the fact these workers have few job skills should not be taken to mean that these workers are not keen or unable to seek out and to exploit better job opportunities.

In addition to the fact that low-skilled workers have few specific job skills, another great – perhaps the single greatest – source of their bargaining power is price.  If they can offer to work at whatever wages make them attractive to employers, they have bargaining power.  The worker who is denied by government the right to offer to work at a lower wage than the one that politicians have divined is minimally acceptable loses bargaining power.  That worker literally has no power to bargain on the wage margin.  That worker is prevented by government from offering to employers “If you employ me, I’ll work for $7.00 per hour.”  The absence of this bargaining power is caused directly by government regulation – and the fact that that regulation might today be well-intented does nothing to alter this awful reality for those workers who are prevented by the state from bargaining for employment by offering to work at hourly wages below the legislated minimum.

Consider McDonald’s hamburgers.  We can reasonably call this food “low-skilled.”  It’s basic.  It is far less valuable than a premium cut of prime rib at Ruth’s Chris Steakhouse, a dish of steamed Chilean sea bass, or any number of other more “highly skilled” – that is, more interesting, more tasty, and (hence) more highly prized and higher-priced – restaurant meals.  Being basic, uninteresting, and abundant, McDonald’s hamburgers sell at prices well below the prices of prime rib, sea bass, and other more tasty and more rare dishes.  But no one alleges that McDonald’s therefore has inadequate bargaining power in selling its hamburgers.

The reason McDonald’s hamburgers have bargaining power equal to that of the finest prime rib at New York City’s or Los Angeles’s most exclusive steakhouse is that McDonald’s is free to price its hamburgers at levels that will attract willing buyers.

There is, though, one germane difference here between low-value foods such as hamburgers and low-skilled workers: today’s low-value food is destined, by its nature, to remain low-value food.  Today’s low-skilled workers, in contrast, are not destined by their nature to remain low-skilled workers.  One (the most?) important source of higher skills is job experience.  Because minimum-wage legislation prevents many workers from getting more skills today – because such legislation prices these workers today out of the job market – that legislation prevents these workers from getting today the greater mix of skills that each could then use tomorrow to bargain for different, better-paying jobs.

It’s a nasty bit of irony that some proponents of minimum-wage legislation advocate such a policy on the grounds that low-skilled workers allegedly have inadequate bargaining power.  The very policy these proponents endorse undermines the bargaining power that low-skilled workers have today and prevents these workers from getting more skills that enable them tomorrow to bargain for better jobs.

Shouldn’t low-skilled workers be accorded at least the same dignity as the lowly no-frills hamburger?

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