Bargaining Power

(This is a current page, from the Patterns of Power Edition 3 book contents.  An archived copy of this page is held at http://www.patternsofpower.org/edition03/3332.htm)

The labour market differs from other markets:

  • The supply of labour cannot be stored; if not used, it is wasted; and the employee cannot afford to wait long for work.
  • A wage might be a matter of survival for the employee.
  • Those seeking work are not only competing with each other. Employers can introduce automation if labour costs become too high, or they can move the work elsewhere.
  • The bargaining power of individuals is partly dependent upon their willingness to move, which may be inhibited by family considerations. One partner in a family may be particularly reluctant to move if the other partner earns more or would have difficulty finding an equivalent job in the proposed location.
  • A wage which is acceptable to a member of a family with several wage-earners might be insufficient for a sole wage-earner with several mouths to feed.

The last point can be addressed by providing tax-funded income supplements for those in need (3.2.3), but all these factors work to the disadvantage of ordinary wage-earners in a negotiation with an employer.

Some employees, particularly those with higher skill levels, tend to have strong bargaining positions as individuals.  This has led to dramatic increases in the pay and benefits of chief executives and bankers for example,[1] compared to other workers.  These individuals, though, are an exception; other workers fare less well in a free globalised labour market.

Trade unions can provide a mechanism for ordinary workers to increase their power by collective bargaining with employers, though union strength has declined since the middle of the 20th century.  Some unions failed to recognise reality, with resulting job losses.[2]  Some were dominated by various forms of communism which sought confrontation as a route to revolution, as described in Arthur Rosenberg’s paper Communism and the Communist Trade Unions.  Unions now, though, are more aware of the realities of a globalised labour market – they cannot exert monopolistic power – and some form of collective bargaining is perhaps appropriate to balance the employer’s power in labour market negotiations.[3]

The supply of available labour is greater, and employees’ bargaining position is therefore weaker, if there is high unemployment.  Governments try, by their macroeconomic management policies (3.3.8), to ensure that unemployment remains at a low level despite fluctuations in economic growth – without letting it get so low that wages start to rise sharply and feed inflation.[4]  If these policies are successful, people will find employment at all levels of skill, albeit in different jobs from those that disappear as a result of technology and globalisation.  Some areas and individuals may suffer disproportionately as the result of change though, despite government efforts to soften its impact (

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[1] Chief executive compensation in America has increased tenfold, relative to that of average workers, between the 1960s and the early 21st century according to Ha-Joon Chang in 23 Things They Don’t Tell You About Capitalism (“Thing 14”).  The high pay of British bankers, particularly their bonuses, became controversial – as observed in the Economist blog in January 2011 at http://www.economist.com/blogs/bagehot/2011/01/bankers_and_their_bonuses; this was still available in March 2018.

[2] The Liverpool docks provide a dramatic example.  The port faced a natural decline, with changes in trading patterns and competition from air transport, but the decline was accelerated by a corrosive confrontation between unions and employers.  The employers had abused their power, with unfair employment practices that included the casual labour system, but the unions overplayed their hand.  An investment in a new grain terminal at Seaforth was never used, as a result of these disagreements, and almost all the docks have now been abandoned.  An extract from Hansard on 25 July 1974 about Seaforth and the loss of jobs in the Liverpool docks was downloadable in March 2018 from http://hansard.millbanksystems.com/commons/1974/jul/25/seaforth-grain-terminal.

[3] Michael R.  Krätke published an article entitled A very political political economist: Rosa Luxemburg’s theory of wages, which lists a number of theoretical approaches as well as describing Rosa Luxemburg’s argument for the necessity of trade unions; it was available in March 2018 at https://www.academia.edu/5779740/A_very_political_political_economist_Rosa_Luxemburgs_theory_of_wages .

[4] Paul Krugman made this point in an essay entitled Ricardo’s Difficult Idea:

“countries have central banks, which try to stabilize employment around the NAIRU; so that it makes sense to think of the Federal Reserve and its counterparts acting in the background to hold employment constant”.

(NAIRU is the Non-Accelerating Inflation Rate of Unemployment: the level of unemployment at which, if you try to reduce it still further, inflation starts to rise rapidly as a result of a wage explosion).  Krugman’s essay was available in March 2018 at http://web.mit.edu/krugman/www/ricardo.htm.