Something’s Price & Its Value Are Two Different Things
The price of a thing is based on the seller’s bargaining power. Its value is related to its market price in a robust, highly competitive market
By David Grace (Amazon Page — David Grace Website)
The Price Vs. The Value Of Goods
Most people think that the price of a thing and the value of that thing are the same, but that’s not true.
Price is the amount that the seller’s bargaining power versus that of the buyer allows the seller to require the buyer to pay in order to acquire the item.
Value is the amount that the product would sell for at a Cost + Overhead + Reasonable Profit price, that is the price available in a robust, highly price-competitive market with large supplies of that product available from many competing sellers.
But in the real world, price has little to do with any concept of value or a “reasonable” profit.
I discussed the ideas of price and value versus a product’s usefulness here:
While the Cost + Overhead + Reasonable Profit price (the so-called “fair value”) for a vial of insulin might be $50, the massive bargaining power of the virtual cartel that controls the manufacture of insulin might be able to set a price of $600 for that same vial.
While the value of a product is based on the buyer’s estimation of what a highly competitive market price would be when there is no shortage of supply, the actual price of a product is based on sellers’ and buyers’ relative bargaining power.
The Price And Value Of Labor Is Different From The Price And Value Of Goods
A Cost + Overhead + Reasonable profit price formula can be calculated for a product, but it cannot be calculated for labor.
I remember reading someone’s comment that a worker was “worth” what it would cost the employer to hire someone to replace him/her, equating the value of labor with the market price of that labor.
Bargaining Power For Labor Is Balanced In A Perfect Market
That equivalency might have some validity in a perfect labor market where the employer’s need to hire the job applicant was exactly equal to the applicant’s need to be hired by that employer, one where the employee was financially secure enough to refuse to accept a job at a wage that s/he considered to be too low, and the employer was sufficiently staffed to refuse to hire an applicant whose wage demand s/he/it considered to be too high.
If all the potential employees in an industry had a single agent representing them and had sufficient financial reserves to refuse employment for several months and if the employers had sufficient employees to refuse to hire additional employees for several months, that is, if the bargaining power between the employers and the employees was roughly equal, and if both parties approached the wage negotiation from a hard-headed, purely dollars and cents point of view, then the wage eventually agreed upon would probably more or less represent the value of the employee’s labor.
If the worker’s wage were based on the employer’s realistic calculation of the profit that the employer would expect to earn on the sale of its product and the volume of product that the employee’s labor would produce, then the upper limit of the labor price that the employer would pay would be the amount of profit that the employee’s work would contribute to the company.
The lower limit of the wage that the employee would be willing to accept would be the lowest wage that would allow the employee to support his family.
In a perfect market the employer would attempt to negotiate a wage as far below the profit that the employee’s labor would produce and the employee would try to negotiate a wage as far above the lowest wage that would allow the employee to support his family.
If the parties had equal bargaining power, that negotiated amount would more or less reflect a material percentage of the dollar value to the employer of that worker’s labor.
Such a perfect labor market almost never exists. Substantially unbalanced bargaining power distorts the price of whatever is being sold in favor of the party with the disproportionately high bargaining power.
Bargaining Power Disparity Reduces Wages
If an employer could make a reasonable profit if the potential employee was paid $22/hour, but because the employee is about to be evicted s/he accepts a wage of $11/hour, it does not mean that his/her labor is “worth” $11/hr.
Instead it means that the massive imbalance in bargaining power between the employer and the employee has depressed the price for the employee’s labor below the dollar and cents amount that the employee’s labor contributes to the employer’s profit, its objective value to the employer.
A low labor replacement cost due to disproportionately high employer bargaining power is not a measure of the value of the employee’s labor. It is a measure of the imbalance in bargaining between the employer and the employee.
The Value Of Labor Vs. The Price Of Labor
- The value of an employee’s labor is related to its contribution to the employer’s profit, and
- the price of an employee’s labor is related to the employer’s bargaining power relative to the employee’s bargaining power,
two very different things.
The value of the employee’s labor is based on the number of units of product that the employee’s labor would produce times the amount of profit that those units of product would generate, but that value and the price of that labor are usually very different numbers.
— David Grace (Amazon Page — David Grace Website)
