The Price For Unskilled Labor Is Mostly Set By Bargaining Power Not Supply & Demand
By David Grace (www.DavidGraceAuthor.com)
There’s an unspoken belief that market prices are always the “correct” prices or the “right” prices or the “fair” prices.
There’s a feeling of morality or at least propriety attached to market prices as if it’s “right” to pay whatever price the market sets and “wrong” to want to pay a price different from the one the market sets.
But that’s wrong.
Market Prices are the result of bargaining power and supply and demand are only two of many factors that dictate the relative level of the seller’s versus the buyer’s bargaining power.
A huge imbalance in bargaining power in favor of the seller will result in an extremely high price.
A huge imbalance in bargaining power in favor of the buyer will result in a disastrously low price.
Fairness doesn’t enter into the market’s price calculations because fairness is not one of the criteria that determine the level of a buyer’s or a seller’s bargaining power.
The market price for a good or service is not right, not wrong, not fair, not unfair, not accurate, not inaccurate, not untouchable or inviolate any more than it’s right, wrong, fair or unfair for a particular army to win a battle.
The most powerful contestant wins the battle not because they are good or bad or right or wrong, but because they are the most powerful.
The Price For Unskilled Labor
Many people hold it as an article of faith that the price paid for unskilled labor is “correctly” set by supply and demand.
This idea is false.
The price for unskilled labor has nothing to do with some mythical true, fair, proper, correct or inherent value of that labor.
The market price for unskilled labor deserves no deference, respect, enshrinement or immunity because that market price is nothing more than an expression of the employer’s vastly superior bargaining power versus that of the worker.
Unionized, unskilled auto workers who have the power to shut down nationwide production have high bargaining power and that power results in their wages being in excess of $30/hour.
Similarly-skilled but non-unionized restaurant workers who, at most, can shut down one or two out of ten thousand restaurants have low bargaining power and get paid $10/hour or less.
It is because the sellers of unskilled labor generally have very low bargaining power that the market price for unskilled labor is low.
Why The Sellers Of Unskilled Labor Have Very Low Bargaining Power
Sellers of unskilled labor have exceptionally low bargaining power because:
- 1) Unskilled workers have no unified bargaining unit
- 2) Unskilled workers cannot afford to withhold their labor from the market
- 3) Unskilled workers can offer their services only within a small geographical area
- 4) Employers set the price for unskilled labor
- 5) Employers are able to act as an informal but unified bargaining unit, and
- 6) Employers are more financially able to hold out longer against paying higher wages
1. Unskilled Workers Are Unable To Present A Unified Demand For Higher Wages
While an employer may control the hiring of dozens, hundreds or even thousands of unskilled workers, each unskilled worker is on his/her own with no ability to bargain for anyone but himself/herself.
Further, because employers know what other employers are paying for unskilled labor they act as an informal cartel where all major employers of unskilled labor informally offer a uniform price.
Unless they form a union, which because of educational and financial issues they are generally unable to do, unskilled workers are seldom able to act as a unified bargaining unit.
2. Unskilled Workers Can’t Afford To Be Unemployed
The dairy farmer can’t stop producing his milk and he can’t store the milk for any long period of time. He must sell his milk quickly or throw it away. The seller/dairy farmer has no real choice. He must sell his milk it at the best price he can get or lose it.
The same is true for the seller of unskilled labor. The unskilled worker’s family has to eat. He has to pay the rent. Because his wages are low he has no savings. The only thing a worker has to sell is his/her time. Time that is uncompensated is time lost, time that is thrown away.
For most unskilled workers their services are like a perishable commodity. The provider of unskilled labor cannot afford to withhold his services from the market but rather he must sell at any price he can get or lose all.
The unskilled worker has almost no ability to refuse work at the offered wage because he has to work now. With few exceptions he has to take the job at the offered price.
3. There Is A Small Geographical Area Where Sellers Of Unskilled Labor Can Market Their Services
The more skilled the service the wider the geographic area where that service can be sold.
A good doctor, lawyer, architect, etc. may find customers for his/her services within an area dozens or even hundreds of miles in diameter.
Because of the low per-hour price of unskilled labor and the costs in both time and money in commuting to a distant job, the size of an unskilled worker’s market for his services is limited to only a few miles.
4. Employers Set The Price For Unskilled Labor
The Normal Ratio Of Sellers To Buyers Is Reversed For Unskilled Labor
For almost any major product or service the number of sellers of that product or service will be a fraction of the number of the buyers of that product or service.
But unskilled labor is just the opposite. The number of sellers of unskilled labor is materially greater than the number of buyers of unskilled labor.
The side of the seller/buyer transaction that has the smaller number of members has the upper hand in setting and maintaining the price for that product/service.
The person who sets the initial price usually determines the general magnitude of that price by looking at what other people are paying or charging for that same product or service.
If you’re going to buy a shirt or a hot tub or a bowling ball the seller doesn’t ask you, “What will you offer me for my shirt or hot tub or bowling ball?” No, the seller tells you what the price is.
When the number of buyers of a product or service is materially smaller than the number of sellers of that product, the buyers set the price.
There are fewer buyers of unskilled labor than there are sellers of unskilled labor so the buyer, the employer, sets the price.
Having the power to set the price for unskilled labor generally presents the potential worker with a “take it or leave it” proposition and it gives the employer huge negotiating power.
The initial price for unskilled labor sets the benchmark price for unskilled labor in that geographical area. The uniformity of unskilled wages is maintained because employers know what other employers are paying and that’s what they offer to pay.
If most employers are paying $10/hour for unskilled labor then every job applicant knows that it will be a waste of time to apply for a job that’s advertising a wage of $10/hour only to demand $14/hour.
By setting the initial price the employer is able to severely limit or eliminate price negotiation.
The practice of the buyers of unskilled labor (employers) offering to pay what others are already paying results in these employers functioning like an informal cartel.
Market theory says that if there is a shortage of unskilled labor that applicants will choose not to accept a low-wage job offer and instead they will withhold their services from the job market until the employers eventually raise the offered wages high enough to attract enough applicants to fill the vacant positions.
But the real world doesn’t actually work that way because price is ultimately determined not by supply and demand but by bargaining power, and the unskilled workers have very little bargaining power, very little ability to say “no” and wait for a better offer.
5. Employers Are Able To Present A Unified Opposition To Higher Wages
No employer benefits from offering higher wages than other employers because employers know that offering a higher wage will just start a wage-war which will only end with all of them standardizing on the same new, higher wage. They know that they’re all better off holding the line and letting the occasional worker who won’t take the offered low wage walk away.
Sure, maybe Joe’s Burgers out on Route 6 may have such a hard time getting a new fry cook that they offer $10.75/hour instead of the $10/hour that Burger King and McDonalds are paying, but they’re not going to offer $12 an hour. They don’t need to. The other employers have set the price at $10 so they only need to go a little above that to get the new worker they need.
Employers that are large organizations, e.g. Walmart, fast food chains, hotel chains, often cannot offer a higher price. A Walmart in a certain town must pay wages that are in line with corporate policy. Even if the manager wanted to pay a higher wage, he/she could not.
Local outlets of large organizations and chains are often prevented by corporate policy and nationally advertised product prices from incurring higher labor prices.
Your local Walmart cannot and will not offer higher wages just because some local job applicants refuse to work without them.
6. Employers Have Greater Financial Resources Than Unskilled Workers
Without savings, unskilled workers have little ability to seriously threaten to withhold their services for any material period of time. Most employers of unskilled labor can easily afford to leave a few positions open for far longer than the workers who say “no” can afford to go without a paycheck.
Huge Imbalances In Bargaining Power Cause Excessive Or Insufficient Prices
Market prices for goods and services where the buyers and sellers have relatively equal bargaining power are likely to be economically “reasonable” and reflect a liveable compromise between the interests of the buyers and the sellers.
Prices for goods and services where the buyers and the sellers have vastly unequal bargaining power are apt to be extremely high or extremely low and thus damaging to one side or the other and often damaging to the efficiency of the economy as a whole.
— David Grace (www.DavidGraceAuthor.com)
