Who Can Negotiate and Why?
The power of outside options in explaining wage discrepancies
In an ideal world, the amount that you see on your paycheck is an accurate reflection of the value that your productive work creates for your employer. But wages aren’t set in a vacuum — the amount you earn is affected by everything from how long you’ve been with the company, to the degree you hold (or don’t hold), whether you’re represented by a union, among others. And of course, your ability to bargain.
Now, when I say bargain, I don’t actually mean how persuasive you can be in that prototypical salary negotiation conversation where you’re sitting across from your to-be employer, dressed in a nice suit, making a case for why you should earn $XX wages as a starting salary.
Bargaining is a well-studied aspect of economic game theory, providing a framework to explore the dynamics that lead to divergent wage outcomes. An important topic that we will explore is the idea of outside options: the value of your alternatives. Although the analysis to follow is incredibly simplified, it’s meant as a means to build a better understanding of the effects that small individual differences can have on our ability to identify and pursue outside options, resulting in increased wage inequality.
