Do Capitalists Have Superior Bargaining Power?
In response to an earlier article on Mises.org in which I described why capitalism, and not labor unions, have given us more and more leisure time quite a few people emailed me to ask: "But aren't workers at a disadvantage in bargaining individually for wages, and aren't unions valuable for that reason?" I never argued that unions had no value, of course, but the answer to this question is nevertheless an unequivocal "no."
The "superior bargaining power" argument has always been the most important argument on behalf of unionism—and of all the legislative privileges that unions enjoy. As Mises wrote in Human Action (Scholar's edition, p. 591), these "garbled ideas are the main ideological foundation of labor unionism and the labor policy of contemporary governments . . ."
The ideas are "garbled" because they are typically espoused by union propagandists or by their academic supporters who are lacking in economic knowledge. Of course all employers want to pay the lowest price possible for the things they buy, such as labor services, and get the highest prices for the things they sell. Don't we all? But economic reality places limits on these pipe dreams.
In labor markets, competition among entrepreneurs assures that there is a close association between worker compensation and the marginal productivity of labor. More precisely, compensation is determined by the workers' "marginal revenue product," which is the multiple of marginal physical product—how many physical goods or services the worker produces in a given time period—and the final price paid by consumers for those articles.
Workers therefore become more valuable to employers if their marginal productivity increases, which is caused by capital investment by employers (which makes labor more productive and hence more valuable), technological improvements, which are usually the result of employer investments in research and development, and improved human capital, which is the result of education, training, experience, and learning of all sorts.
Workers also become more valuable to employers if say, consumer demand is strong, which drives up the price of the good or service they work at producing. This increases their marginal revenue product as well, since the demand for labor is a "derived demand," being derived from the consumer demand for the goods and services that that labor is used to produce.
If an employer attempts to exploit some or all of his employees, in a competitive, capitalistic labor market he will merely create a profit opportunity for his rivals, thereby harming his own business. If an employee's marginal revenue product is say, $500 per week but he or she is paid only $200 per week, then it will pay competing entrepreneurs to hire that worker away for $300, then $400, or higher, because they will still be earning a profit in doing so. As Mises wrote (p. 592), "There will be people eager to take advantage of the margin between the prevailing wage rate and the marginal productivity of labor. Their demand for labor will bring wage rates back to the height conditioned by labor's marginal productivity."
Even if some employers do exploit their employees by paying them less than their marginal revenue product, it is not at all clear that this would primarily benefit the employers, if it benefited them at all. Product market competition may well force them to pass their cost savings on to consumers in the form of lower prices, which would benefit the wage earners.
The only conceivable way that the exploitation of workers could work is if there were a universal cartel of employers that operated an ironclad cartel with no cheating, and they all agreed to pay wages below marginal productivity levels. The only known instance of this—and of universal worker exploitation—would be under socialism, where the state is the monopoly employer. It has never occurred—and could never occur—under capitalism because of the well-known cheating problems with all cartels, especially one as gigantic as a universal employer cartel. "It has been demonstrated that at no time and at no place in the unhampered market economy can the existence of such cartels be discovered," wrote Mises (p. 593).
Another reason for the "superior bargaining power" fallacy is that those who talk of this dubious theory typically speak as if "labor" is homogenous, when it unequivocally is not. Mises explained the significance of this fact as well as anyone can:
What is sold and bought on the labor market is not "labor in general," but definite specific labor suitable to render definite services. Each entrepreneur is in search of workers who are fitted to accomplish those specific tasks which he needs for the execution of his plans. He must withdraw these specialists from the employments in which they happen to work at the moment. The only means he has to achieve this is to offer them higher pay. Every innovation which an entrepreneur plans . . . requires the employment of workers hitherto engaged somewhere else (p. 594).
In reality, union representation harms many workers, contrary to the assertions of the proponents of the superior bargaining power fallacy. For one thing, unions can only benefit some of their members—the ones who are not priced out of jobs by wages that are pushed up above market rates through use of the union strike threat or other devices. Other union members, typically those with the least job experience, will lose their jobs. As they seek work in other areas, including the non-union work force, they will tend to depress wages there. In general, virtually all gains by unionized workers come at the expense of non-union workers who are deprived of job opportunities by union power.
One consequence of exclusive representation laws is that the more productive workers within a unionized workplace are usually made worse off by being legally prohibited from being paid higher than the general union scale. Indeed, the effects of unions has been to reduce the dispersion of wages, or to reduce the wages paid to the higher productivity workers while increasing the wages of the less productive ones. In other words, union bargaining causes the best workers to be penalized, and the least productive ones are enriched. This is one among many reasons why employers go to great lengths to avoid unionization: rewarding mediocrity and penalizing superior performance is not the way to remain competitive in the global economy.