Let Them Compete: Labor Markets Are Workers’ Friends, Not Theirs…

How do labor markets work?

Like any other market. Supply and demand determine the prices of broccoli, beans, and bowling balls. They also set wages. What Brian Kaplan calls the world’s largest market is complex, and the competitive model doesn’t explain it everything. However, people don’t understand how competitive labor markets work, and that’s a bigger problem than voters who don’t sign up for Journal of Labor Economics. As educators, economists have work to do.

Historians and economists have based much of their analysis on the idea that workers and employers have unequal bargaining power. W.H. Hutt traced this idea, which he called “mysticism,” to Adam Smith. Hutt argued that competitive labor markets are workers’ friends, not enemies. His point of view is at odds with what many people think. Hutt did not believe employers were enlighteners or philanthropists. Bob may be obsessed with his bottom line, else Employers are obsessed they Willing to hire workers who Bob might mistreat. Hot doesn’t think of a wish, either. Increasing productivity in competitive labor markets leads to better wages and working conditions. Studies of apartheid in South Africa show how white workers enriched themselves by stopping local competition. So how does the competitive job market work?

First, people try to maximize their well-being. Second, they compare costs and benefits. It is easy to object that people should not be concerned with themselves or that they are not always rational. by reasonableHowever, we don’t mean that people will Always Understanding the record straight, that psychological biases don’t stare them down, or that they never do stupid things. The economists’ assumption of “rational choice” is not an assumption about how well the mind works. Instead, by rational, we mean that people change their behavior in response to evolving costs, benefits, and constraints. If beef prices go up and chicken prices go down, people will buy less beef and more chicken, all else being equal. As Ronald Coase points out, it may not be “rational” to dash across a busy street to get to a sandwich shop. However, we can predict that people will take more of these opportunities if traffic wanes a bit.

Nor do economists justify or rationalize the kind of self-indulgence we try to teach our children. When we say that people maximize their well-being, we do not mean that they are pathologically selfish sociopaths. We define “care” and “well-being” broadly and subjectively: people try to design the world to their liking. They may be narrow-minded, materialistically focused, or pathologically selfish. They may also be altruistic. Parents define their “own interest” and “well-being” to include the well-being of their children. People also make trade-offs. Sometimes, they read to children at bedtime. Other times, they are so tired they decide to go straight to bed.

Worker substitutes determine the amount of labor people will save in a competitive labor market. Worker productivity, measured by the value of workers’ incremental contributions to production, also known as the marginal product, determines how much labor firms demand for various wages. In competitive equilibrium, labor is supplied by workers and firms demand it, up to the point where the value of the marginal product of labor is equal to the value of the best substitute for workers. Once the dust settles, businesses and workers in competitive markets realize all the potential gains from trade.

We must remember some important facts. First, markets are competitive on the demand side as well as the supply side, and profit-obsessed employers are eager to snatch the labor they can hire profitably. Second, labor market brinkmanship is costly, because time is money. To refuse to hire a worker who can be employed profitably is to sacrifice the difference between the worker’s contribution to production and the worker’s wage. It may be possible for the monopolist (a single employer in the labor market) to hold out. But in a competitive job market, profit-obsessed employers will be keen to snatch workers they can profitably hire. Third, people act as individuals, not as individuals. While it may be good for the capital as a class To keep wages, it’s hard to keep combinations in pursuit of that power. For example, assume that everyone else in the union will offer low wages. In this case, an individual cartel member can increase their profits by cheating the cartel and offering them slightly higher wages.

Thus, competition in the labor market protects market participants from ‘exploitation’. When there is a shortage of labor, it raises wages. When there is a surplus of labour, it lowers wages. In equilibrium, it increases the gains from the trade. However, government intervention can redistribute some of these gains from trade (at a cost in terms of lost output). In this respect, Marxists and public choice economists can agree that there is a great deal of effort to induce the state to create economic rent, or to return an asset for what it can earn elsewhere. Marxist analysis would stress the strength of the capitalist class. In South Africa in particular, this would be incorrect. In general, apartheid helped white workers, while harming black business owners and workers.

WH Hutt has argued that competitive labor markets are the most reliable guardians of workers. He was never one to defer to people simply because of their “greatness”. On the contrary, he argued that even greats such as Adam Smith and Alfred Marshall had “vague” ideas about bargaining power. Workers compete with each other for jobs, but firms compete with each other for workers. When people are allowed to compete, one foolishness becomes another opportunity. If, as Hutt did, we want to increase incomes (particularly for the poor), we would be wise to repeal rules and laws that make labor markets less competitive.

Art Cardin

Art Cardin

Art Cardin is a senior fellow at the American Institute for Economic Research. He is also an associate professor of economics at Samford University in Birmingham, Alabama and a research fellow at the Independent Institute.

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