Over the years, the economy has evolved from the small pre-industrial craft economy, where business enterprises were truly small and the path to good paying skilled work was through apprenticeship, to the larger industrial economy based on wage-labor to our current post-industrial economy where firms are large and one is either skilled or not. And yet, the assumptions about the worker’s relationship to the employer are still grounded in the past. In an economy where many work for large companies, who, because of their monopsony power, are able to drive down wages, we need to rethink our labor market arrangements, and ultimately labor law.
The neoclassical economics model assumes that workers freely negotiate with their employers as equals their wages and working conditions. As a theoretical construct, this argument has historically been used to outlaw unions as monopolies in restraint of free trade. It has similarly been used to oppose maximum hours and minimum wage laws on the grounds that they would violate the worker’s “liberty of contract.”
Institutional economists were quick to point out the obvious that in the real world there is an asymmetrical power imbalance between employers and their workers. Employers are wants traders who can afford to wait out producing goods until they get workers who will work for whatever wages the employers are willing to give them. Workers, however, are needs traders who, because they need to work in order to eat, are forced to take whatever wages are offered. Free negotiation? Take it or leave it.
In the neoclassical model, workers do have a degree of power to the extent that they possess skills that employers truly need, that without they would not be able to function. But as firms get larger in scale, especially when government fails to enforce antitrust laws, these growing monopolies become effective labor monopsonies that are able to suppress wages, especially those of low-skilled workers.
The neoclassical response to this is that all workers are paid according to the value of their marginal product. Therefore, labor laws like unions and minimum wages artificially inflate wages above the value of their marginal product. Monopsonies, however, suppress wages so that workers effectively get less than their marginal product. What, then, are we to do?
The traditional response to asymmetrical power imbalances has been to strengthen labor market institutions in order to afford workers, especially those at the bottom, a degree of monopoly power. After decades of weakening such institutions going back to the Reagan years, which included stacking the National Labor Relations Board with people who were fundamentally anti-labor, this would be a difficult road to hoe. Moreover, federal courts up to the Supreme Court have been stacked with conservative judges who are similarly anti-labor. Were we to even concede that anti-labor is too harsh, they are certainly ambivalent towards labor because there is nothing in our law which recognizes a worker having a property right in his/her labor.
Given where the courts are, it is highly unlikely that there will ever be an expansion of property rights to include one’s labor so that payment below marginal product would be considered theft. But given that big firms like Walmart are no longer broken up because their economies of scale benefits consumers, that route is highly unlikely as well. Perhaps we should revisit the corporatist model which would involve wage setting by committees made up of big business, big government, and big labor.
As I suggested last time in this space, that the nation may need to revisit the need for a new industrial policy, it may also need to have greater coordination so that workers are paid fair wages. More common in Europe, corporatism entails a cooperative relationship between government, business, and labor. The objective is to reach an agreement on wage levels in order to maintain economic stability, presumably in the larger public interest. Arguably this was the objective of the Wagner Labor Relations Act which legalized unions and embraced collective bargaining, but that was still voluntary.
Corporatism, in part, does reflect an assumption that wage inflation will result in unemployment, but strikes too lead to instability. If all the major players can be brought into the equation, then strife and instability can be avoided. Above all, however, corporatism involves planning. It is essentially a system of regulating conflict between interest groups in society. A community’s economic growth relies on cooperation between major economic interests, but it also assumes instability to be due to conflict between these groups.
Critics, however, argue that it effectively subordinates labor interests to those of big business with the assistance of the government. Some view it as a form of fascism because it blurs the traditional liberal distinction between state and society. Moreover, it is centralized planning. By establishing wage rates at the governmental level it denies workers freedom of contract. But freedom of contract does not work in voluntary markets where there is asymmetrical power.
Although corporatism is often described as a top-down approach in which labor’s interests are often subordinated to those of capital, corporatism may still be an example of economic stabilization policy allowing for some worker participation short of full blown workplace democracy. Still, the question remains: given the nature of today’s global economy, can we still rely on voluntary interactions between workers and employers which have characterized most free market economies?
Liberal public policy is predicated on the assumption that there needs to be a level playing field and that there are times when a neutral umpire is needed, and that umpire might have to be government. A governmental committee, whose members would be chosen by corporate and labor interests alike, coordinating with labor and business, could ensure wage rates which are efficient, equitable, and which effectively reduce inequality.
It is true that there would be little room for negotiation in smaller businesses, but the established wage rates per industry and occupation could effectively establish putative minimum wages. In many European countries where wages are set by wage councils, there is much less inequality. Much of the strife that we have been witness to, especially the polarization of our political sphere, is a function of globalization. The only way to seriously address these issues is through greater cooperation. Corporatism was seriously considered during the 1970s, but ultimately rejected because of the Fascist charge. Nevertheless, it may be time to revisit the issue, albeit with a more democratic focus.