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  • Writer's pictureOren Levin-Waldman

What Constitutes a ‘Just’ Labor Market?

With much political discourse surrounding social justice these days, one might be tempted to ask the obvious question of what a “just” labor market might look like. A neoclassical model of competitive markets assumes the labor market to be just when all actors in the marketplace have been free to make choices with regards to whatever transactions they were free to enter into. All resulting outcomes are assumed to be fair because all actors in the marketplace were indeed free to make choices. Therefore, in a race for life two individuals winding up in different places is not unjust, because both are presumed to have been equal at the start and where they wound up is a function of the choices they were free to make.

And yet, the question remains: are we all equal and free to make choices? Is the labor market not unjust if indeed some actors in the marketplace aren’t free to make choices because of disadvantaged circumstances that they may have been born into? If we aren’t all born with the same natural endowments, are we all really equal to begin with? Most workers are forced to work for whatever wages they can get because they have no choice if they want to eat. To say they have a choice only makes a mockery out of choice if the alternative is to starve.

Workers in the neoclassical model are assumed to be the equals of their employers in terms of their bargaining power. Indeed, they control whether they will be hired through the wages they demand, because they can always lower their wage demands to the point where there is a demand for their services. That social justice has even become a topic of discussion only reveals how seriously flawed the neoclassical model really is.

Capitalist markets are by definition exploitive. Workers are perpetually disciplined by their need to work in exchange for wages that enable them to subsist. As globalism has resulted in, and in fact required, falling wages in order to be competitive, and that social programs also be cut so that business environments will be attractive to investment and economic growth, the effect has only been to discipline workers more. Although it is true that exploited workers can always leave and take another job elsewhere, this is only true in a slack labor market. On the contrary, workers with few options for survival are only forced to remain employed and are effectively in a situation where they will continue to be exploited.

Workers are needs traders who have to work because they need to. Employers, however, are wants traders, who enjoy the luxury of waiting until terms are favorable to them. Consequently, the two are not equals and that the power imbalance between them is asymmetric. Those at the bottom are especially needs traders and are forced to accept whatever conditions are offered and at the lowest wages because they do not have the ability to hold out for something better. Therefore, they don’t enjoy the same freedom as those with greater power.

Given the power imbalance between employers and workers and that some are born into more advantaged circumstances than others, thereby affecting the outcomes, it would be a stretch to call the U.S. economy a just economy, let alone a just labor market. What, then, would a just labor market look like?

The first place to look for guidance is, of course, John Rawls’s A Theory of Justice. Rawls’s two guiding principles are justice as fairness and priority of the right over the good. In justice as fairness, individuals accept in advance the principle of equal liberty and they do this without any specific knowledge of what their particular ends are. This is because they are under a veil of ignorance where they know nothing about their attributes, their resources, their endowments, and even their preferences. It is this veil that leads to a priority of the right over the good. Because they are under this veil, they would choose a system of justice that would protect individuals’ rights from say a mob seeking to impose its own good.

If, for example, Person A doesn’t know that her aspiration is to be an investment banker, she also wouldn’t be in a position to favor a tax code that effectively favors the rich, i.e., low marginal rates and low capital gains, over the poor. Similarly, if she does not know that she could wind up an impoverished member of the underclass, she isn’t in a position to favor a progressive tax code to redistribute wealth and income to the poor.

Applied to the labor market, we don’t know whether we have the ability to be rocket scientists, or whether we might wind up as low-skilled workers. Under a veil of ignorance, it is possible that we might choose a set of institutions that afford workers continuous opportunities to retrain and upgrade skills when necessary. We don’t know that we are even capable of learning the necessary skills to command higher wages. Moreover, we don’t even know that the employers that we would bargain with as equals, as the neoclassical model suggests, would actually bargain in good faith.

Rawls does introduce the difference principle where he suggests that redistribution could be justified if it makes the least advantaged better off. Does this mean the wealthy need to be overtaxed to pay for programs that would benefit the poor? Or perhaps it could mean that measures are taken to make sure that they have jobs and that institutions are in place to ensure that they are good paying jobs. Nobel laureate Amartya Sen defines poverty as the deprivation of capabilities, by which he means human agency.

A capability is a type of freedom in that it allows people to be autonomous. If low wages put workers in an exploitive position whereby, they are unable to fully realize their agency, they are being deprived of their capabilities. To the extent that they are deprived of their capabilities, are they not the same as wage slaves? A just labor market, then, has to be one where workers can in fact enhance their capabilities.

For Sen, unemployment leads to social exclusion and the dramatic loss of freedom of choice. It is damaging in the long term in that the unemployed lose their abilities, cognitive skills and motivation. It leads to the loss of human relationships and familial cohesion. It also exacerbates racial and gender inequality because women and racial minorities are overrepresented across the unemployed. Ultimately, it leads to the loss of social value and responsibility. And yet, the Fed’s response to rising inflation is to hike interest rates, which can only lead to more unemployment and the loss of capabilities.

A just labor market, then would, at a minimum, be one in which workers can claim to be members of the middle class. It is one in which labor market institutions are in place to bolster wages, even in the low-wage sectors of the economy so that workers can be self-sufficient, and in turn develop their capabilities. A just labor market, then, has to rest on a broad middle class and policies that facilitate the maintenance of a broad middle class. A just labor market that strengthens the middle class is also one where inequality will be less.

The response to inequality is not one that simply redistributes by overtaxing the wealthy in order to pay for programs that benefit the poor. Rather it is one where there are labor market institutions in place to prop up wages. Instead of programs, emphasis needs to be on job creation. It may also be one where policies are in place, perhaps through education and training, to facilitate transitions in a global economy. Otherwise, workers’ capabilities deteriorate, thereby perpetuating an unjust economy. At the end of the day emphasis has to be less on economic growth and more on economic development.

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