- Progressives will often claim that workers are at the mercy of employers, and this dynamic forces workers to accept poverty wages
- But this notion overlooks the interplay of a competitive, market-based economy
- Government interference in the labor market is typically harmful to workers
Many progressives include in their critique of free-market capitalism the notion that employers have so much power over workers that they can set wages at subsistence levels. Workers, according to this theory, are at the mercy of greedy businesses and must accept whatever wages are offered. Worker “need” is exploited by employer “greed,” and workers are eternally destined to be on the verge of starvation with no power to improve their lot.
Reality, of course, has proven that to be false. The financial conditions of the working class have improved dramatically over the past century, with workers rising to upper income brackets a regular feature.
Why is this the case? It certainly seems intuitive that workers are at the mercy of employers and would be obligated to accept whatever pittance the greedy capitalists might offer. So why aren’t they?
George Reisman, economist and author of the book Capitalism, offers in this article a thought experiment that provides an explanation.
He discusses the case of a late-model car owner who moves to New York City for work. “If this car owner cannot afford several hundred dollars a month to pay the cost of keeping his car in a garage, and if he cannot devote several prime working hours every week to driving around, hunting for places to park his car on the street,” writes Reisman, then “he will be willing, if he can find no better offer, to give his car away for free — indeed, to pay someone to come and take it off his hands.”
Reisman continues. “Yet the fact that he is willing to do this is absolutely irrelevant to the price he actually must accept for his car.” His desperation, in other words, is not the only factor in setting the car’s price. Instead, it is “determined on the basis of the utility and scarcity of used cars — by the demand for and supply of such cars” (here “utility” means the value derived from a good or service).
Just because our hypothetical car owner would be willing to give away his car for free in no way means he would have to. And the fact that he would be in a position of desperation likewise does not mean he would have no leverage with potential buyers of his car.
The reason is simple: Used cars are a scarce good, and potential buyers must compete with each other. As Reisman puts it: “The price the sellers receive in a case of this kind is not determined by the terms on which they are willing to sell. Rather, it is determined by the competition of the buyers for the limited supply offered for sale.”
Buyers will put in competitive bids for the used car or risk being outbid by other potential buyers.
The comparison to the labor market quickly becomes apparent.
“Exactly like the used cars or anything else that exists in a given, limited supply,” Reisman wrote, the value of labor is determined “by the competition of buyers for the limited supply.”
Despite this reality, one may still have objections. Perhaps the “greed” of employers is deep and universal. Perhaps the wages they offer are all so stingy that workers have no other option than to accept subsistence wages.
Nevertheless, as Reisman points out, “It also quickly becomes clear that ‘employer greed’ is fully as irrelevant to the determination of wage rates as ‘worker need.’”
He explains that, if employers want to hire reliable workers that will help their bottom line, they must outbid their competitors.
“The rational self-interest of employers, like the rational self-interest of any other buyers, does not lead them to pay the lowest wage (price) they can imagine or desire, but the lowest wage that is simultaneously too high for other potential employers of the same labor who are not able or willing to pay as much and who would otherwise be enabled to employ that labor in their place,” Reisman writes. In sum, he adds, “the higher bid is to his self-interest because it knocks out the competition.”
Of course, different economic conditions favor workers or employers slightly more. Tight labor markets enable workers to be choosier and hold out for more money, while a struggling economy with not as many job opportunities favors employers and causes workers to compete for fewer openings. But the principle remains the same.
Moreover, government interference with the labor market can stymie the competitive bidding process to the detriment of workers. Minimum wage laws, protectionism or subsidies favoring specific businesses or industries, occupational licensing, and mandated benefits are some examples.
It’s a myth that a competitive, market-based economy results in impoverishment of workers. Pretending otherwise and imposing government intervention into the labor market would be doing workers a great disservice.
