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Fostering More-Competitive Labor Markets

JOSEPH E. STIGLITZ

The commonsense statement that employers have power over their employees has long been heretical in the economics profession. For decades, economists and the policymakers they advise have assumed a competitive model of labor markets where the supply of wages is set to match the demand for labor.

The model looks like this: Workers are paid according to the value of their marginal contributions. All employers have to pay the same market wage for labor of a given quality, which is measured by the worker’s skill and education level. Executive salaries reflect managerial acumen. Shareholders receive a return equal to the cost of their capital. If a worker does not like her job, she can quit it with little consequence for herself or her family—she can find a similar job paying a similar wage elsewhere. No one has power to negotiate for a little more, and no employer has the power to exploit any worker. If the employer tried to do so, the worker would just up and leave, quickly finding another employer who would not be exploitive. In this model, the term “bargaining power” does not appear; indeed, neither does the term “market power.” The competitive marketplace sets all wages and prices, and buyers and sellers are all just price-takers.

Of course, this is not the world in which we live. Even the corner grocery store knows it can raise its prices a little bit without losing all of its customers, which is what the standard competitive theory suggests. More and more, firms have demonstrated high and increasing levels of market power (Philippon 2019; Stiglitz 2019). At the same time, the bargaining power of workers has weakened.

It was never an equal match. An employer typically can find an alternative worker far more easily than a worker can find an alternative employer. This is especially so during slack periods in the labor market, or in places where there has been persistent unemployment. Leaving or losing a job is often greatly disruptive to workers and their families. There are mortgages to pay, children to feed, bills coming due. From the perspective of workers, jobs are not easily substitutable.

As the chapters in this volume make abundantly clear, this imbalance of market power has consequences. It enables firms to raise prices for goods and services—lowering the real incomes of workers. It enables firms to suppress wages of workers below what they would be in a competitive marketplace—contributing to the inequality crisis facing the country. This economic inequality gets translated into political inequality, especially in our money-driven politics, resulting in rules that evermore favor big corporations at the expense of workers. The growing political inequality, in turn, hampers economic performance, and ensures that most of the benefits of our anemic economic growth go to those at the very top (Stiglitz 2012).

In the middle of the 20th century, John K. Galbraith (1952) described an economy based on countervailing power—where labor institutions and government checked the power of large corporations and financial institutions. But policy choices over the past half century have upset this balance in ways that have weakened not only the workers, but also the economy and the country. This volume explores what has happened by concentrating on one understudied part of the problem: the labor market.