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Bargaining Power and Wages

Recently, Amazon announced a wage increase that brought workers’ minimum wages to $15, which was seen as a big win for low-wage workers and a response to criticism of Amazon’s labor practices. However, the larger trend is of wage stagnation; real wages haven’t grown by much for workers at the bottom tier. The Economist argues that the solution to such wage stagnation can not be based on simple economic models of the relationship between productivity and wages, as significant growth in worker productivity has not been met with the expected growth in wages. Instead, it requires delving into the bargaining power between workers and their employers.

If we were to use a simplified model network to describe the inherent power held by workers and firms, “firm” nodes would be in the center, having multiple “options” to easily switch between. In other words, firms can more easily find a new hire. On the other hand, “worker” nodes have barely any connections or options. In other words, workers find it more difficult to find another firm. Using this network model, one can see that firms hold much greater power relative to workers, leading to a lower share of the surplus given to the workers. One of the suggestions posed in the Economist article (by researchers Naidu, Posner, and Weyl) is to increase the number of firms present, which, in the model, translates into increasing more “options” for each “worker” node, increasing their bargaining power. The other suggestion would be to encourage unions to form.

While assessing the relative bargaining power of workers and firms is important to understanding today’s wage stagnation, the suggestions for resolving this disparity may not be the best solutions. For instance, unions have alternate options or competing interests (ex. political lobbying, in-kind or illiquid benefits, etc.) beyond increasing the wages of their workers, which may not result in the desired growth in wages. Also, certain industries may have certain inherent difficulties (ex. high barriers of entry, low profit margins, etc.) that prevent firms from successfully raising wages. This is why the Economist concedes that “economists are unlikely to cheer such proposals.” In the end, it may be inevitable for workers in a particular industry from achieving a better balance in bargaining power, and the government can consider offering resources and assistance to move these workers towards higher-paying jobs.



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