Changes in Bargaining Power in the Labor Market
Throughout history, workers have bargained with employers for their wages. Each side has an incentive to keep more for themselves, so bargaining power is key. This article examines the labor share in the U.S. business sector. Typically, the labor share is the ratio of wages to worker productivity. So, the labor share should be constant when productivity and wages increase by the same amount. Since the early 2000s, the labor share has dropped significantly. Workers are being paid less for each unit of productivity. The article concludes by arguing that automation is partly to blame for this. When firms are given the option to automate jobs with robots or other technology, it strengthens their bargaining power.
In class, we covered how to model bargaining power in different networks. This is directly applicable to modeling the bargaining power of workers and firms. Consider a 2-node network, one node representing firms and one representing workers, with the nodes connected by an edge. This resembles the network of firms and workers before automation is introduced. As we learned, the relative bargaining power of each node is equal. So, before automation, firms and workers had equal bargaining power. Now, add a third node representing automation to the network. This node is connected only to firms. Now, firms have the option of excluding workers in favor of automation, so their bargaining power increases, and worker’s bargaining power decreases. Workers are not entirely replaced by automation, because they are more cost effective, so the power distribution is not as uneven as it would be in a typical 3-node path. But, as the article suggests, this change in bargaining power may have been partly to blame for the decline in labor share.