Bargaining Power: The Inevitable Price of "Help"

I want to talk about 3 popular market interventions that are meant to "help the little guy": minimum wage, collective bargaining, and rent control.

Many people feel "collective bargaining" is a not a market intervention, but I beg to differ -- when companies collude to fix prices, it is against the law and they can be prosecuted.  Collective bargaining is when employees collude to fix prices.  Allowing collusion by any actors in the marketplace is a form of market intervention.

When an employee is hired for a market-value wage, the employer knows that it will not be trivially easy to replace them.  Thus, the employer fears their employees leaving and tries to keep them happy.

Imposing a minimum wage raises wages, but because the wage is above its market value, there wind up being fewer jobs than applicants.  In that context, it is trivially easy for the employer to replace the employee, while a loss of the job is catastrophic for the employee, who may take a long time to find other work.  As a result, the employees get treated like dirt, and they put up with it.

Allowing collective bargaining is different from imposing a minimum wage.  It is similar in that it raises employee pay and wipes out the individual bargaining position of the employee.  However, the union is in a position to watch out for them, and it becomes painfully clear to the employee that without the union, they are nothing to the employer.  They don't realize that if they were being paid market wages, the employer would value them much more -- they become convinced that without the union, they would have no rights at all. Any criticism whatsoever of collective bargaining with such people sets them off raving about how collective bargaining is a basic human right guaranteed by the constitution, which is utter baloney.

Imposing rent control, similarly, means imposing a shortage of housing.  At that point, it becomes harder for tenants to find a place to live, and easier for landlords to replace tenants.  The relationship becomes skewed -- one actor, the landlord, finds himself in a position of complete power, while the tenant finds himself in a position of complete helplessness.  This is greatly exacerbated by the fact that in most rent control schemes, if the tenant leaves and is replaced, the landlord can charge a higher rent to the new tenant.  The tenant has negative bargaining power.

This creates a situation where the landlord has a large disincentive to make his tenants happy.  He drags his feet about fixing anything.  When I moved to NYC from a non rent-controlled area, I seemed to always be running into people who were suing their landlords, because the only way they could get their landlord to fix anything was by filing a lawsuit.  Society winds up needing a byzantine set of laws about what landlords have to fix and when, while if everybody were just paying market rents, all these laws and lawsuits would be totally unnecessary, since landlords would be motivated to keep any decent tenant happy.

The consequence of this is that, in a rent-controlled context, renters really despise their landlords, and it becomes politically infeasible to allow rents to keep pace with inflation.  In NYC 40 years ago, rents got so low that in many apartment buildings, the rent collected was less than what was required to maintain the building, and many landlords went Galt and abandoned them -- I've heard there were many abandoned tenements, especially in the South Bronx.

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  • A former member
    A former member

    If unions hadn't demanded an 8-hour work day, do you think we would still have a 10-hour day?

    January 11, 2014

    • rna2600

      With respect to the 40 hour work week, with our without Unions - I don't believe a work week any shorter would allow meanigful work to be done. You can try to negotiate all you want - with or without a Union - but in the end, to get work done, one must work. Technological advances bring repetitive workers some reprieve, but creative work cannot be automated, and it seems that a 40 hour work week is a "sweet spot" in terms of the number of hours necessary to actually produce meaningful work. Which also speaks to the point that, as examples, Wall Street, academia, and tech jobs commonly need their workers to work more than 40 hours - and the workers do it. Because to get actual work done, they must.

      January 21, 2014

    • Bill

      There are economies of scale in work. A knowledge worker working 20 hours a week produces much, much less than half as much as one working 40 hours. So there is a pressure for more hours.
      But your analysis that if one person works 10 hours less then someone else must work only a 10 hour week is idiotic. If you are doing unskilled work for a big employer, like Staples, where the store is open 12 hours a day with many people starting and ending shifts at different times, it would probably be easy to negotiate a deal where you work part-time for less than 40 hours a week.

      January 21, 2014

  • Judi

    Regina, thanks for your thoughtful posts. We'll miss you tomorrow!Certainly the Hershey story is horrifying. Perhaps defining a floor (crafting reasonable laws about treating employees properly, as you described in your first post) is one thing we'll discuss. In my experience, there seem to be two ways to set this floor: 1) laws/regulations as you describe, enforced inconsistently by government entities like OSHA, 2) working conditions negotiated by, & enforced somewhat consistently by unions+government. I myself just have no experience whatsoever with a company owner who had always held the best interests of his workers at heart in the first place, sorry!

    January 11, 2014

    • rna2600

      Judi, I agree that it is rare for a modern corporate owner to put the workers ahead of the shareholders (that would include the owner) interests. In this case, this company was created at a time before most of the more intrusive government regulations were put in place or even thought of, and a company was an extension of the owner as a person. Hershey came from poverty, and his own father had never succeeded in providing for his family via being an entrepreneur. This in an era when having your wife and children go hungry was an embarrassment, when individuals were accustomed totaling personal responsibility, and there were no government handouts. So Hershey taking care of his workers was a personal decision made from his own pride for his company and his feeling of responsibility for the workers who took the jobs he knew he personally created.

      January 21, 2014

  • Judi

    One of the most engaging and helpful Meetups I've ever been to! Superb group!

    January 13, 2014

  • A former member
    A former member

    2 · January 11, 2014

    • Yen

      Insightful about the article author's understanding that, "...(Obviously if the minimum wage shot up to $100 per hour, that'd be much more disruptive, but no one is proposing that.)..."

      January 12, 2014

    • A former member
      A former member

      Raising prices is mentioned in the article. It is point #3.

      January 12, 2014

  • Yen

    Sorry, can't make it this time. Good topics. I hope to make future ones.

    January 12, 2014

  • A former member
    A former member

    Hi, I'm terribly sorry to be missing this meetup. Something has come up which can't be postponed. I hope that you'll have a great meet up :)

    January 12, 2014

  • Al

    ...is anyone available around 6 pm? I'm tied up in Greenwich Village until 5:30.

    If so, email or text me your phone number.
    ---------------------------
    Al Russell Moldof, CPA
    (347)[masked]
    [masked]

    January 11, 2014

    • Bill

      We'll be there until about 7.

      January 12, 2014

  • Bryan G.

    Sorry guys, something unexpected came up. Hope to see you next time.

    January 11, 2014

  • rna2600

    LAST POST!! Sorry everyone - I won't do this again!

    Read up from 5 posts ago. Maybe get a cup of coffee or tea first... :}

    In this case, the workers (representing the common American) failed utterly to educate themselves about economics and instead made a money-grab during an era that supported such behavior. Through this long example, I am agreeing with Bill - collective bargaining is clearly when employees aggregate their power to collude to fix wages. And it can result in skewed, unfair economic situations, and/or be abusive - in this case to a company owner who had always held the best interests of his workers at heart in the first place.

    January 6, 2014

  • rna2600

    Fourth post - She continues:

    In the 60's when communism took over as a national meme, workers striked against Hershey, calling him a "capitalist pig", demanding even more salary and perqs, shutting down the factory, and locking him and his family in their home for days. This display of utter ingratitude and lack of economic understanding was disgusting. The workers treated Hershey horribly, failed to appreciate anything this man had done for them during previous decades, and broke his spirit. He fell into a depression and died several years later.

    January 6, 2014

  • rna2600

    (third post - read up - sorry everyone! I didm;t know there was a limit on post lengths)

    Through his own philanthropy, with no government intervention, arrangement, or tax break, he ran a school for orphan boys (I like to think in this era it would be for both boys and girls), he gave his workers housing he subsidized himself, and he paid a high wage. During the depression his workers were, by any measure, living a middle class lifestyle, with cars and private homes, and college scholarships available for the children lucky enough to be part of Milton Hershey's community. This persisted during the Depression, where a job at Hershey's was considered a plum beyond any other.

    January 6, 2014

  • rna2600

    (keep reading...)


    It seems like in all cases where workers are seen to be abused, there is an economic and power inequity present - examples: depression workers needed work of any kind at any pay desperately, poor people working minimum wage jobs lock themselves into desperate situations.

    And sometimes workers themselves are the abusers, as Bill points out with the example of collective bargaining. The example that springs to my mind is that of Milton Hershey when he was the CEO of the ultra-sucessful Hershey factory in Hershey, PA in the 1900's. (third post follows this - whew!)

    1 · January 6, 2014

  • rna2600

    I'm sorry to miss this meeting - I will be out of town. The topic, as usual, sounds so interesting, and, Bill, I agree with your observations. Although most people think raising minimum wage is positive for workers, as you say, it is overall negative. We've all seen "Norma Rae" and, while I'm sure employers in certain job sectors take advantage of their employees, however in many if not most cases, crafting reasonable laws about treating employees properly (no overtime without pay (ex: Walmart, McDonalds), no unreasonable quotas leading to dangerous situations and high injury rates (ex: meatpacking/industrial butchering), reasonable break times (positive example: airline pilots, negative example: sweatshops)) would address these problems directly. (second post follows this....)

    1 · January 6, 2014

  • Judi

    Bill, hi! Happy 2014!

    I look forward to seeing everybody again, and I love the topics! Just to kick it off: I have to disagree with the premise in your 3rd paragraph.

    A company always has multiple options for distributing work; the individual typically has only their own time and skills. So a company typically has a number of acceptable Best Alternatives to a Negotiated Agreement (BATNAs) with a given individual; the individual typically is in a "take-it-or-leave-it" situation. It seems to me that the the individual bargaining position of the employee has already been wiped out (as you say); the individual is so disadvantaged in the current economic environment that a fair negotiation is unlikely, if not impossible. Happy to hear contravening data!

    Cheers--Judi

    January 5, 2014

    • Bill

      I don't see what you mean by "the individual typically has only their own time and skills". Doesn't the typical businness have "only their own factory" or "only their own store"?

      There are many thousands of businesses in NYC. Most jobs are not so rare that only one company will be hiring for a given set of skills. If the company is not offering an attractive deal, the employee can go elsewhere, and they often do.

      January 5, 2014

  • A former member
    A former member

    Hi, I did not mean to impose. I merely suggested the book as a reference that could potentially provide some information on types of economies, their heirarchies, labour structure, etc.. I am hoping to join the session and meet up with everyone, listen to their views, and learn more about the subject myself :)

    December 30, 2013

  • A former member
    A former member

    I recommend a review of "Varieties of Capitalism" by Hall & Soskice (2001) by the fans, to raise the level of discourse :)

    December 29, 2013

    • Bill

      Hi guys, glad that you are so interested, but this is not a book club.
      Many intellectual meetups have no preparation required -- they post a one-sentence question, and everybody shows up and talks about whatever they think.
      On the opposite end of the spectrum are book clubs (i.e. the Secular Humanist Book Club or Prague Spring) where you have to read a whole book to attend (or come to learn and (hopefully) keep your ignorant mouth shut).
      My meetups are in the middle. I have some required reading, but I try to keep it down to less than a couple of hours.
      The Amazon page on that (expensive) book is REALLY not very informative. The intro is not very long, and there is only one review so far which really lacks substance.
      This meetup has a discussion board. If you would like to write up what you think are the main points of the book in a review there, that would be great, and then maybe (maybe -- not a promise) we might base a meeting on it sometime.

      December 30, 2013

    • A former member
      A former member

      Hi Bill, This will be my first time at your meetup, and I wasn't at all trying to focus your agenda on this particular book. I merely thought it sounded interesting, and came with the recommendation of Amir, who is an economist. I also think that these meetings are more informative if people do a little homework on the issues before attending. I am certainly willing to do so...

      December 30, 2013

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