Criticisms Related to Bargaining Power

Some critics stress the importance of bargaining power in influencing wages and employment, shifting them away from the supply-and-demand equilibrium or replacing supply and demand completely as the determinant of wages. Bargaining power may be exercised by employers or employees or both:

Employers may influence the wage by restricting their hiring. When the wage is below the supply-and-demand equilibrium, employers find it profitable to hire more workers at the going wage, but hiring the additional workers could force wages higher (moving upward along the supply curve of labor), leaving the employers worse off on net. Conversely, the employers as a group may have higher profits with less labor, but a lower wage -- lower on the supply curve of labor. Strong competition for employees, in which each employer offers higher wages to get more employees according to their marginal productivity, would eliminate the low wages and lead the labor market to the supply-and-demand equilibrium. However, if employers can avoid this competition for labor, they can keep wages down and profits higher. Some critics believe this is possible because labor markets are typically segmented by skill, experience and location. As a result of this segmentation, they feel many labor markets are dominated by one buyer (called monopsony) or a few buyers (called oligopsony).
Employers may also keep their wage costs down by discrimination, paying different wages to different workers and, as nearly as possible, paying each one the minimum necessary. Some employees may accept lower wages than others because their alternatives are limited by gender, race, age, disability, or unpredictable personal characteristics. Having worse alternatives, they may accept lower pay and thus allow employers to expand their work forces without moving up the labor supply curve and paying higher wages overall. Again, strong competition for labor would tend to limit (perhaps not eliminate) wage discrimination.
On the employees' side, labor unions can favor the employees' bargaining power (again) by limiting competition for jobs among the employees and potential employees. Where this is very successful, it leads to collective bargaining between employers and employees. That is, the union or a group of unions, and the employer or a group of employers together negotiate a contract that determines wages and conditions for a whole group of employees, sometimes a whole industry or group of industries. This factor may be exaggerated -- only about 20% of the American labor force is unionized -- but unions are more important in some other industrialized countries and collective bargaining settlements may influence the wages and conditions for non-unionized employees. Also, a group of employees may find means of limiting their competition in the absence of unions.
In the absence of any union, when wages are determined by individual bargaining, the bargaining power of the individual workers may be an important influence on wages. This is especially likely when employers practice wage discrimination. However, the average bargaining power of the individual worker may be increased or decreased by general conditions in society, such as the distribution of political power and -- of course! -- the overall balance of supply and demand for labor.

These criticisms lead a minority of economists to question the analysis of minimum wage laws given in an earlier page. In that discussion, a minimum wage law leads to a decrease in employment as the market moves up the demand curve for labor. But in some of the models based on bargaining power, employment is not on the labor demand curve. In that case, the impact of a minimum wage law on unemployment is unpredictable.