Econ 302- Wage Determination and Bargaining Power

    In Blanchard’s Macroeconomics Seventh Edition Textbook, bargaining power is listed as an important input that affects wage determination. The amount of bargaining power workers have is dependent on the type of job as well as the labor market conditions. Throughout the Covid-19 pandemic, the labor market conditions have changed drastically. Specifically, we see that inflation and unemployment have risen, and the labor force participation rate has lowered. We would expect to see that “the lower the unemployment rate, the higher the wages (Blanchard, p.144). However, the high demand for labor paired with the lower labor force participation and high inflation have pushed wages higher than expected (Furman). Furman’s article discusses three points that affect real compensation: the tightness of labor markets, employers adjusting compensation for inflation, inflation expectations. The tightness of labor markets can be seen in the high demand for labor paired with the high unemployment. We would expect to see an increase in bargaining power for workers to increase their real compensation, as employees are in high demand by employers. Yet the higher levels of inflation have been pushing up prices in the market. Employers adjusting wages for inflation “was standard in contracts and bargaining in earlier periods of high inflation but has been largely absent for several decades,” (Furman). When employers adjust for inflation, they are taking into account the higher prices within the market. The lack of this adjusting in recent decades creates an impact on the compensation of today’s workforce, as higher wages are not increasing the buying power of employees. 

    Diving deeper into the effects of unemployment and inflation upon employee wages, data from the Current Population Survey (CPS) demonstrates that as of February 2022 the participation rate was 58%, based off of numbers from the Labor Force Employment Status Table (PEMLR). Participation rates have largely remained in the 60th percentile as far back as the 90s, but has been decreasing since 2000 (Statista). Some have argued that the low participation rate is due to the unemployment benefits rolled out by the government during the pandemic. However, Nicolas Petrosky-Nadeau and Robert G. Valletta of the Economic Research Department of the Fderal Reserve Bank of San Fransisco found that these benefits were only decentivizing the lowest paid brackets, and most preferred to return to their jobs with their previous salary (2021). Despite these low participation rates pushing up compensation due to the tight labor market, we see that adjusted for inflation, workers’ compensation has actually decreased from the pre-pandemic trend by 2% (Furman). 

    The article by William Van Lear shows a different way of displaying bargaining power in terms of profit and stock valuation. In that model, wages and profit have a negative relationship since the lower wages from the firm means they have less costs and higher profit. From the model of stock valuation they argue that times of relatively low wages can drive stock market booms with the help of expansionary policies. If the workers have greater bargaining, relatively more of the income will go towards them which in turn increases the propensity to consume and aggregate demand. Greater worker bargaining power can be created by different factors that are pro-labor like greater unemployment benefits and higher minimum wages.

Bibliography

Blanchard, Olivier. “7- The Labor Market.” Essay. In Macroeconomics, 7th ed., 137–56. Harlow:                     Pearson, 2021.

Furman, Jason, and Wilson Powell. “Worker Bargaining Power Has Been No Match for High Inflation.” PIIE, October 29, 2021. https://www.piie.com/blogs/realtime-economic-issues-watch/worker-bargaining-power-has-been-no-match-high-inflation.

Petrosky-Nadeau, Nicolas, and Robert G. Valletta. Extra Unemployment Benefits Are Not Primarily to Blame for Labor Shortages. Barrons, September 9, 2021. https://www.barrons.com/articles/altria-stock-philip-morris-goldman-sachs-upgrade-51647956262.

Statista Research Department. “USA - Civilian Labor Force Participation Rate 1990-2021.” Statista, January 31, 2022. https://www.statista.com/statistics/191734/us-civilian-labor-force-participation-rate-since-1990/.

Unites States Census Bureau. “CPS Basic Monthly FEB 2022.” MDAT, 2022. https://data.census.gov/mdat/#/search?ds=CPSBASIC202202&cv=PEMLR,PREXPLF&wt=PWCMPWGT.

Van Lear, William. “Stock Market Booms and Labor Bargaining Power.” Challenge 64, no. 4 (2021): 292–302. https://doi.org/10.1080/05775132.2021.1950449.