When Employers Compete, Workers Win — When They Can’t, Workers Lose by Donald J. Boudreaux

David Henderson does a very nice job summarizing why stripping workers of the right to offer X as part of an employment contract makes most workers worse off, even if the intention of the government officials who do the stripping is to help workers — and, indeed, even if a Nobel laureate economist misses this reality.

Here’s another part of the picture.

Workers’ bargaining power ultimately is tied positively to workers’ alternatives: the greater the number, and the better the quality, of a worker’s employment options, the stronger is that worker’s bargaining power. If many different employers are competing for your services — each by offering you good pay, good benefits, and good work conditions — you as a worker have splendid bargaining power.*

It follows that government interventions that reduce the creation of good jobs— that is, interventions that reduce firms’ incentives to create better opportunities for employing human labor — reduce workers’ bargaining power. In turn, it follows that if overtime-pay arrangements of the sort that emerge in the absence of government restrictions on employment contracts are for many firms and workers the most efficient sorts of labor contracts available — as they are likely to be in a competitive economy — then government prohibitions that make those contract terms illegal will reduce firms’ efficiencies and, hence, dampen their willingness to create new jobs that pay as much as jobs would pay in the absence of those prohibitions.

Put differently, government restrictions that shrink the ways that employers can squeeze more efficiency into their operations shrink the number of jobs that are created, or reduce the maximum pay that employers can offer to employers who perform newly created jobs.

Over time, therefore, regulations such as the newly imposed overtime-pay diktats dampen workers’ bargaining power by reducing the number of high-as-possible-quality jobs created by employers. With fewer such jobs, there’s less competition for workers.  And with less competition for workers, workers’ bargaining power shrinks.

Note that empirically documenting this reduced competition for workers, as well as documenting its effects on workers’ pay (lower than otherwise), fringes (lower than otherwise), and work conditions (worse than otherwise) would be practically impossible. Because the consequences of these diktats play out fully only over a long span of time, it is simply too difficult for an empirical investigator to uncover, amidst all the countless other changes that occur in the economy, the details of what pay, fringes, and work conditions would beotherwise — that is, had such diktats not been imposed.

Yet unless you think you can say nothing absent empirical evidence about the effects on workers’ well-being of a reduction in the intensity and quality of competition for labor, then you should worry that these new overtime-pay diktats will, over time, make many workers worse off than they would otherwise be.

* Note that if, in this situation, you as the worker (whose services employers are competing for) agree to reduce the value that you will receive on one margin (say, pay) in order to increase the value you will receive on another margin (say, working conditions), it would be wholly mistaken for an outside observer to notice your agreement to work for lower pay and conclude from that observation that youremployer has undue bargaining power over you. And it would harm you if this outside observer, arrogant in his or her ignorance of the details of your and your employer’s affairs, orders your employer to increase your pay to some level higher than you agreed to accept.

Cross-posted from the indispensable Cafe Hayek.

Donald J. Boudreaux

Donald Boudreaux is a senior fellow with the F.A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics at the Mercatus Center at George Mason University, a Mercatus Center Board Member, a professor of economics and former economics-department chair at George Mason University, and a former FEE president.

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