Think about a model where prices are determined by relative bargaining power. The buyer wants to do the deal, but wants a lower price. The seller wants to do the deal, but wants a higher price. Each threatens to walk away from the deal if the other side refuses to budge on the price. The better his alternative opportunities relative to this deal, and the easier it is to walk away from this deal, the more credible his threat, and the stronger his bargaining power.
You can think of the perfectly competitive model, where prices are determined by demand and supply curves, as just the limiting case of this sort of bargaining model. The demand and supply curves cross at P*. If P is just a fraction above P*, all buyers can find willing sellers, but some sellers can't find willing buyers. So the buyers have bargaining power, because they can credibly walk away from the deal and find another seller who can't find a buyer; and the sellers have no bargaining power, because they can't credibly walk away from the deal and find another buyer who can't find a seller. So the price falls back to P*. Vice versa if P is less than P*.
Now add monetary exchange to the model. All goods are bought and sold for money. Buyers of goods are sellers of money. Sellers of goods are buyers of money.
Start in equilibrium where buyers and sellers have exactly the right relative bargaining power that prices stay the same.
Now suppose something changes, so that people want to hold more money. People want to buy more money and want to sell less money. This reduces the bargaining power of buyers of money and increases the bargaining power of sellers of money. These are the same people of course, because we all both buy and sell money. That's what money is.
In the market for apples, sellers of money (buyers of apples) have more bargaining power; and buyers of money (sellers of apples) have less bargaining power. It is easier for buyers of apples to find willing sellers and harder for sellers of apples to find willing buyers. The quantity of apples traded would fall, because trade requires both a willing buyer and a willing seller who can find each other. If the price of apples eventually fell, the relative bargaining powers of buyers and sellers would eventually fall back to its original equilibrium.
The same would be true in the market for bananas.
The same would be true in the market for labour.
What we call a "recession" is a reduction in the volume of trade, one that is associated with an increase in the bargaining power of sellers of money and a fall in the bargaining power of buyers of money.
So when Paul Krugman says that recessions weaken workers' bargaining power, my response is that he has correctly noted one symptom but has misdiagnosed the disease. It's a partial equilibrium description of a monetary/general equilibrium disease.
It is buyers of money whose bargaining power is weakened. And sellers of money whose bargaining power has strengthened. And all buyers of money are also sellers of money. We are weaker when we try to buy money and stronger when we try to sell money. Just like in Paul's favourite babysitters coop model.
Is labour any different from, say, apples?
Well yes. Labour is different in one very important respect:
Suppose a competing seller of apples offered me a better deal than my current seller of apples. If my current seller refused to cut his price, I would feel free to walk away from the deal and buy apples from the competing seller.
Suppose a competing seller of labour offered me a better deal than my current seller of labour. If my current seller refused to cut his price, would I feel equally free to walk away from the deal and buy labour from the competing seller? Nope.
Suppose a competing buyer of labour offered me a better deal than my current buyer of labour. If my current buyer refused to raise his price, would I feel equally free to walk away from the deal and sell labour to the competing buyer? Yes.
There is a taboo against buyers of labour switching to a competing seller who offers a better deal.
There is no taboo against sellers of labour switching to a competing buyer who offers a better deal.
That asymmetry of taboos strengthens the bargaining power of the seller of labour and weakens the bargaining power of the buyer of labour, ceteris paribus. Because it makes it harder for the buyer of labour to walk away from the deal. So something else needs to adjust to restore equilibrium in relative bargaining power so that ceteris is not paribus. That something else might be unemployment.
Nick's Law of Relative Bargaining Power: any exogenous change in relative bargaining power will cause some change in the market that restores the original level of relative bargaining power. If there is a taboo against employers quitting workers but no taboo against workers quitting employers, and if people fear breaking taboos, then something else will change that re-equilibrates the fear.
Normal people, even economists, don't like talking about taboos. It's taboo to question taboos. Normal people don't even notice anything strange about them. "Of course it's wrong to fire your existing worker and replace him with a lower wage worker! Of course it's right to fire your existing employer and replace him with a higher wage employer!"
Normal people will get mad at me for even talking about this taboo, and calling it a taboo. But normal people are wrong. It's our job, as economists, to be a bit autistic about things like that.
"Some people would have you believe that employment relations are just like any other market transaction; workers have something to sell, employers want to buy what they offer, and they simply make a deal. But anyone who has ever held a job in the real world — or, for that matter, seen a Dilbert cartoon — knows that it’s not like that.
The fact is that employment generally involves a power relationship: you have a boss, who tells you what to do, and if you refuse, you may be fired. This doesn’t have to be a bad thing. If employers value their workers, they won’t make unreasonable demands. But it’s not a simple transaction. There’s a country music classic titled “Take This Job and Shove It.” There isn’t and won’t be a song titled “Take This Consumer Durable and Shove It.” "
If you really want to see why employment relations are different from any other market transaction, and if you really want to talk about power relationships, you first have to recognise that asymmetry of taboos. Then you have to ask what effects that asymmetry of taboos will have. Will it create an offsetting asymmetry in the new equilibrium?
Of course there isn't a song titled "Take This Consumer Durable and Shove it". We do that the whole time, when we walk away from one car dealership to get a better price at a second car dealership. There is no taboo against walking away from a seller of cars and buying from another seller instead.
Now, here's the real question: why isn't there a song, sung from the POV of an employer, titled "Take This Worker and Shove him"? That song would be taboo. There is a taboo against walking away from a seller of labour and buying from another seller instead.