Buyers and sellers, bargaining power and recessions, and asymmetric taboos

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.

Here's Paul:

"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.

Comments

[Kenneth Duda]

Nice post. A few observations:

1. I feel like your main contribution here is pointing out a reason why wages are among the stickier of sticky prices, why wages do not fall in response to shocks (instead the labor market doesn't clear i.e. unemployment). To me, this observation is the key justification for aggregate price level support (monetary and/or fiscal stimulus) during, say, a negative aggregate demand shock due to, say, a sudden jump in the consumer savings rate due to, say, the end of a real estate bubble. Am I barking up the right tree here?

2 I don't think you addressed what I regard as the main thrust of Krugman's article, which was hypothesizing that businesses prefer mild depression over full employment because the business gains from weak labor outweigh the business losses from weak demand. It's a curious point. I had wondered why the business community didn't line up behind stimulus support and at first chocked it up to ideology and cluelessness, but then I got surprised by the way corporate profits recovered better than the labor market. Maybe Krugman is onto something.

3. If you were looking for evidence of the firing-people taboo in action, a certain US presidential candidate tangled with it and lost: http://www.cbsnews.com/news/mitt-romney-i-like-being-able-to-fire-people-for-bad-service/

$0.02

-Ken

Kenneth Duda
Menlo Park, CA
[email protected]

[Nick Rowe]

Kenneth:

1. Good point. A very important point. Implicit in my post, but maybe it should have maybe been made explicit. Workers' threatening to replace employers with other employers can push wages up. Employers' can't easily threaten to replace workers with other workers, to push wages down.

2. That was my previous post.

3. Good example. If he had said "I like being able to fire employers for bad working conditions" everybody would have nodded in agreement.

[Robert McClelland]

"There is a taboo against buyers of labour switching to a competing seller who offers a better deal."

So what. It's clearly a toothless taboo.

[Nick Rowe]

Robert: would you consider boycotting an employer who broke that taboo, by not buying his goods, for example? If so, you are one of the teeth that enforces that taboo.

[Frank Restly]

Nick,

"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."

What we call a recession is a reduction in the nominal value of trade (usually measured in the medium of exchange). This can occur for a number of reasons:

1. Bargaining power of sellers of money increases (consumers) and bargaining power of buyers of money decreases (producers) - Demand deficient recession
2. Bargaining power of sellers of money decreases (consumers) and bargaining power of buyers of money increases (producers) - Supply deficient recession
3. Bargaining power of both sellers and buyers of money decreases caused by natural catastrophe, war, or any interruption of legal remedies in a market economy.

[Danyzn]

And the toothfulness of the taboo means that even a perfectly selfish and rational employer will observe it.

[Lord]

This doesn't seem like the only one. If money is non neutral then neither is change in debt. Debt relations are also assymetric.

[Wonks Anonymous]

I wouldn't say there's no taboo against firing your employer. Employee's often have some notion of loyalty (even if it's more to their co-workers than boss) that they wouldn't have for, say, the car-dealer. But I agree it's asymmetric. "I found someone cheaper" is not considered an acceptable reason to fire, but if even an additional employee at lower wages is taboo that makes the hypothetical a bit moot.

[Nick Rowe]

Danyzn: yep. And if it is also taboo not to make others respect the taboo, the taboo will be powerful even if nobody believes in it. Nobody wants to go first in breaking the taboo.

[Nick Rowe]

Wonks; true. It's not 100% asymmetric. But employers will still wish them well in their new jobs.

[Hunter Pritchett]

So you're argument for why there is unemployment right now is because there is a taboo against firing someone and then hiring someone cheaper, so instead employers just do the firing part and not the hiring part?
This does not seem to be the taboo to me. To me there are two taboos: 1. reducing someone's wage 2. paying two people different amounts for the same work. These may work together to yield the same result as a taboo against firing then hiring cheaper, but it is different; it is (drumroll) sticky wages. Nothing new here, move along.

Also, I think what Krugman is saying is that the "general equilibrium disease" is being borne by labor as shifting power relationships allow them to sell money (buy labor) for even more expensive (even cheaper) amounts then they are suffering in marketplaces where they buy money (sell goods). Your post doesn't really refute this.

[Min]

"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."

Does not follow. Consider the miser. The miser, sitting on his pile of cash, is a seller of money when people in general want to save. (By inclination, he may be a buyer of money in normal times, which is why he is a miser.) Well, misers these days use banks, preferably offshore banks. So they are not sitting on piles of cash. But they are able to raise money easily to sell to others, if they wish to do so. So are other people besides misers. It is those who are able to raise money easily who are the seller of money and have bargaining power, and those who are not able to raise it easily who are the buyers and do not have much bargaining power. (There is a fuzzy boundary between the two, of course, but it is misleading to say that everybody is a buyer and seller of money.)

[Nick Rowe]

Hunter: "So you're argument for why there is unemployment right now is because there is a taboo against firing someone and then hiring someone cheaper, so instead employers just do the firing part and not the hiring part?"

Do you mean right now, **in the US**? (Since you write "labor".) Nope. That taboo didn't suddenly appear in 2007. It's an excess demand for money what dunnit.

Do I think that taboo makes unemployment generally higher than it would otherwise be? And makes it so that workers generally have worse options if they had to quit? And makes wages stickier downwards than they otherwise would be? Yes.

And that you cannot begin to discuss bargaining power in the labour market, and why the labour market is different from other markets, while failing to acknowledge the existence of that taboo? Absolutely yes.

Would anyone even think of discussing bargaining power between husband and wife without acknowledging any asymmetries in who can divorce whom? (ummm, I expect the answer to that is "yes"!)

Sure, nothing new here, move along. What taboo?

[Nick Rowe]

Min: you are talking about hoarders of the medium of exchange, not misers who save! Saving is investment, unless it's hoarding!

[Robert McClelland]

Nick: Companies have been moving their operations to areas where labour is cheaper for a long time now. If the taboo had any teeth that wouldn't be happening.

[Nick Rowe]

Robert: Yes, I think that is one way they get around the taboo. The taboo doesn't apply to foreigners. And if there were zero costs to getting around the taboo, for all employers, it would indeed be toothless. One employer goes abroad, and a "new" employer reappears offering lower wages.

[Too Much Fed]

"Now suppose something changes, so that people want to hold more money."

Let's make that more realistic. Now suppose something changes, so that people (could be only some people, not all) want to hold more "money", want to hold more financial assets denominated in "money', or hold more of both.

Also, are you assuming the quantity of apples demanded is unlimited?

[Too Much Fed]

Nick said: "Saving is investment, unless it's hoarding!"

Are you sure about that one?

[nemi]

Is it correct to say that people want to hold more money in a recession?
Banks sell access to current resources, or money, and demand claims on future resources, or future money. Sometimes, they simply match buyers and sellers of claims on future resources (people who want to save or borrow money), but sometimes - i.e. when debt levels increase - they are net providers of money.
Most people and institutions, except banks, has a net debt of money (even if they have positive wealth). I a recession, people generally try to pay down their debt - i.e. decrease the current money supply.

[Hunter Pritchett]

TL;DR taboos are more likely to constrain employers when the people who are directly affected have a retaliation mechanism.

Nick: I agree that it is excess demand for money, sorry for omitting it from my question. It is important to be very specific in complex arguments like these. I also agree that sticky wages be bad.

However, I think your taboo is subsumed in the normal taboos that people have classically said cause sticky wages. My understanding of the cause of sticky wages are that no one is willing to a) take a pay cut nor b) do the same job as someone else at the same company for less money. Under my understanding an employer would not try to replace an employee with a new, cheaper employee because he assumes the new employee will not work very hard and possibly quit after finding out that others doing his same job are being paid more. In your version the employer would not try to replace an employee with a new, cheaper employee because he would fear retribution from other employees and/or customers. I think that assumption is pretty weak. It seems that companies are not afraid of outsourcing their work to poor countries, and hence are not (too) afraid of a customer reaction to replacing employees at lower pay. The coworker retribution channel is more credible, but still weak in my eyes due to problems with coordinated action. There is obviously an exception for unionized industries.

There are three situations where I think the fire/rehire (yours) and same job, less pay (mine) taboos would differ in outcomes:
1. If there was only one person in the company doing said job.
2. As mentioned already, outsourcing to poorer countries (in your scenario the coworkers should be equally angry no matter where the job goes, in my scenario people from poor countries are more likely to understand why they are not being paid as much as someone in the US, and are likely to just be happy to have a job)
3. A rearrangement of tasks after a job is eliminated so that the new, lower-paid job will not have any current employees in the same role (your theory would suggest some worker backlash, even if a decreased amount, mine would suggest none)

I think at least for the latter two there is enough outsourcing and restructuring that it seems pretty clear employers are not too scared of coworker backlash. I would have to do more research on the first. It does seem, however, given that sticky wages exist, that employers are afraid of employees quitting after a week or being lazy after finding out that others make more then them, or that they now make less than they used to.

[nemi]

PS: I view a recession as an excess demand for claims on future real resources (given current relative prices). To what extent this translate into changes in the demand for money, other financial assets and/or real resources is a orthogonal, but very policy relevant, question.

[Nick Rowe]

Hunter: good comment. I'm wondering if we aren't looking at the same thing from different angles. You can break the taboo against wage cuts if you can convince the workers you can't stay in business otherwise. You can't break the taboo against wage cuts by convincing workers that other workers will work for less.

nemi: how would an excess demand for oil futures, stocks, or bonds, cause a recession, unless it also created an excess demand for the medium of exchange.

Lord: " Debt relations are also assymetric."

Can you explain what you mean by that?

[Too Much Fed]

nemi said: "Is it correct to say that people want to hold more money in a recession?"

I'd say in a recession people want to hold the highest yielding asset that won't go down in value or default.

If I think a recession will cause a mortgage bond to default, I will try to sell it and buy an FDIC-insured CD.

[Too Much Fed]

Comment in spam?

[Min]

Saving is investment, Nick? If I pay off my credit card, am I not saving? Yet I am not investing, am I? Au contraire, I am taking money out of circulation.

Besides, I broadened my scope beyond misers to include anyone who finds it easy to raise money. :) It's just that misers are an obvious example. ;)

[Min]

Nick Rowe: "You can't break the taboo against wage cuts by convincing workers that other workers will work for less."

One thing that is happening now is wage cuts via unemployment, as people accept lower paying jobs after being laid off. There are also various propaganda efforts to break the taboo on low wages by characterizing certain workers as overpaid (such as teachers), by characterizing the working classes as undeserving (moochers, takers, the 47%), by characterizing workers as dependents ("No poor man ever gave me a job."), and by lowering expectations (such as The New Normal).

[nemi]

Nick: an excess demand for future real goods (future consumption of oil and other stuff) implies that you want to sell stuff today in exchange for money/bonds/oil futures etc. that will give you access to resources in the future.

If my demand shift from apples today to future apples, the price of future apples should increase and the price of present apples should decrease. If the present price of apples is sticky, the price of present apples will not decrease. If everyone wants future apples, and this puts us into a recession, our income and saving will change rather than our ability to pay for future apples - and there is no reason to expect the future price of apples to change either.

This does not, as far as I can see, chang depending on which instrument I use in order to transfer claims on present resources into claims on future resources - e.g. on whether I use money, bonds, gold etc.

[nemi]

PS: My biggest problem with the "demand for money" terminology is that to a greater extent than any other good, we certainly do know that it is a placeholder for something else - I.e. a demand for liquidity and/or future goods and/or different goods and/or power and/or status and/or etc. etc. etc.

My second biggest problem is that we do not know what it is. Is e.g. store credit "money"?

[nemi]

Too much Fed: "I'd say in a recession people want to hold the highest yielding asset that won't go down in value or default."

I agree.

[Determinant]

Employers' can't easily threaten to replace workers with other workers, to push wages down.

Says who? What do you think all those "contract" workers are for? Their disposable nature partially serves to encourage fully-tenured employees to not get ideas about compensation.

When you say "firing", I think you mean layoffs. In Canada for legal reasons involuntary severance without cause is usually called a layoff, even if it's just one person. And it happens a lot. "The position has been discontinued". Ring any bells?

[Nick Rowe]

Do I talk about "firing" my apples seller for just cause? Do I talk about "laying off" my apple seller because of circumstances that were no fault of the apple seller? Nope. I don't talk about it at all. I just do it. I stop buying from him, and maybe buy from someone else instead.

When a worker quits, he does not distinguish between quitting for just cause ("firing" his employer), or quitting because he really couldn't keep working there any more, or just felt like it. Out of politeness he might explain his reasons to the employer, but he is not forced to justify his decision.

All that fine legalistic language just goes to show how powerful the taboo is, and how everyone tippytoes around the subject. "Your position has passed away"

[Determinant]

No, Nick. My point is that what you fall "firing" is very, very common, and the taboo isn't what you think it is. It's just hidden behind some terminology. There is justification for the difference: A worker laid off without personal cause gets severance; a worker who is fired for cause is not owed any severance. Money is at stake with the use of terminology. However, the parrot is still dead, and you are still unemployed.

[Lord]

Debt is commonly created at a fixed nominal rate for a fixed duration where the borrower may refinance/repay at any time but the lender can only recall the loan under set conditions. Floating rates, variable payback, and prepayment penalties muddy this up slightly but the lender determines when/whether to issue the loan while the borrower decides when/whether to refinance/repay. Current interest rates aren't fixed but are bounded. More growth, income, and wealth encourage more debt while declines discourage it because of those bounds. When rates fall, risk rises, so it is difficult for a change in rates to fully compensate for a change in borrowing demand. Deleveraging puts downward pressure on asset prices and collateral values, while the the zero bound and risk perceptions prevents rates from falling further.

[Nick Rowe]

Lord: Ah! OK. You mean like open mortgages, where the debtor can quit but the creditor can't.

[Scott Sumner]

One reason I love posts like this is that I believe most really smart macroeconomists look for simple models, and reality is complex. It's not a question of labor unions or menu costs or money illusion, it's all of them interacting. And here you've added "buyer/seller of labor asymmetry", which might be even more important than the others. But "more important" might also be a meaningless statement, as they all interact to produce nominal wage stickiness. That and NGDP shocks will get you business cycles.

[Nick Rowe]

Thanks Scott. I think one important thing the asymmetric taboo adds is that wages will tend to be downward sticky but upward flexible. You don't get that with pure menu costs or money illusion.

[Andy Harless]

Why is there a taboo against switching to a new labor supplier? Because it involves a large cost to the old supplier. And why is there such a large cost? Because there is (normally) unemployment. (By contrast, there aren't normally a lot of unfilled jobs, except in some particular fields where the supply of qualified workers is low.) I don't think it's appropriate to talk about the taboo as if it were exogenous. Maybe taboo+unemployment is an equilibrium, but then you need to explain why we're almost always in this equilibrium rather than another one.

[Nick Rowe]

Andy: yep. The taboo creates the conditions for its own justification.

I don't know why we usually observe this equilibrium and not the other one, without the taboo. Maybe the other equilibrium is unstable?

[Determinant]

Come now, Nick, embrace your inner Depressive. All things are not equal, and labour is not a the fruit section at the grocery store. (Apples or pears?).

Most of the time, things aren't ideal. Life sucks. It's taboos, it's just the way of things.

*This post has been brought to you by my Venlafaxine bottle*

[Squeeky Wheel]

This really belongs on your previous article, but they are related so...

I'm not sure I entirely believe the labor supply curves as usually drawn. Roughly, employers (some of them, and individually) won't demand more labor just because wages fall. In software, it's well recognized that low-skill and new-to-company (Brooke's law) are negative in productivity. Dropping the cost of software engineers does not entice me to hire much more of them - they aren't fungible. On the other end of the spectrum, a MacD outlet faced with a 50% cut in labor costs does not hire many more front line employees - there's no work for them. Instead it pockets the increased margin (I think this is PK's argument). Would the cut in labor costs create a new outlet? Maybe, if there is enough demand.... If so, then efficiency wage curves are not much flatter than labor supply curves - higher yes, but perhaps not much so? And I think I'm also arguing that labor demand is upwards slopping against AD.

Sorry the argument is not very concise. But maybe you can see where I'm coming from.

[Frances Coppola]

Nick,

Interesting post. A few thoughts.....

The "taboo" only applies to workers who are actually employed, and it's not a taboo so much as a legal restraint. And like all legal restraints, employers find ways round it - often with the connivance of governments, who dare not tackle the privileges of the employed but are happy to encourage casual, temporary and self-employed work, particularly for the young and the poorly skilled. The result can be a dual labour market, such as exists in some Eurozone countries and in Japan. But even when employment legislation is more flexible, as in the UK, employers still evade what employee protection exists - Macdonalds, for example, routinely dismissing workers just before they had completed 1 year's service so they could not qualify for employment protection or redundancy pay.

Re sticky wages: I don't know about Canada, but in the UK wages aren't nearly as sticky as they used to be. The IFS recently produced a research paper showing that in 2009-11, one third of existing UK employees took nominal pay freezes or cuts rather than lose their jobs. And this doesn't take into consideration the NON-employed workers whose nominal incomes also fell at that time, especially the self-employed, whose nominal incomes fell off a cliff. The UK famously had higher employment than expected during that time, but coupled with low productivity and a huge output gap. Wage flexibility perhaps has unexpected costs.

The IFS paper is here. http://www.ifs.org.uk/wps/wp201311.pdf. It's an interesting read, though they don't consider the effect of in-work benefits - if employees know that government will top up their wages they would be more likely to accept nominal wage cuts, I think.

[Nick Rowe]

Determinant: "Most of the time, things aren't ideal. Life sucks. It's taboos, it's just the way of things."

Agreed. Except a lot of taboos are good taboos. And it's funny how taboos can suddenly change, and we look back on the old taboos, and find it amazing we could ever have thought the way we did. Sex, race, eugenics, alcohol, smoking, men wearing hats indoors. And when we look back on today, we will also find it amazing that some things were, and other things weren't, taboo. But I sense that the asymmetric taboo I'm talking about here is an older taboo than most. It has waxed and waned over the decades. For Russian serfs it was symmetric(?), and for chattel slaves asymmetric the other way(?). Hockey players?

Squeeky: If the aggregate demand for goods is there, I tend to think of the aggregate labour demand curve as being highly elastic, except in an agricultural economy where land is in fixed supply and scarce. You can always import more capital.

Frances: thanks! Yep, the laws tend to follow the taboos, and vice versa. We do see employers getting around the taboo, and managing to employ labour in ways that avoid the taboo. But the very fact that we make a distinction between "regular" jobs and "temporary contract" jobs, and that the former are seen as good jobs and the latter as bad jobs, suggests to me that the shadow price of the taboo is large. If the taboo had no teeth, workers would not prefer jobs that are covered by the taboo.

[Ronald Calitri]

Good point in labor markets; but needs perhaps, bifurcation.
There is, after all, a "zero lower bound" to labor, pre and post-slavery economists have argued (Smith and Ricardo) 'survival' is a constraint on the demand curve, a form of "price control" imposed from outside. Though it is taboo to pay starvation wages, forget about taboos, every employer's true pride is paying costs of reproduction and no more.

However, and this point needs to be made most strongly, though the minimum wage worker is powerless to resist, paying to launder the company shirt, and while the government will step in, if called upon, to enforce the legal taboo, in the real economy, informal transactions are hugely important.

There, the rules of Aristotle, "towards things inanimate there is neither Friendship nor Justice: nor even towards a horse or an ox, or a slave _quâ_ slave, because there is nothing in common: a slave as such is an animate tool, a tool an inanimate slave. _Quâ_ slave, then, there is no Friendship towards him, only _quâ_ man: for it is thought that there is some principle of Justice between every man, and every other who can share in law and be a party to an agreement; and so somewhat of Friendship, in so far as he is man."

Since the "taboo" is in "Nichomachean Ethics," it is probably real, but not really a taboo, more of a norm. However, I don't think, in either of our societies, it is followed. A lot of employers so many tiny employers, stop at the first "qua," and even more with the second. Employees are exchangeable tools, that's the real economy, for the most part. Few indeed survive the full qua.

[Frances Coppola]

Nick,

I think we are back to the price of safety again, aren't we? Your "taboo" is effectively a very valuable safe asset. It used to be that very safe jobs - in the civil service, for example - had relatively lower pay than other jobs, precisely because of that safety aspect. But I think we are now mispricing this "safety" asset, just as we are mispricing the "safety" asset implicitly embedded in government debt, insured bank accounts and agency MBS. Consequently although we regard safe jobs as "good" jobs, we aren't paid more for doing less safe jobs. In fact many people are paid less. These days, the most insecure workers tend to have the lowest incomes. It looks as if safety is no longer regarded as valuable, but I don't think that's true. I think the problem is that it is far too valuable, so employers are restricting its availability rather than paying those with insecure jobs the value of the safety they have foregone (if that makes sense).

The asymmetry you describe could be regarded as the sellers of labour having an implied call option on the "safety asset" in a "good job". The employer can't dismiss them without incurring a considerable cost, namely the exercise of that call option, which might be felt as exorbitant payoffs and/or lawsuits, with associated reputational damage (unquantified and potentially unlimited). But if the employee leaves, the call option expires unexercised.

From the employee's point of view, that call option is an extremely valuable asset. But from the employer's point of view it is a potentially very expensive contingent liability. So employers try to find ways of reducing the asymmetry by "locking in" employees - perhaps by creating equivalent contingent assets on the employee's side, for example by paying part of their remuneration in deferred bonuses, company shares or stock options (!). Or they simply pay them more to encourage them to stay - which might explain why "safe" jobs tend perversely to be more highly paid than insecure ones. Or they reduce the value of the call option, or eliminate it completely, by diluting the "employed" status of the worker. This last is becoming increasingly frequent, particularly for the young and the less skilled - probably, as the IFS says, because they have the least bargaining power.

The question is, why are people prepared to forego safety without reward for the extra risk they take on? This was the question that the IFS was asking, though they didn't put it like that. I think we are looking at two asymmetries, actually: the asymmetry that you have noticed (workers can leave but employers can't dismiss), and another one - namely, the (considerably) greater power of buyers of labour when there is both a real risk of unemployment AND a stigma associated with unemployment (the more spells of unemployment you have, the harder it is to find work). The threat of unemployment is an extremely valuable negative asset on which employers have a put option. I'm sure you can see where this is going. The value of that negative asset is inversely related to the employability of the worker. For those with little experience and/or poor skills, the threat of that option being exercised is sufficient to encourage them to accept both rubbish wages and complete insecurity. Of course the employer can exercise the option at any time at his discretion, but there is at least a delay in the exercise of that option, which creates the temporary illusion of security. For the not-very-employable, the fear of unemployment is very real.

Sorry about this long and rambling comment. This has gone a very long way from your sticky wages discussion. And I'm probably talking nonsense. But it's interesting.

[Nick Rowe]

Ronald: I reckon that for 99% of our existence, until a couple of hundred years ago in rich countries, the Malthusian model worked pretty well. The population was close to the margin of subsistence. And I wonder how much that would have influenced norms about what employers owed employees.

Frances C: you are talking a lot of sense!

The two asymmetries: the taboo asymmetry I'm talking about; and the cost of being unemployed. Which came first? (Chicken or egg?) That's what Andy and I were discussing briefly above. We can imagine two equilibria:

1. No taboo and no unemployment. You don't need the taboo because any worker who loses his job can quickly find another one just as good. And because there's no taboo, wages aren't sticky down, so there is no unemployment.

2. Taboo and unemployment. You need the taboo because there's unemployment, and there's unemployment because there's the taboo.

Andy wonders why we normally only observe the second equilibrium. Maybe the first is unstable??

[Mrrunangun]

As an employer, I competed for good employees with larger better capitalized businesses which could offer better pay and benefits. My approach to the competitive aspect was to find good people ( able, cooperative, pleasant, and punctual), treat them well, and make my shop a pleasant place to work. I could be more flexible than large employers about working from home or drug testing, significant advantages in employing contemporary working class individuals. This approach meant that I could not tolerate an employee who made my shop an unpleasant place to work for the others for long. If a good employee burned out on a job, I offered an alternative job in my shop whenever possible. I believe that most sensible small employers do HR along these lines.

That means that times of high unemployment give you a better grade of employee and you try to keep them on as long as you can. In times of low unemployment you have more turnover, as a greater fraction of hires will fail to fit the needs of the shop. It means that you let the single mom work from home when her kid is sick and if you have someone who indulges alternative life styles or unorthodox pleasures on his own time, you don't care as long as it does not affect his work or his ability to make the shop a good place to work. When you live in a small city you see your employees at church, the grocery, school events, etc. You may be more strongly bound by our host's taboo than someone who lives in a wealthy suburb and never sees her employees outside of work.

[Kaleberg]

"There is a taboo against buyers of labour switching to a competing seller who offers a better deal."

Maybe back in 1965, but not since, maybe, 1972. Of course, I'm referring to this planet, not one of those exoplanets that astronomers and economists are so fond of.

[Philippe]

Nick,

there isn't really an asymmetry of taboos, there's just a general 'taboo' against harming people, treating people badly, exploiting people, etc.

People will object to companies firing workers so as to replace them with cheaper workers, if they think this involves harming people, treating people badly, or exploiting people.

They won't object to people quitting their job for higher pay if they think this doesn't involve harming people, treating people badly, or exploiting people.

The reason people tend to see one as being worse than the other is because they consider one to be more harmful than the other. It's not because of some sort of irrational 'asymmetric taboo'.

[Nick Rowe]

Which of these two stories sounds more plausible:

1. A worker quits to get a higher paying job, and his employer wishes him well with his new employer.

2. An employer lays off a worker to replace him with another who will work for less, and the worker wishes him well with his new employee.

[Nick Rowe]

Philippe:

If you quit, and your boss has to replace you with a worse employee at a higher wage, does this not hurt him? Of course it does. And, you will say, it serves him right for paying you too little.

If your boss quits you, and you have to replace your boss with a worse boss at a lower wage, does this not hurt you? Of course it does. But would you say, it serves you right for being paid too much?

[Philippe]

1 obviously.

In 2 the fired worker is left without a job and an income. He might be unable to pay his rent/mortgage or provide for his family.

In 1 the employer still has his business and his money as before.

People would be more likely to see 2 as worse because it is considered to be more harmful, for obvious reasons. Not because of an irrational taboo.

[Nick Rowe]

Philippe: "In 1 the employer still has his business and his money as before."

No he does not. He has lost his employee.

The fact that you simply cannot see it the other way around, from the other's perspective, shows how deep-seated this taboo, and this bias, really is.

[Philippe]

"No he does not. He has lost his employee."

If, by quitting, an employee caused his employer to lose his business and income, I think most people would see that as bad. Indeed it is seen as 'taboo' to just quit without giving your employer any warning or time to find a replacement.

As I said there's a general taboo against harming people, treating people badly, exploiting people, etc. People will object to either firing workers to replace them with cheaper workers, or quitting for higher pay, if they think either of these involves harming people, treating people badly or exploiting people.

In general people object to the former more because they see it as being more harmful. Not just in theory, but based on the evidence.

[Frances Coppola]

Nick,

Yes, I think the first equilibrium is unstable. It would only be stable if workers were infinitely substitutable - which clearly they are not. Adjusting pay alone only works for unskilled jobs. For everything else you have to adjust skills as well, which takes time, costs money and may in some cases be simply impossible. So skills shortages, gluts and mismatches all inevitably exist, and that means that not all workers can be certain of walking straight into another job, and not all jobs can immediately be filled if a key worker leaves. Unemployment is therefore inevitable. But it's maybe less clear why the taboo is also inevitable. I think you touched on it in your reply to Philippe. It is to do with the cost to employers of losing key staff.

The lengths to which employers will go to retain key staff suggests that losing workers they can't easily replace is a very significant cost to them. The worker's right to leave is another valuable "safe asset" whose price is positively correlated with the employability of the worker. This time it is the worker, not the employer, who has the put option: we could say that the worker's implied threat to leave disciplines the employer who can't easily replace him in much the same way as the implied threat of dismissal disciplines lower-skill workers who face unemployment. The more "in demand" the worker is, the more likely it is he will leave and the more difficult the employer will find it to replace him. So whereas the workers are very happy with their freedom to change jobs whenever they want, employers will constantly try to reduce the elasticity of their skilled workforce. Therefore an employer who dismisses key staff on a whim is not acting in the best interests of the business. In fact he is possibly certifiably insane. Hence the taboo.

Conversely, in low-skill jobs where workers are far more substitutable, employers want elasticity, but the workers don't. If employers get what they want, it has untoward economic effects because of the extreme uncertainty faced by their workers. People who think they are going to lose their job any moment and have no idea when, or if, they will get another one don't plan for the future and don't make spending commitments. They may spend - sometimes rather a lot - but it's ad-hoc. If a large proportion of the workforce are living like this, demand is volatile (I'm not sure if that makes sense but I can't think of a better way of putting it).

So when the labour market (high AND low skill) is highly elastic, the pattern of behaviour from both employers and workers is driven by extreme uncertainty and the risk of negative shocks: it's volatile and reactive. That doesn't make for a stable economy, I'd suggest.

There is some support for this argument from a surprising place. Researchers at the ECB produced a paper a while ago which among other things found a positive correlation between highly elastic workforces and both frequency and intensity of financial crises. The paper itself is here: http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1514.pdf. It's flawed but fascinating. The relevant bit about elastic workforces is on p.40, but the whole paper is well worth a read.

[Sandwichman]

"Well yes. Labour is different in one very important respect..."

Oh?

What you're doing here, Nick, is tacitly assuming that labour-power is a "normal" commodity and then explicitly pointing out one rather minor anomaly to that (supposedly) normal commodity's normality. However, if you took a broader view, you would note that, to begin with, the seller of the commodity, labour-power is constrained from disposing of a life-time supply all at once. That's just one aspect but it should provide you with a hint of the peculiarity of labour-power, aside from any rhetorical pronouncements from the U.S. Congress (Clayton Anti-trust Act), the Treaty of Versaille or the International Labour Organization that "labor is not a commodity or an article of commerce."

Of course the "fictional" status of labor as a commodity is one of the pillars of Karl Polanyi's critique of economic liberalism. One overlooks the beams of Polanyi, Marx, Veblen, Keynes, Kalecki, John Maurice Clark, Marshall, Pigou and Hicks (to name a few) and beholds your mote of a "taboo" only at the risk of falling afoul of Matthew 7,5: "Thou hypocrite, first cast out the beam out of thine own eye; and then shalt thou see clearly to cast out the mote out of thy brother's eye."

[Nick Rowe]

Sandwichman: when I go to my hairdressers, what am I buying? Am I buying a haircut, or am I buying her labour? Yes, she owns her own tools. So do most auto-mechanics.

I would take your Matthew 7,5 more seriously if followers of Marx, when they actually get into power, weren't the biggest offenders. That is a whole forest of beams.

[Nick Rowe]

Frances: re the risks to employers of losing key staff. That reminds me of one efficiency wage theory of unemployment. Because quits are costly, employers will pay above-market wages to reduce turnover, because a workers will be very unwilling to quit if he gets a higher wage in his current job than he could get elsewhere. When all employers do this the result is unemployment, and unemployment deters workers from quitting, so no individual firm tries to pay wages above the wages paid by other firms. If it were taboo for workers to quit, there would be no unemployment (in this model).

[Nick Rowe]

Philippe: "In general people object to the former more because they see it as being more harmful. Not just in theory, but based on the evidence."

But see above: "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."

If the asymmetry of taboos causes unemployment, then it will be more costly for an employer to quit an employee than for an employee to quit an employer.

The assymmetry of taboos creates the conditions for its own justification. See my discussions with Frances and Andy above.

[Sandwichman]

Nick: "if followers of Marx, when they actually get into power, weren't the biggest offenders."

Nick, aside from your omission of Polanyi, Veblen, Keynes, Kalecki, John Maurice Clark, Marshall, Pigou and Hicks, your assertion about "followers of Marx" is an unwarranted red herring. Harold Rosenberg argued that, "no one is a Marxist who, in the interest of working-class liberation, consents to serve the powers of the new other world created by Marxist totalitarianism." Whether one is a Marxist or not, one can also distinguish between Marx's critique of political economy and his historico-political imagination. That is to say, one doesn't have to believe that the proletariat is the revolutionary subject of history to acknowledge the contribution of Marx's analysis of labour power's peculiarity as a commodity.

But forget Marx. What about Polanyi's critique? On what grounds do you hold up "one very important respect" in which labour is different from apples or bananas and disregard the myriad fundamental ways that labour has been shown by Polanyi et al. to be different? Might not your "taboo" have somewhat of the character of a consolation prize or even a "booby prize"? Taboo or tabooby?

[Nick Rowe]

Sanwichman: "On what grounds do you hold up "one very important respect" in which labour is different from apples or bananas..."

The answer is obvious from my post. Because that difference is directly relevant to Paul Krugman's post about bargaining power of workers in a recession. Which is what my post is about.

As a general rule, remember this: my posts are usually not about the things you want them to be about and want to talk about.

[Sandwichman]

"Because that difference is directly relevant to Paul Krugman's post about bargaining power of workers in a recession."

And you're saying that John Maurice Clark's analysis of the overhead costs of labour and social cost-shifting is not???? I fully understand that you don't want to talk about the things I want you to talk about. You seem to think that's because what I want you to talk about is irrelevant to what you're talking about. I think you don't want to talk about what I want you to talk about precisely because it is relevant. As a general rule.

[Nick Rowe]

S: You are not very good at commenting on blogs. Remember how I once explained to you how to write a good comment? I don't have the patience to keep on explaining it.

[Sandwichman]

Nick, "Man is born ignorant; he is not born a fool; and it is not even without labour that he is made one." -- Helvetius

[Nick Rowe]

Very good Sandwichman. But not a good comment. Now please go away.

[Ronald Calitri]

An interesting comment thread. Perhaps now desirable to try remodeling the previous post this sprang from.
So basically, you are not giving up on defining the labor market using 'taboo,' an anthropological word that entered English about the time Smith, Ricardo, and both Malthuses, were working, and up until the spin you are putting on it here, for the most part derogatory. That the word's usage has changed is not at all a problem. Today we tend to respect, or at least tolerate, others' taboos, though the litany of ethnic insults my superego is holding per-conscious says otherwise. So, I'm suggesting, the conversation would be better-off back to, the 'efficiency wage' discussion. We really should not be limited to the behavioral models put forward by major discussants. Not that most are wrong, just incomplete. Most employers, at least those taught in business schools, use well-worked applications in the efficiency strain. So much so, it is remarkable that straight-line labor supply curves across the population are still utilized. The word I used before, bifurcation, that of dual labor markets, has tendrils of great historical depth.

A lot of issues in your question about whether Malthusian constraints impact labor markets. Firstly, most historical societies have endured Malthusian pressures; but by no means predominately lived at subsistence level. Secondly, the advanced countries of this millennium are still enduring them. Just, today we call it population pressure.
The reality is that labor markets were differentiated in the most ancient civilizations we know about. Labor relations have really not changed a lot. The words we use are different, but what they describe is not.

So, how do we get from there to 'efficiency' when constrained to think of labor as a commodity? The labor market has rules. In Aristotle's "Economics," we find,
"Of workers there are two kinds; those in positions of trust, and the laborers."
Aristotle goes on to describe the inducements of various types, applicable to either. Your discussion is about trusted workers. There is a lot more herding when it comes to laborers, a lot of pretending that laborers are 'trusted,' for appeasement's sake, and laughter when the pretense is broken. That’s in this world, complicated as hell, but certainly an economic formation, many markets rather than a single market, and quite determinate.

So, the answer is that the wage adjustment process is only marginally involved with bargaining during transactions. It is much more about roles, and the bargaining that does take place is really at the political level. At best, there might be multiple price/quantity equilibria, as politics determines.

Let me pull a Sagan on you. If familiar with the name Sapolsky, please nod. The socioeconomic gradient of health stretches back into the mammalian lineage, and likely further. So, I guess we'd like to talk about the curvature of that; but if you are serious about us being different from 99% of history, then we are the 1 percent. A better approximation, given, say, just 10 million years as alpha, beta and gamma monkeys, would have today's advanced country citizens as the 1/1000th percent, not really a credible divergence.
Apologies, I don't know if you intended that pangloss, but your remark about wages anywhere between W2 and Wmax in the last post was rather beyond the pale.

[Frances Coppola]

Nick,

I've been thinking about that efficiency wage model. I don't think it works in the bifurcated labour market we have (implicitly) been discussing.

Firms increasing wages to retain workers they would have difficulty replacing doesn't cause unemployment among those workers: it does among other workers, but that doesn't affect the behaviour of firms or workers in the scarce-skills sector. Making it taboo for those workers to quit kills the wage spiral, but it also ossifies the scarce-skills labour market. But actually you end up with an ossified labour market anyway, whether or not there is a taboo on quitting.

If the wage spiral is allowed to run its course, eventually all jobs requiring those skills will be filled, and all workers with those skills will have jobs and will earn about the same. They will probably stay in the same job until they retire, too, since if this high-skill sector is sclerotic others are likely to be too, so career paths will be virtually non-existent. There is no unemployment among this cohort, though there might be quite a lot of frustration at their lack of opportunity for advancement (when I worked in banking we called this "dead men's shoes" - you couldn't be promoted until someone more senior left). Admittedly, if someone did leave he would find it very difficult indeed to get another job. But I don't think it is primarily the threat of unemployment that forces these workers to stay. It's the lack of opportunity. They aren't going to find a better job anywhere else.

But there are impossibly high barriers to entry for younger people with similar skills but less experience. Those younger people have a choice between remaining unemployed until the older cohort retires, retraining for other skilled jobs (though the same situation is likely to exist in those too), or accepting less skilled, lower paid and more insecure jobs. The result is a bifurcated labour market - a secure, highly paid and highly skilled older cohort and a far less secure, poorly paid and eventually less skilled (because of hysteresis effects) younger cohort. It is that younger cohort that experiences unemployment, not among the more skilled people but among the genuinely unskilled, who now have to compete with higher skilled people and inevitably lose out even for jobs they are perfectly capable of doing. (Actually the generational split is not as clear-cut as this. Unskilled older people also lose out, particularly men in their 50s.)

Of course, if the economy grows, then there should be increased need for the higher-skill jobs, which creates opportunities for skilled youngsters without dislodging incumbent workers. But if the economy stagnates, as it has in Japan, there may be no more need for higher-skill jobs. In which case, as the older cohort retires, skills gaps emerge which affect productivity and output. In the long run, bifurcated (dual) labour markets are not good for the economy.

[anon]

To me, it's not at all clear that employers would pay higher wages (leading to involuntary unemployment) if workers are free to quit. They may simply pay lower-than-market wages at the start of the worker's tenure, with the understanding that this portion of the compensation would be recouped later in the worker's career. Though, this might fail (and "efficiency wages" in the conventional sense would then come back into play) if the employer cannot be trusted to "fairly" compensate the worker later in her career, i.e. there is moral hazard on the employer's part.

[Too Much Fed]

nemi's post said: "Too much Fed: "I'd say in a recession people want to hold the highest yielding asset that won't go down in value or default."

I agree."

Thanks! Hardly anyone agrees with me here.

Squeeky Wheel said: "I'm not sure I entirely believe the labor supply curves as usually drawn. Roughly, employers (some of them, and individually) won't demand more labor just because wages fall. In software, it's well recognized that low-skill and new-to-company (Brooke's law) are negative in productivity. Dropping the cost of software engineers does not entice me to hire much more of them - they aren't fungible. On the other end of the spectrum, a MacD outlet faced with a 50% cut in labor costs does not hire many more front line employees - there's no work for them."

I agree.

[J.V. Dubois]

This is a beautiful post. I was thinking about your "recession is lack of trade" idea many times but I did not have a look at it from bargaining power point of view. You may have just "microfounded" your theory :) Now all we need is young economists to go through sectors with a lot of differences in bargaining power and take a look at what happens during recession. Maybe this may explain what is going on with real estate - why do we sometimes see whole newly built neighborhoods being leveled by bulldozers after years of vacancy instead of being sold for a cheaper price?

Nothing more to add, your thoughts about "taboos" seems right to me and that there are some people who do not agree was expected. Anyways this discussion reminded me an article from Bryan Caplan about a poll among employers by Truman Bewley that I bookmarked for later review. I did not read the book itself, but Bryan's article contains enough information or a good teaser.

[Nick Rowe]

Frances C (I must call you "Frances C", because Frances Woolley is the only "Frances" on this blog :-) )

"But I don't think it is primarily the threat of unemployment that forces these workers to stay. It's the lack of opportunity. They aren't going to find a better job anywhere else."

Yep. There are two types of efficiency wage model:

1. Where efficiency wages apply to all jobs, so you either get an efficiency wage job or you are unemployed. It's a theory of unemployment.

2. Where efficiency wages apply to some jobs but not others, so you either get an efficiency wage job or a regular low wage job. It's a theory of wage differentials.

You can always blend the two, and get a model where low wage jobs are about as good as unemployment.

anon: Yep. A problem for most efficiency wage models is "Why don't employers require new workers to post a bond?" The standard answer is that that creates moral hazard on the employer's part, to fire the worker just to grab the bond. A rising wage profile, where you get paid less than your market value initially, and more when older (or a company pension) is like posting a bond.

JV: thanks! I'm not sure if it's really all there though, in terms of microfoundations.