Tuesday, March 26, 2013

Labour Bargaining And Wages

If you had a choice between two jobs with equal compensation, but one has higher bonuses and allowances but the other has higher base pay, which should you choose?

Take the one with higher basic salary (excerpt):

The intercept is negotiable, the slope is fixed

A new hire only gets one chance to negotiate: a brief window between the time that an offer is made and the time when that offer is accepted. Those initial terms and conditions determine the employee's salary for years to come - possibly the entire the duration of his or her time at the institution.

Think of a graph with job tenure (years of service) on the horizontal axis, salary on the vertical, and a curve showing the evolution of a person's salary over time. Roughly speaking, the intercept of that curve is negotiable, and the slope is, if not entirely fixed, at least largely independent of a person's initial starting salary (for references, see here).

An extra $100 in starting salary means an extra $100 in salary each and every year - until one jumps to a different pay scale, gets a salary-boosting outside offer, or hits a salary ceiling - none of which may ever happen. Hence, If one is offered a job, it is critically important to negotiate...


...People who are hired during tough job markets earn lower salaries than people who are hired in good job markets. It may rankle that the useless person next door is paid $10,000 a year more, but generally speaking the only way of addressing that inequity is to get an outside offer. Or just let it go, and enjoy life.

Prof Woolley is talking about the university market, but the comments apply to most jobs in general. Bargaining power of course varies with market power i.e. the more specialised and rare your skills are, the stronger your bargaining position.

One of the major theoretical underpinnings of having a minimum wage is that at the low end of the income scale the substitutability of skills and knowledge are high, which increases the negotiating position of the employer relative to employees i.e. employees face a more competitive market but employers are in a monopsonistic position.

These relative bargaining positions gradually flip as skills, knowledge and experience increase, as more highly skilled labour becomes progressively rarer and thus more valuable. At the tip of the income pyramid are the “superstars”, where skills or personal characteristics are considered unique and as such command ridiculous prices. Think of a Tiger Woods or a Steve Jobs. Now labour is the monopsonist, and employers are in a competitive market.

In this rarefied atmosphere, it’s tough to make the case for income being “fair” even between high income earners – somewhere along the line, income arguably diverges from productivity, and compensation becomes less about talent and more about who makes the best use of the opportunities (and rents) they get.

It also helps to have the better agent, or have a bigger market. CEOs in Europe generally make less than CEOs in the US or the UK – CEOs in Asia make even less on average. There’s a hypothesis making the rounds that rising income inequality among musicians is due to the Internet and social media – the larger global reach allows better known acts to sell greater quantities of product, be it records or concert tickets (for top acts, both have been rising as a share of the total during the 2000s), but at the expense of lesser talents.

Nevertheless, for us poor grunts stuck between minimum wage and superstars, what to do? One commentator (I’m looking at you Jason) mentioned widening access to economy-wide wage information. That would help, as it reduces labour market friction and improves employee bargaining power. But I guess the answer still boils down to brushing up on your negotiation skills, or always being prepared to jump jobs.


  1. *Aw shucks, thanks for the shout-out*

    Will probably add something constructive later if (not when) the level of work tapers off by the end of today.

    Btw, what's your take on BNM's MPC calculations?

  2. The type of industry matters as well, not just the pay. I'm in an industry where it's not atypical for people to be employed for life - specialized skills, only a handful of other competitors you could jump to, and if you do you generally get branded a traitor because of access to secret company information.

    On the other hand, because of the difficulty in recruiting new talent, they need to be able to recruit young, train them and keep them. Pay structure is also generally very flat, they need to offer more at the low end to attract people into the field, and they can afford to offer less at the high end because they know no one is going to jump ship because there's no where to jump to.

    I would certainly recommend this sort of industry over the typical ones where the relationship between employer / employee is more adversarial. It certainly would appeal to some people, if they could find work like this. I actually like this model so much that in an ideal world all companies would work like this, but the chance of this happening is slim...