Monopoly Demand For Labor?; G. Tenney

Adam Smith taught that because employMr. Tenney teaches economics at Northern Nevada Community College in Elko, Nevada. ers were fewer in number, they were able to combine forces against the workers and force the workers into compliance with their terms. In his view then, employers would be able to create a monopoly of demand for labor, which would allow employers to re strict their demand for labor and lower the wage rate to a level consistently lower than the marginal revenue realized by the firm through the productive efforts of the em ployees. Another economist from the classical pe riod, Jean-Baptiste Say, wrote of the "ur gency" of the workers' needs relative to those of the employers. According to Say: The wages of the labourer are a matter of adjustment and compact between the conflicting interests of master and work man; the latter endeavoring to get as much, the former to give as little, as he possibly can; but, in a contest of this kind, there is on the side of the master an advantage over and above what is given him by the nature of his occupation. The master and the workman are no doubt equally necessary to each other; for one gains nothing but with the other's assis tance; the wants of the master are, how ever, of the two, less urgent and less immediate. 3 Taking from the sentiments of great think ers such as Smith and Say, others called for the organization of workers into unions with 174 the purpose of raIsIng wage rates. The socialist thinker Karl Marx went still an other direction with the labor theory of value, and wrote about the outright' 'exploi tation" of the workers by capitalists.

But what of this so-called "disadvantage" on the part of labor? Is it really possible for an employer to monopolize the demand for labor, and thereby consistently push the wage rate below the productivity of that labor? Careful thinking about the nature of labor markets in the real world reveals the truth of the matter. Employers do not enjoy any general advantage over workers, and it is impossible for employers to join to gether to create a "monopoly of demand" for labor services. It is impossible to have a monopoly over the demand for labor be cause man's desires to have services per formed are dynamic-not limited in the manner that the supply of goods and ser vices are. There is always work that can be done in society, and no one firm or one industry can possibly be the sole denlander of labor services. Subjective-Value Theory In the later part of the nineteenth century, the Austrian economist Carl Menger discov ered the error of the labor theory of value, and replaced it with a subjective-value ap proach. In addition to Menger, others have articulated the subjective-value theory, and meaningfully built upon it. Under this ap proach, the value ofa product is determined subjectively by the prospective consumer as he weighs the benefit from consuming a unit of the good against the cost sacrificed in order to obtain the product.

This value is often referred to as the marginal utility of the good, and is specific to the individual perceptions of the market participant. Thus inputs into the production process, such as materials and labor, are valued at the amount necessary to attract these productive factors away from their alternative uses. Logically then, wage rates as well as the price of other inputs are determined subjectively, based on the final value attached to the final product by the 175 consumer. 4 This is quite different, and in fact the opposite, from the prior thinking which held that the value of the finalproduct was obtained from the value of the inputs into the productive process. Perhaps the most thorough expositions of the subjective-value approach to the con cept of valuation were provided by Ludwig von Mises. Concerning the possibility of a monopoly of demand for labor, he denies that any such situation can persist in any meaningful way in an unhampered market economy. In the real world, labor is not homogeneous. The demand for labor ser vices is a demand by business firms for a specific type of labor that is suitable to render specific services. In order to obtain these specific services, the entrepreneur must offer these workers incentives suffi cient to entice them to withdraw their efforts from other endeavors which the worker might choose to engage in. These induce ments are offers of higher pay, and can be made by higher wage levels, greater em ployee benefits, or a combination of both.

Labor's "Inability to Wait" Professor Mises has further pointed out that the "inability to wait" or "urgency" argument, that was a major focus of the classical economists, is not valid. The "in ability-to-wait" argument assumes that the difference between the wage set by the marginal productivity of the worker and the imagined lower rate set by the so-called monopoly power of the employer is pock eted as additional profit by the entrepreneur. In the Mises view, an employer attempting to act as a monopolist in his hiring practices would have to have an effective monopoly in the selling of his product, the purchasing of other productive inputs, and all other as pects of his business. Because productive inputs, and labor in particular, are limited, and can and will be used in alternative uses by competitors and non-competitors alike, it is impossible for the entrepreneur to act as a monopolist to persistently depress the wage below the rate conditioned by the marginal productivity of the laborer.

176 THE FREEMAN • APRIL 1994 The businessman can succeed in lowering workers' pay only by restricting his demand for labor, which will have the effect of reducing the quantity of labor hired and used. Other employers, and would-be em ployers, seeing these bargain rates for labor, will want to take advantage of the opportu nity of the lower labor prices, increase their demand for labor, and push the wage back up to the level prescribed by the marginal productivity of the labor. It must be conceded that in a world where such competitive restrictions as occupa tionallicensing and business permits domi nate the industry, these measures will tend to restrict the competitive bidding for cer tain types of labor. Although these anti competitive measures are not in accordance with an efficiently operating economy, and the elimination of such measures in an economy should be encouraged, it is naive to believe that such measures will be suc cessful in preventing potential demanders of labor from bidding up wage rates in order to remain competitive.

There are many margins on which a firm can effectively compete when it comes to satisfying the desires of consumers. A higher wage rate (or equivalent employee benefits of one kind or another) paid to workers might be the very edge that a firm needs in order to compete successfully in the market for its products. The very notion that workers compete with their employers in a meaningful way in setting wage rates is somewhat misleading from the start. An employer's primary com petition in the hiring and use of productive inputs, including labor, is from other entre preneurs who use, or can use, the same inputs in other productive processes. It is not necessary for two firms to be in the business of producing the same product, or even in related industries, in order to vie for available labor services. The non-specific nature of labor services assures that those services will be desired by any number of firms. Professor Paul Heyne has pointed out: "Workers compete against workers, corporate employers against corporate em ployers. And this is the competition that affects wage rates. Workers cannot success fully insist on the wage they think they deserve if other workers are willing to sup ply very similar services at lower wage rates. ,,5 Thus we see that the competition that employers have from other employers of all kinds assures that any bargain-priced labor will be competed for by the employers bidding up the wage rate to the value of the output of that labor.

In summary, the demand for labor ser vices is treated by business firms in the same manner as the demand for other inputs to the productive process. Because the efforts of workers can be put to use in a variety of ways by a variety of firms that mayor may not be competing directly in the product markets, the price that firms will be required to pay for these services will tend toward the value of the workers' output as perceived by the end users of the products that they produce. There is no lack of demand for labor by employers acting either on their own or in tacit combinations as monopolists, because there are no limits to the number of produc tive labors that are required to be performed in society. D 1. Adam Smith, The Wealth of Nations (Chicago: The University of Chicago Press, 1976), p. 72. 2. Ibid., p. 74. 3. Jean-Baptiste Say, A Treatise on Political Economy, First American Ed. (Philadelphia: Claxton, Ramsen, and Haffelfinger, 1821; repr., New York: Augustus M. Kelley Publishers, 1971), p. 338.

4. Eugen von Bohm-Bawerk, Value and Price (Spring Mills, Pa.: Libertarian Press), pp. 28-29. 5. Paul Heyne, The Economic Way ofThinking (New York, Macmillan Publishing Company, 1991), p. 307.