This section is from the "Economics In Two Volumes: Volume I. Economic Principles" book, by Frank A. Fetter. Also available from Amazon: Economic
§ 9. Basis of the personal bargaining power in the wage-contract. We arrived at the explanation that the price of labor bought by an employer must be related to and depend on the value of the services bought. Wages, just as the prices of commodities, depend on the values in the minds of the various traders, and these values in turn are the reflection of consumers' choice. But the personal element of bargaining between man and man seems to obscure our view of the motives determining wages much more than of the motives determining commodity prices. If the fisher and the miner bring their products to the general market, the question uppermost is the price the product shall bring, and their labor-incomes are easily seen to be the price of the material products (less certain costs and allowance for equipment) (see above, section 3). But if an employer hires a number of workmen, and the labor of each becomes merged and lost to view in a complex product, what part of this undivided product is, on value-principles, imputable to the labor ? If we lose hold of a guiding principle of value, there is danger that we shall see only the superficial fact of the personal bargain between employer and workman. Sometimes the personal power of the employer looms so large that he is thought to " pay whatever he pleases," sometimes wages seem to depend on the whim of labor leaders, sometimes on the monopolistic power of organized labor. This way of viewing the problem has even been dignified with the name of " the bargain theory of wages." Such a view overlooks the logical cause of value, and the network of impersonal forces which enwraps and binds the personal bargain. What makes the employer "please" to pay as much as he does; what is there in the economic situation that at one time gives to the labor leader bargaining power to get an advance of wages, and at another time does not? These are questions whose answers help us to go deeper into the explanation of wages.
9 This doctrine was given its name by the English economist J. E. Cairnes (Some Leading Principles of Political Economy, Newly Expounded, 1874). As presented by him the doctrine was given a very different emphasis, for he supposed it to be a rare and remarkable exception to what he believed was the general rule, that the cost-of-production regulated the price of goods, - essentially a "labor-theory of value." We regard it merely as a helpful way of presenting a particular case of the general rule that the value of agents is derived from their products when the market is viewed as a whole.
The truth seems to be that while wages paid by an employer result from a bargain, this in turn rests on the same causes of value as does the bargain for material agents (commodity prices, rents, as also interest rates), that is, on the direct or indirect effect of labor in the gratifying of desires. When the employer is producing goods to sell he is acting as a middleman between the employee and the ultimate consumers whose desires combine to impart value to the labor used. The greater the demand for labor services and the more limited the group of laborers that can render these services, the greater is the bargaining power, and vice versa. Bargaining power is simply the power to bring about a true equilibrium price inherent in the economic situation.
§ 10. Friction in the adjustment of wages. The conformity of actual wages to the true equilibrium price under any given market conditions is never complete. Actual wages may be said, in somewhat indefinite phrase, to have "a tendency to conform," to an abstract competitive price, meaning that the most fundamental forces are always working to that end. These forces, however, are counteracted by many other influences, some slight and temporary, and others strong and long continued. We do not here refer to such things as monopolistic power of organization which, however artificial it may seem, is a part of the economic situation for the time and determines the market-price. We refer to other conditions, such as the following.
The wage received by any particular employee may be higher or lower than those of other workers and than the true market-price as a result of favoritism, due to friendship, relationship, or bribery, in private employ, in corporations, or in government service.
As a whole, the prices of labor have more inertia and more momentum than do prices of material commodities. As the prices of the commodities that labor helps to produce go up or down, wages follow more slowly. This is true of wages whether the change is in the general scale of prices (see the standard of deferred payments in Vol. II) or in the price of the particular class of goods. Habits of thought count for more in wages than in most other prices. Caste and custom are great influences making for inertia of wages. The laborer thinks of his labor as worth so much, and in general is slow to ask more, and is loath to take less than he has been getting.
Combinations of workers may hasten the rise and retard the fall of the prevailing scale of wages. The adjustment of labor-supply to commodity prices is in large part brought about, therefore, when prices of products rise, by taking on less capable workers at the same wages, and by working more regularly and for more hours; and when prices fall, by throwing the less efficient workers out of employment, and by working fewer hours. In contrast with wages, profits are quickly adjusted to price changes, going up quickly when prices of products rise, and going down, often for a time to a minus quantity, when prices fall. (See later under profits and enterprise.)
§ 11. Uniqueness of separate services. In many cases the individual employee can not get higher wages because of his immobility. He (or she) has a home, and must live at home, and tho he may have greatly improved in efficiency in the particular position, may not be able to accept positions open elsewhere at much higher salaries. He can not sell his labor in an open market. Many positions of confidence and trust are such that it requires years of experience to gain efficiency, yet that experience and efficiency pertain to that particular job, and can not be in large part transferred elsewhere. In such situations the employer may be able to retain this person, under existing market conditions, for less than he would have to pay to get some one else to fill the position satisfactorily.
On the other hand an employer often is forced to pay a higher wage to hold an employee than on general price conditions is warranted, in order to hold the services that have become particularly valuable to his business. In many cases, too, old employees are retained after they could be replaced by more efficient men at the same or lower salaries. Services are well-nigh the least standardized of all saleable things, and in countless cases both the laborer and his job have more or less the character of uniqueness; that is, there is no other job exactly like this one and no other laborer exactly suited for that particular work. These are facts which must neither be overlooked nor exaggerated to the point of obscuring the general conformity of wages to market conditions.