Krugman on Bargaining

Paul Krugman says that in a weak economy workers have weak bargaining power. In his opinion, that’s bad for workers, but good for their employers. He writes:

Now think about what this means for workers’ bargaining power. When the economy is strong, workers are empowered. They can leave if they’re unhappy with the way they’re being treated and know that they can quickly find a new job if they are let go. When the economy is weak, however, workers have a very weak hand, and employers are in a position to work them harder, pay them less, or both.

As a result, he says that workers are burdened by a “fear factor” and goes so far as to label our economy “the fear economy,” implying that the workplace is somewhat akin to a police state.

Now let’s turn to reality. In his book, The Road to Freedom, Arthur Brooks summarizes a number of studies on how people feel about work:

  • It turns out that the vast majority of Americans instead of living in fear of being fired actually like their jobs: 89% are either very satisfied or somewhat satisfied with their jobs.
  • Satisfaction is the roughly the same, up and down the income scale.
  • Further, Americans are happier when they work more hours: those who are happiest work 50 to 59 hours a week (Europeans are happiest working 35 to 39 hours).
  • Only 11% of American workers say they wish they could spend a lot less time on their jobs.

As for “bargaining,” alert readers will recall it is a word that Krugman has used before, with respect to health care. A “single payer” he says would have the bargaining power to push doctors’ fees below their current levels and reduce the price patient must pay. But why is it good for doctors to live in fear, but not ordinary workers? And if the single payer bargaining is good for medicine, why wouldn’t it work just as well for college professors — given that higher education seem to have all the same problems that the health care system has. (Think how much lower Princeton tuition might be if Krugman, Uwe Reinhardt and all their colleagues had their salaries cut in half.)

Moreover, if “bargaining power” is what counts, why not have government bargain for us in every market for every product we buy?

Before I go on, pick up any introductory textbook in economics and see if you can find the word “bargaining” or the word “fear.” I bet you can’t. That’s just by way of warning you that Krugman’s depiction is not the way real economists would describe any of this.

Take this job and shove it.

As for actual “bargaining,” it is very rare in our economy. It only happens for the sale of unique assets (e.g., a house) or unique services (e.g., a secretary who can put up with my demanding personality).

Let’s say Macy’s has a lot of Christmas decorations on hand — merchandise it didn’t sell before December 25th. Would you say that the store is in a weak bargaining position vis-à-vis its customers? You could say that, and before the science of economics developed many people might have said that. But economists have found a more precise way of describing the situation: they use the concepts of supply and demand.

The truth is that none of us actually bargains with Macy’s any more than most workers bargain with employers. What happens in this example is that supply exceeds demand at the current price. So what does Macy’s do? It drops the price and puts all the Christmas paraphernalia on sale. And if the store drops the price enough, supply will equal demand and it will clear out its inventory.

In most of the labor markets that Krugman writes about, no one bargains about anything. McDonald’s doesn’t bargain with its employees. It sets a wage for the services it wants and hires people who will accept that wage and who it thinks can do the job. As long as it is attracting the labor it needs, it keeps the wage at its current level. But if it finds it cannot get the labor it needs it raises the wage until it is able to man its restaurants.

Wage rates in most occupations do not change hourly or daily or even weekly. They change. But they change relatively slowly. Sometimes the wage is too high, reflecting a surplus of willing workers. There will be downward pressure on wages to clear the market. In the meantime, workers will be pushed to be more productive and the least productive among them probably are at risk of losing their jobs. At other times the wage is too low, reflecting a shortage. Workers will have more options with other employers and there will be upward pressure on wages.

Contrast this to a different model, however. Suppose that the labor market worked like the commodities market — with wages changing instantaneously to clear the market. Would you rather work in a market in which your wage income changes every minute — in which all of Krugman’s commentary becomes irrelevant? Or would you rather live with the current system?

One thing that is clear about the current labor market is that we have a surplus. The youth unemployment rate is 16% overall and 28% for young blacks. Just like Macy’s Christmas decorations, we can’t clear the market at the prevailing wage. So what is Krugman’s answer to this problem? Instead of advising job seekers to do what Macy’s did and lower their asking price, Krugman in an earlier column advocates outlawing such behavior with a higher minimum wage!

Maybe his next column will integrate the two previous editorials and make the case for a perpetual economy of fear.

Comments (24)

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  1. Bob Hertz says:

    When it comes to labor markets, Krugman probably favors the usual European approach……which does call for higher minimum wages, and then if surpluses persist the state will provide unemployment benefits.

    “Clearing the market” by having people work for $3 an hour is considered barbaric by Krugman. He feels it is better to set the minimum wage as a living wage, and have laid off workers collect unemployment and other federal benefits.

    This is not an easy issue. The black ghettos of the 1920′s featured very low wages and some awful living conditions, along with low unemployment.
    The welfare ghettoes of the 1960′s and onward had far fewer bad jobs, and a lot more federal benefits.
    Charles Murray says that this was a disaster.

    Meanwhile, health care as usual is very complicated.
    The large insurance companies have been bargaining down rates for most doctors and hospitals for the past 25 years, and I have not noticed any overall decline in medical costs. I have not even noticed any decline in most insurance premiums!

    Bargaining may be over-rated in health care, at least without many qualifications.

    (

    • Underwriterguy says:

      Bob, let me split a hair. The reason insurers bargain down rates is that employers (who are the purchasers of most insurance) pit insurers against each other on rates (or claims costs in the case of ASO). While there is some ability to compete on other than price, being more than a few percent high will lose business.
      Of course, employers bargain down insurance costs to remain competitive while offering wages that meet their needs for workers. And the wheel goes around…

  2. Ken says:

    Krugman is not an economist. He is a propagandist.

    • BHS says:

      That’s the perfect way to describe him.

      • Trent says:

        He was assaulted by internet goers after his comments on Bitcoin. He then had the nerve to blame his comments from 1998 on Time magazine telling him he had to write something

  3. Devon Herrick says:

    Paul Krugman says that in a weak economy workers have weak bargaining power. In his opinion, that’s bad for workers, but good for their employers.

    This statement contains a grain of truth. However, in a weak economy, consumer demand is (by definition) probably weak; and consumers have more bargaining power to negotiate lower prices. Lower prices lead to lower profits. Lower profits result in weak demand for labor. The reduced bargaining power is a function of the economy; not stingy employers.

    When I was taking economics in college, my professor explained that labor market flexibility is important to economic recovery. He also explained that wages are sticky. That is, the price of wages cannot be instantaneously adjusted for weakening demand. That is why layoffs of say, 5%, are more common than merely lowering wages by 5%.

    Although workers may be at a disadvantage when bargaining in a tough economy, they probably have more job security in the long run when the firms they work for have the flexibility to hire an fire according to their labor market needs.

  4. Kenneth A. Fisher, M.D. says:

    Same is true in health care, we need market forces and price transparency with health savings accounts & national high deductible insurance for all Americans starting at birth and continuing throughout life.

  5. Sean Parnell says:

    The other misused term along the same lines is ‘negotiating.’ I hear constantly from anti-market people (at least in health care) that a person can’t/shouldn’t have to ‘negotiate’ with a doctor or hospital over the price of care, or that people just can’t ‘negotiate’ such a complex service. Well, there’s a grain of truth to this, but in a reasonably well functioning market, there isn’t any ‘negotiating’ just prices. For example, at Regency Healthcare and Surgery Center of Oklahoma (see: http://selfpaypatient.com/2013/12/02/cash-only-surgical-center-featured-in-orthopedics-this-week/) there’s no negotiating or bargaining, just a price. Just like you don’t ‘negotiate’ your dinner bill at a restaurant, there’s no need to do it for health care services either.

  6. Breck says:

    I don’ believe Krugman has worked in the real world lately. All companies, large and small, depend on their employees. Of course, they depend on some more than others, but all businesses in today’s recognize that they cannot function without a contented workforce and they take every possible measure to keep their people, especially those they would have trouble functioning without, happy. That said, it is to a worker’s advantage to develop a set of job skills that he/she knows many businesses need. That gives you bargaining power because you know you can easily find another job if your current employer doesn’t do enough (think more pay) to keep you happy. And everyone working today knows that a business can’t stay in business without making a profit, and when the bottom line is threatened by hard economic times there will be painful, for both parties, layoffs. That doesn’t make capitalism “cruel and heartless,” it just means you have to take your job skills somewhere else. Krugman is an idiot.

  7. Jlee94111 says:

    Wonderful….yes higher education and health care have many similar problem…

  8. Richard E. Ralston says:

    During the Great Depression in the 1930′s, who had recently arrived in America from the Soviet Union, compared the fear of losing a job in America and the difficulty of having to find a new empoye–with losing a job in Russia where the government was the only employer. Losing your job in Soviet Russia was a death sentence.

    That is a the “bargain” that Krugman advocates in health care and most of the rest of our economy.

  9. Al Baun says:

    Two observations with respect to the doctor’s supply and demand examples:

    First, “Sometimes the wage is too high … workers will be pushed to be more productive and the least productive among them probably are at risk of losing their jobs.”

    Yes, but from a practical point of view, insurers [private, government, single-payer] are the employers and doctors are the employees. Yes, “things change” and productivity and adaptability must prevail. I don’t think the standard argument, that lower wages will cause doctors to flee the profession, holds much water if one compares lower health care costs and higher doctor/patient ratios in modern countries that enjoy universal health care. http://kff.org/global-indicator/physicians/

    Second, the doctor’s assertion, “But if it [employers] finds it cannot get the labor it needs, it raises the wage until it is able to man its restaurants.” Good in theory but incorrect in practice. In the construction, agriculture, economic dining, and a plethora of other trades, employers simply turn to ‘creative remuneration’ or cheaper sources of labor, in large part illegal. They then oppose any legislative or immigration reform so as to keep that work force in chains. In the health care profession, the employers (insurers) are simply reducing what they pay their employees (providers) to answer their customer’s (taxpayers) demands. Welcome to reality and have you been fitted for you manacles yet?

  10. Bob Hertz says:

    Al Baun is absolutely right on how the cheap-labor sector tries to avoid the bargaining demands of workers.

    In a closed labor market, a job which was boring and risky and exhausting (like farm work) would yield a higher wage in order to attract laborers.

    But farmers and restaurant owners and most retailers are addicted to cheap labor, so they have turned to immigrants and outsourcing and (on occasion) children.

    I would be a lot more impressed with the Heritage and AEI types and their defense of free markets, if they would actually expect cheap-labor firms to adapt to free markets. Pat Buchanan might be the exception here.

    • Breck says:

      What do you mean by “closed labor market?” Any time a market is closed, price distortions are bound to occur. It seems to me that there are some jobs, and picking crops is a fine example, which have very limited productivity. Unless the price of fruit increases dramatically, the price of labor to pick it cannot go up either. I imagine there are isolated example of forced labor, but for the vast majority there is nothing chaining anyone to an unpleasant, underpaid job. Obviously migrant workers find the work acceptable or they wouldn’t do it. I think the only workers chained to their jobs are government bureaucrats who are paid much more than they are worth and have no marketable skills outside of narrow government assignments.

  11. Don McCanne says:

    This article requires a complex response that can be found in “The Political Economy of Human Happiness” by Benjamin Radcliff (Cambridge University Press, 2013). Hint: It’s about markets, public policy and the commoditization of labor, and ultimately about the subtitle: “How Voters’ Choices Determine the Quality of Life.”

  12. Charlie Bond says:

    Good morning John,
    There is bargaining in the health care market–against fictitious prices. So no one knows what care really costs.
    Health plans now control prices and patient flow, so doctors have virtually no bargaining power. As seen by the recent United Health purge of its panels, they also have little control over their professional future.
    As author of AMA’s first book on employment contracts for physicians, we are seeing an unprecedented flight to hospital employment of physicians. Physicians perceive there is more security in such relationships. Sadly, however, they have no collective bargaining rights, and don’t use the power they do have to negotiate their contracts. Doctors, being trusting souls (and cheap), will readily sign multi-year, multi-million dollar contracts without getting any assistance or advice. So just as they did with managed care, they sign away their livelihoods and many of their professional perogatives. As a result, most are just jumping from the frying pan into the fire.
    It would be very interesting if you and Paul would square off over the questions of physician employment. The ringer is that hospitals and large medical groups not only have the power to fire doctors, but hold over their heads the very real threat of reporting them to the National Practitioners Data Bank and the state licensing board. Such reports are ruinous to doctors’ reputations and cost tens of thousands of dollars to fight. The power equation thus is heavily tipped in favor of the employing hospital or group. The NLRA excepts the learned profession, so doctors have no right under the law to unionize. Clearly there is a danger that contol of the doctoring we receive in the future will be in the hands of non-physicians.
    In response to a request from Dr. Jay Gregory, who was chair of the AMA’s Medical Staff section, I wrote two paragraphs that should be in every doctor’s contract with hospitals. They have become known as the Bond clauses–because they are intended to protect the bond between physicians and patients by assuring physician independence. One clause provides that physicians shall have the right to treat patients and advocate on the patient”s behalf according to the doctor’s best medical judment and to do so without fear of reprisal. Similarly, the second clause assures a physican’s right to speak and vote his or her mind in medical staff affairs.
    As patients we take for granted that doctors can do these things on our behalf. It is surprising,however, how much resistance the Bond clauses meet in negotiation.
    The situation for physicians in this country is becoming dire. We need public awareness, because it not only vitally affects the cost of health care, it affects access and quality as well.
    Cheers,
    Charlie

    • Breck says:

      Charlie,

      I respect your experience in these things, but I have a question. Judging from my recent experiences with medicine and doctors, it doesn’t appear to me that doctors conduct their businesses in a business-like manner. I recently had minor surgery for a hernia. The doctor and the outpatient surgery center of which he is part owner billed my health insurer roughly $13,000. The insurer and I (via copays) actually paid only $3,000. If I ask a doctor what he charges for a surgery the usual answer is: “Whatever your insurance pays me.” So it appears that he bills at exorbitant rates so as not to leave any money on the table, since various insurers reimburse at different rates.

      Wouldn’t it be better for doctors, who are actually small businessmen, to figure out what it costs them to provide their services, and then bill accordingly? If they want to serve more patients, and thus increase their income, they might advertise and work to lower prices while improving outcomes.

      Is it not also true that, in years past, doctors grew accustomed to functioning outside normal business constraints because insurance paid whatever they charged. Since patients were not incurring the cost themselves and had no incentive to control costs, doctors reaped the benefit, it seems to me. If you don’t think insurance distorts what providers charge, next time you dent a fender on your car take it to a number of body shops. Tell some you have insurance to pay for the repair and tell others that you must pay yourself. You will find that the body shops who think your insurance is paying will charge you a great deal more than the ones who believe they are competing for your business.

      What I’m saying is that doctors have grown accustomed to charging whatever they liked instead of understanding and controlling their costs, and marking up their services as needed to make a profit, but not so much as to price themselves out of the market. In other words, running a business like a business. If they did that, it seems to me they could avoid all the problems you spelled out above.

      P.S. I don’t believe the solution to your problems is to unionize doctors. That would be a godawful calamity to our health care system that would render it into the same condition as public schools.

      • Parallel says:

        Breck,

        A fallacy I see over and over is the discussion over how much doctors “charge.” Your doctor was typical in saying he “charges” “whatever insurance pays.”

        That doctor is exactly right. Physicians don’t actually “charge” for anything (other than those who are direct-pay/concierge); they code for what they do, and then receive whatever the insurance company has agreed to pay for those codes. If the doc accepts insurance from many companies (and I’d say most do), then he has no idea how much any particular thing costs – each insurance company has negotiated a reimbursement for each particular procedure “code.” Medicare is sort of the bellwether for the costs, but most docs have very little control over how much things – even their own labor – costs any particular patient.

        In this sense, patients really have no “bargaining” power with their physicians. And even as reimbursements for physicians are reduced, overall health costs don’t decline, since physicians’ fees are a very small portion of the cost of health care. Patients have little to no skin in the game at the point of “service” (medical care), so most don’t really know or care to find out how much things cost.

  13. Bob Hertz says:

    Notes to Breck and Charlie:

    You both raise good points. However, even if every doctor and every insurance company competed honestly for fees on discretionary surgery, I am not sure that health costs overall would come down

    My belief is that the large academic and world-class hospitals, plus the drug companies, bulk up on the charges for cancer patients and transplant cases. And this drives overall insurance premiums a lot, whether public or private.

    In other words, saving $1,000 each on 20 cataract surgeries is immediately cancelled by a $500,000 charge for a transplant or a premature infant.

    I may be wrong, but no one to date has shown me that I am wrong.

  14. Breck says:

    Bob –

    I don’t claim to understand the health care business, but why should cancer treatment or other expensive treatments be any different? As John Goodman likes to point out, if you are willing to travel to Thailand you can cut the price of major heart surgery quite drastically right now. And an Indian heart surgeon does bypass surgery for $5,000 by running his hospital like a business.

    Don’t assume that it’s only simple procedures that can be done more efficiently and cost effectively.

  15. Bob Hertz says:

    Well, the Indian surgeon is working with a lot of very cheap labor. Let’s not give too much credit for running a better hospital.

    Anyways,

    maybe the real question is this:

    when will an American insurance company send patients to India, and achieve lower premiums in that manner?

    That would be true international competition!

    (at the same time, many thousands of American hospital employees would lose their jobs. it will not be pretty.)

  16. John Henry says:

    Paul Krugman’s father was a labor union organizer. That may not matter to most, but his “feet under the table” bias (as I’m sure my farming background affects mine), I believe, definitely affects him. Having said, my observation from following him for many years, he’s had an enormous influence on the Keynesian antithesis to Monetarist Economics, which the majority, if not all of post fall-of-communism Finance Ministers around the world (who became Monetarists)showed the debate was over, and Monetarist economics won. Now look. Articulate debaters like Milton Friedman of his day, are in amazing short supply. Keeping the dialogue going ala John Goodman along with the failed policies once again of the “utopionists” will once again turn the tide. Keep the faith, o ye’ of little faith (in free markets and individual freedom).

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