The myth of labor’s inequality of bargaining power

This paper argues that the widespread belief in labor’s exploitation and “underpayment” in a free market economy is illogical and lacks a serious empirical foundation. Theories of systematic disadvantage ignore the behavior of entrepreneurs under the profit-and-loss motive and the tendency for risk-adjusted rates of return to equalize. Labor has proven versatile and mobile in the U.S. economy, where technical progress also has been extraordinarily labor-saving. Nor have discrimination (when unaided by the public sector), fluctuations in unemployment, or formal collusions resulted in systematic underpricing of labor services. The author thanks John Allen and Donald Deere for their comments on an earlier draft of this paper. The usual caveat holds.