How much market power do employers have and over whom?

The only labour markets with any significant evidence of a power of employers to keep wages down by the more than even a few percentage points are professional sports and professors (Boal and Ransom 1997, 2002; Ashenfelter, Farber and Ransom 2010; Hirsch 2008; Hirsch and Schumacher 2005). These professionals have few alternatives for their specialised skills. They invest up-front in skills demanded by one sport or one or two universities per city. It is in higher skilled markets where employers might take advantage of the more limited mobility of specialised human capital.

By contrast, the low-paid search in thick job markets because they can apply for most any unskilled vacancy in any industry that is albeit within their commuting radius (Hutt 1973; Alchian and Allen 1967, 1983; Manning and Petrongolo 2011). The higher skilled search in markets much thinner in near-by vacancies that open regularly which are well-matched to their idiosyncratic backgrounds (Lazear 2009; Fishback 1998; Manning 2006, 2011). The main hiring criteria for low-skilled vacancies is that the successful recruits be friendly and reliable (Osterman 2001). Little of their human capital is specialised and whose value depends on staying with one employer for a length of time.

Activists do not give employers their due for seeing entrepreneurial gain in tying their own hands to prevent opportunistic behaviour towards employees of all pay grades. Employers and the employee to accumulate specialised skills or experience have an incentive to share the costs and returns of that human capital to bind themselves to each other (Oi 1962, 1983a; Becker 1993). The employer pays for part of costs of specific human capital while the worker’s trainee wage pays for the rest. Employers then pay a premium over the wages the up-skilled worker could earn elsewhere to induce them to stay long enough to recoup their joint training investment (Leuven 2005; Becker 1993).

Many contractual and other arrangements emerge to reduce mischief in long-term relationships where one party depends on the other to stay in the relationship long enough for their specialised investment to be recouped (Alchian and Woodward 1987, 1988). Without long-term safeguards against opportunism after specialised assets have been sunk, many valuable relationships rich in specialised human capital might not be formed (Klein 1984, 1998; Klein, Crawford and Alchian 1978).

There is evidence that workers with similar skills in similarly attractive jobs, occupations and locations earn similar pay (Hirsch 2008). There can be unexpected shifts in the supply or demand for skills but these imbalances even themselves out once people have time to learn, update their expectations and adapt to the new market conditions (Ryoo and Rosen 2004; Bettinger 2010; Zafar 2011; Arcidiacono, Hotz and Kang 2012; Webbink and Hartog 2004). Skills supply and student enrolments can be ‘remarkably sensitive’ to changing career prospects (Ryoo and Rosen 2004).

Activists underrate the hand that the low-paid play. Employers are more likely to have power over the wages of higher skilled workers because of the more limited mobility of their human capital.

Despite these concerns about employer power over the wages of the more skilled, there is good evidence that the demand and supply of human capital responds to wage changes. Over- or under-supplied human capital leaves and enters in response to changes in wages until the returns from education and training even out with time (Ryoo and Rosen 2004; Arcidiacono, Hotz and Kang 2012; Ehrenberg 2004). As evidence of this equalisation of the returns on human capital across labour markets, the returns to post-school investments in human capital are similar – 9 to 10 percent – across alternative occupations, and in occupations requiring low and high levels of training, low and high aptitude and for workers with more and less education (Freeman and Hirsch 2001, 2008). Activists are proposing a living wage increase far larger than any upper-hand employers might play.

This entry was posted in labour economics, labour supply on by .

About Jim Rose

Utopia - you are standing in it promotes a classical liberal view of the world and champion the mass flourishing of humanity through capitalism and the rule of law. The origin of the blog is explained in the first blog post at

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