The idea that there is a systematic imbalance of bargaining power between employers and employees is refuted in the latest study published by the New Zealand Business Roundtable.

Entitled Power in Employment Relationships: Is There an Imbalance?, it is authored by Geoff Hogbin, an economic consultant and former academic at Monash University, Melbourne.

Hogbin observes that the idea of bargaining inequality in employment relationships, which can traced back at least to the early years of the industrial revolution, was reinforced and propagated by Karl Marx who argued that employers could and would use their stronger bargaining power to drive wages down to subsistence levels.

Most contemporary labour market economists have a different view. Elementary economic analysis suggests that, as for other goods and services traded through markets, wages and other terms of employment are determined largely by supply and demand. There is no reason to suppose that the employer side of the market has inherent power over the employee side.

The 'bargaining inequality' fallacy is readily exposed by reference to several empirical findings:

• Far from falling to subsistence levels (the logical consequence of inherent power imbalance) real wages in modern economies have risen steadily over the last two centuries to levels that would have seemed incredible in the times of Karl Marx.
  
  
• Aggregate labour income in modern economies accounts for around 65-75 percent of gross domestic product and is not higher in the more heavily regulated labour markets of the world. Indeed it seems to be relatively higher in some of the most lightly regulated labour markets, such as the United States.
  
  
• If employers had inherent power to set wages below the value of labour's contribution to production, then rates of return on capital should be higher in labour-intensive industries than in capital-intensive industries, but this is not the case.
  
  
• If employees were disadvantaged by their allegedly weak bargaining power in labour markets, there are many other ways in which they could engage in productive activities (eg through self-employment, independent contracting, labour hire companies, or workers' cooperatives). The fact that individual employment contracts have remained the dominant arrangement for over two centuries is compelling evidence that they deliver greater net benefits for most workers than any of these alternatives.

At times there may be a sellers' or buyers' market for labour, due to supply and demand conditions, but this is so for other markets and does not reflect a systematic imbalance of bargaining power. As for other markets, wage adjustments facilitate market 'clearance' and the attainment of full employment.

The study describes in detail the nature of the employment relationship and examines bargaining power issues in contract formation, in the ongoing employment relationship and in contract termination. It concludes that a freely functioning labour market conducive to full employment provides the best protection for employees and employers alike against opportunistic exploitation by the other party and that labour market regulation should be neutral between individual and collective contracting.

Hogbin says, "The argument that laws to encourage the formation of trade unions and strengthen their bargaining power are required to counteract the superior bargaining power of employers is not tenable."

Commenting on the study, Roger Kerr, executive director of the New Zealand Business Roundtable, said that the alleged power imbalance is central to the view that labour markets require special regulation. New Zealand's Employment Relations Act 2000 is based on the premise of an "inherent inequality of bargaining power in employment relationships".

Mr Kerr said that the policy implications of the study were clear. "New Zealand does not need the complex labour market regulation embodied in the Employment Relations Act. A basic framework of contract law which provides firms and employees with the freedom to choose arrangements that suit them best would be more conducive to productivity gains, higher wages and better employment relationships in New Zealand."

For a further analysis of bargaining power issues, see Richard Epstein, Is There Unequal Bargaining Power in the Labour Market?, New Zealand Business Roundtable, February 2005.

For more information, contact:

Roger Kerr
Executive Director
Ph: 04 499 0790
Email: rkerr@nzbr.org.nz

Geoff Hogbin
Ph: 00612 9955 7121
Email: ghogbin@ozemail.com.au

Web: www.nzbr.org.nz