Thursday, January 24, 2008

Where do Wages and Prices Come From, Part 2

I've made some posts recently about where wages come from, and why we should expect employers to find it difficult to exploit workers in competitive labor markets. I see that Russell Roberts over at Cafe Hayek has made some similar points. Some highlights:
-only about 10% of the U.S. workforce is unionized.
-Somewhere between 0.5% and 2.2% of hourly workers earn minimum wage or less.

Why does this matter? If you believe that wages are the result of a capitalist conspiracy against workers, or that employers have the power to set wages at whatever level they wish, you are left with a theory that is unable to explain the real world. An overwhelming majority of the workforce works in jobs that pay more than minimum wage, and which are not unionized, yet they do not earn subsistence wages. In fact, many of them are paid quite well. The view that workers are persistently at the mercy of employers is inconsistent with a glance at the real world.

Once you can answer the question of why greedy employers persistently pay workers more than a subsistence wage, and why employees' incomes display such a huge variance, you have a theory of wages. The model we use in economics is Supply and Demand, and it is theoretically and empirically robust. Is there a competing model that can explain the data as well? If there is, I'm not aware of it.