Pondering Walter Williams: The Art of the Deal

The other day in class WW tried to convince us that the phrase "bargaining power" (especially as it pertains to wages and labor) is a vacuous statement. The argument is reminiscent of economic thought's early days, when a great debate raged over if it was supply or demand that determined price.

It's both, of course, and Williams used a similar argument. While one could demand a low wage, the other could respond with a low quantity of working hours. Price and quantity go hand in hand, just like supply and demand. Thus claims of having superior bargaining power is the same as claiming superior demand. It's meaningless.

I disagree. The bargaining process is not a one-time negotiation where a wage is presented, a quantity of labor is responded with and there's nothing beyond that except agreement or rejection. Bargaining is a process of give and take where new offers are made for a single unit. It is a process that describes how supply and demand discover price and quantity.

Bargaining power is really a comment about elasticity. As different wages are offered, different hours (explicitly or implicitly) are offered to match with it. Each negotiator has a range of prices and a range of quantities they would be willing to put on the table but without the other party giving up and walking away. The wider those ranges, the greater the bargaining power.

Suppose I seek out employment at the Cato Institute. Being a first year grad student, I know I have a small range of p's and q's to offer them because my human capital is relatively low (but still pretty good). Now fast forward about five years. I've publish a few papers and got my PhD; my ranges of p's and q's has increased. I have more bargaining power. Bargaining power describes how sensitive the size of sets of p's and q's are to changes in human capital (just as elasticity describes how sensitive Q is to changes in P). Like elasticity, bargaining power is influenced by similar determinants, most notably the number of substitutes.

It's difficult to measure human capital so it's difficult to come up with an absolute value of bargaining power. We can estimate the ranks of such power, if someone has more or less or roughly equal ranges of offers. Thus we can say if someone has superior (greater) bargaining power, just as we can say if some goods are more or less elastic than others. (We can use the word "superior" because more bargaining power is always preferred by any agent while more elasticity may be preferred or not depending on if one is on the demand or supply side.)