Dictating Contract Terms Limits Bargaining Power
By David Henderson
Last month, I pointed out Paul Krugman’s Orwellian use of language. In discussing the Obama administration’s rules on overtime pay, he had written:
It [government policy] can also engage in what is sometimes called “predistribution,” strengthening the bargaining power of lower-paid workers and limiting the opportunities for a handful of people to make giant sums.
He saw those rules as an instance of strengthening power. I noted that those rules do the opposite: they reduce bargaining power. A low- or medium-wage worker who wants to forego overtime pay in order to have more flexibility in number of hours worked over, say, a month will now be less able to do so because the federal government has taken away his/her bargaining power.
There are many other such instances in government policy. Here are four:
1. The minimum wage.
The higher the minimum wage, the less bargaining power an unskilled worker has. To make it worth employing an unskilled worker, the employer needs to trim other components of the pay package, including ones that the worker might want more than higher pay. This bargaining power is gone.
2. Rent controls.
Someone living in New Jersey who wants to move to Manhattan might be willing to pay more for a rent-controlled apartment than the current tenant of that apartment. But rent control stringently limits the potential tenant’s bargaining power.
3. Mandated parental leave.
When the government mandates parental leave, even if unpaid, women’s wages will tend to adjust downward or not rise as quickly because women are more likely than men to take advantage of that leave. So women who would not want to take advantage of that leave, either because they don’t want children or they want children but don’t want to take time off, lose their power to bargain for higher wages and no leave.
4. Restrictions on evicting tenants.
The harder the government makes it to evict tenants, the higher will rents be to compensate for this risk. Those tenants who would rather pay lower rents and live with higher risk of being evicted don’t have that option.
Question for readers: What are some other good examples of government restrictions that limit people’s bargaining power?