I recently read a claim that employers have unfair bargaining power relative to employees. The reason is that the employees need money right away while the employers don’t need workers right away. I have certainly heard such a claim before, but it recently struck me that it is silly.
I certainly agree that many workers need a job right away. And I also agree that many employers are unlikely to be desperate to fill a vacancy–particularly if an employer has many employees.
Of course, this is not always true. Not all workers are so desperate and some employers may be brought to a standstill without a key employee.
But let us suppose that a currently unemployed worker accepts an unfairly low wage because he needs the money now and cannot hold out for a fair wage. The employer would be willing to pay more, and if the employee just waited a bit, the employer would offer more. But the employee cannot. He must eat.
Now, the unemployed worker is employed. Earning an unfairly low amount by assumption, but presumably no longer desperate.
So now the unemployed worker can look for a new job. He doesn’t have to quit, become unemployed, and then look for a new job. He can seek this new job while continuing to work.
Now, the claim that the workers have nothing and need money right away no longer applies. This worker can continue to work at his current pay until a better offer comes along.
Is this realistic? Do firms actually hire the employees of other firms? Do people accept a new job while they are currently working for an employer? Or is that sort of thing quite rare, with employers generally hiring those who are unemployed and most employees only obtaining a new job if they have been laid off or fired from their previous job?
There about 150 million people employed right now in the U.S. and there are about 7 million unemployed people. Hires are over 5 million per month. More people are hired in two months than are unemployed today.
Quits are about 3 million per month. That is 36 million per year.
Do all of these people become unemployed? Of course not. For the most part, these are people who have been hired while they already have another job which they then quit.
There are many reasons why someone might quit one job and take another, but a key reason is better pay and benefits. Of course workers leave one employer and go to another that offers a better deal. Of course employers will hire currently employed workers. In fact, there is evidence that they discriminate in favor of the currently employed.
If the desperation of unemployed workers to take anything was important to employers you would expect that they would be most anxious to hire the unemployed. But they aren’t. That suggests that employers do not obtain a benefit from this sort of bargaining power.
Layoffs and other discharges are about 1.6 million per month. Almost certainly, they add to the pool of unemployed. (In 2009, layoffs and discharges were almost 2.5 million per month.) If it weren’t for new hires, in 10 years, everyone would be unemployed! But, more people are hired than lose their jobs. That is why employment grows. In the last decade or so, it rises about 200,000 each month because total hires are greater than total separations.
The point of these figures is to understand that the labor market cannot be identified with people losing their jobs, being desperate to find work, and then employers finally hire the unemployed. While that is part of the story, workers being hired away from one employer by another is very significant–more significant.
The pace of new hires is very important. In 2008 and 2009, new hires dropped significantly. While there was plenty of hiring–3.5 million a month–that is a lot less than 5 million. During the year or two when it was worst, something like 70 million people were hired. But these days more than 100 million people would be hired over a similar period of time. That makes a big difference.
As mentioned above, layoffs jumped up too–close to the number of hires. But the rest of the story is that quits dropped off tremendously, to less than 2 million per month. Why? Most likely because firms were hiring less, and that mostly means hiring fewer people away from other employers. Current employees quit less often since there are fewer new, better job to take.
When labor demand is strong and growing, wages rise from employees switching employers. When labor demand is weak and there are few hires, then wages stagnate.