The Bargaining Theory—The Modern Idea

The Bargaining Theory—The Modern Idea, Bargaining Theories

Also implied in Smith's The Wealth of Nations was the pos­sibility of a bargaining theory of wages. His statement of the em­ployer's advantage in bargaining as against the employee's disadvantage sounds extremely modern. He also noted the great variation in wage rates from community to community and from occupation to occupation. Likewise W. T. Thornton took into account the adverse bargaining condition of wage-earners. John Davidson and Maurice Dobb, American economists writing in 1898 and 1938 respectively, became dissatisfied with previous theories which tried to isolate one single determinant of wages, and they contended that a variety of factors influence wages not at all equally or consistently. Furthermore, there was competition among the various claimants for the larger shares in the total product. The limits within which bargaining can take place are a maximum at the top beyond which the employer cannot stay in business, and a minimum below which the employee will not work. A great many factors will determine the point, within these limits, at which an agreement will be made—not the least of which is the organized bargaining power of the employer and employee.

The chief criticisms of this hypothesis are: First, that the theory really begs the question. For, what really determines the limits of the employer's and employee's power? It might easily be sub­sistence modified by custom on the one hand and the sum of the claims of rent, interest, and profits on the other. Secondly, the theory seems to have its real application in organized industries, which actually account for a minority of employees and in­dustries.