Introduction:
Labor Market as Ultimatum Game
In the standard neo-classical economics
that I was taught in college, labor contracts are assumed to be
negotiated between parties who have an equal ability to refuse the
terms of any proposed contract and walk away from the agreement.
Each party to the contract is also assumed to have the same amount of
information available to them; for instance, the working conditions
and the amount of surplus created by the production process. It
follows from these assumptions that each party to the labor contract
(i.e. the worker and the employer) will only agree to contracts which
provide each with the value of their contribution to the production
process. So long as there is competition among both employers and
employees, capitalists will not be able to exploit workers (by paying
them less than they are worth) and workers will not be able to
exploit capitalists (by demanding more than they contribute).
Of course, this description of the
labor market sounds patently absurd to anyone who has spent time
toiling in the low-wage sectors of our economy. The statement that
both parties to a labor contract have an equal ability to walk away
from the agreement recently elicited a well deserved guffaw from one
of my friends.
An alternative model of the labor
market is offered by scholars such as Prof. Ellen Dannin1,
who describe at-will employment as a “dictator game2”
in which the employer tells the worker the terms of the agreement and
the worker has no choice but to accept3.
While Dannin's description is closer to lived reality for most of
us, it too, like the neo-classical description above, fails to
capture the nuanced real-life interaction of employers and their
employees (at least, to this humble observer).
A better description can be had, I
think, by conceptualizing the labor market as a variety of ultimatum
game4.
In a standard ultimatum game, two players are given the task of
dividing a sum of money between them. The first player (the
'proposer') makes an offer to the second player (50/50, 60/40, 99/1,
etc) and the second player decides whether to accept or reject that
offer. If the second player accepts the offer both keep the amounts
agreed upon, but if the second player rejects the offer neither
receives anything. Usually, the game is only played once by any test
subject or pair of subjects and both players know what the stakes are
(that is, they know what the total amount being divided is). The
ultimatum game bears many resemblances to my experience working in
low-wage sectors (janitorial, retail sales, food service); however,
there are a number of tweaks that could be made to the standard
ultimatum game that would make it much more closely resemble what
people like myself face when we go out to look for a job.
First, and most obviously, the
ultimatum game is only played one time by any given individual in an
experiment, while employment negotiations are (for most of us) a
'repeated game.' Not only do workers seek employment at multiple
establishments and employers interview multiple job candidates, but
the 'ultimatum game' continues even after employment as workers and
employers negotiate for adjustments of wages, benefits and working
conditions/requirements. Besides being a repeated game, labor
contract negotiations also have distinct 'informational asymmetries.'
Workers and employers do not have the same amount of information
regarding what the actual value of the product or service that the
worker will be making or providing is; nor do they have equal
information regarding the relative share of revenue that labor is
responsible for creating. Workers and employers bargain for shares
of revenue created by the productive process, but only the employer
knows what that revenue actually is. Contrariwise, employers have no
way of knowing for sure ex ante what the individual characteristics
of an employee are, and therefore what their productivity will
actually turn out to be.
Another difference between the actual
labor market and the standard ultimatum game experiment is that
players in the ultimatum game do not suffer any personal economic
consequences if the game ends in refusal, both players simply walk
away in the same economic position that they were before. No one had
gained, but neither has anyone lost. In the real world, on the other
hand, people seeking employment are often in no position to refuse
any offer, however small. This is why my friend laughed at the
notion that workers and employers are on equal footing in negotiating
labor agreements and why Prof. Dannin has characterized the at-will
labor market as a dictator game. Different individual workers will
have differing degrees of ability to refuse low proposals, based on
things like their accumulated savings, strength of social and
familial 'safety nets,' relative slack or tightness in the labor
market, and their individual psychologies. Because these factors
(and many others) are unique to each individual 'player' in the labor
market ultimatum game, generalizations about workers abilities to
refuse proposals must be made with a great deal of caution. My
preference is to assume some sort of distribution of player's ability
to reject low offers, random or otherwise. I have tried to
encapsulate these realities into two concepts which I will explain in
more detail later: ability to refuse (ATR) and economic effects of
refusal (EER).
So, we might conceptualize the labor
market (or at least large portions of it) as a modified ultimatum
game; one in which players repeat the game indefinitely with multiple
other players in an environment of informational asymmetry, and in
which players experience differing consequences as a result of games
that end in refusal. It is on this basic conceptual framework that I
will build in what is to follow.
Differential Ability to Refuse
We start with the last difference between the standard ultimatum game
and real life that I mentioned above, i.e. that in the ultimatum game
neither party suffers economic consequences for a refusal to accept
the offer. The worst-case scenario for either player is that they
leave the experiment in exactly the same economic condition as when
they entered it. In real life, on the other hand, the refusal to
accept an offer of employment can have very real economic
consequences for the players involved. Failing to reach an
acceptable arrangement with another party in the labor market can
lead players to lose not only money, but homes, families and
self-respect as well.
I say “can” because the degree to which failing to accept an
offer (or failing to make an acceptable offer) will effect a
particular player is dependent on all sorts of things, many of which
are not susceptible to economic analysis, even of the rather “soft”
variety I am attempting here. We can, however, sketch the broad
outlines of what conditions, at least here in the United States, we
might expect to diminish or enhance a person's ability to refuse any
given offer (hereinafter, ATR). Strictly speaking, only workers
should have an ATR, since they are the ones who accept or refuse the
labor contract offered by the employer. However, we might also speak
of the employer's ATR as their ability to refuse to increase their
offers as a result of not finding any takers at their current offer
level. ATR then, for both employers and workers represents their
ability to wait for a better deal to come along.
Many
different variables, so to speak, go into an individual's ATR. The
one that we will be most concerned with here is the economic effects
on an individual of refusal to accept an offer or to make an
acceptable offer (hereinafter EER, economic effects of refusal). By
economic effects, I mean real effects on an individual's standard of
living and their ability to maintain that standard into the
foreseeable future. While we would expect an individual's EER to
have a relatively strong negative correlation to an individual's ATR,
even extremely high EERs can be overridden by other constituents of a
person's ATR. As a dramatic example, I offer the experience of my
homeless friend Dave (known to the transient community in Missoula,
MT as “Crazy Dave”). Dave used to work as a cook at a local
restaurant. The sheer quantity of food wasted by the establishment
became increasingly troubling to him until one day he decided that he
would rather live off the incredible waste of our society than
continue to contribute to it. He walked off the job and never looked
back (although he has done a fair bit of work since then, just not
paid work). For Dave, the economic effects of his refusal to accept
any
wage offered, dramatic as they were, were far outweighed by the
negative psychological effects that he experienced as a result of
acceptance. Most of us, however, do not posses David's ethical
rectitude, and so our ATR will likely largely reflect our EER.
As a general proposition, we might expect workers to have higher EERs
than employers, and low-wage workers have higher EERs than high-wage
workers. Labor market conditions will also differentially effect
players' EERs. A tight labor market (low unemployment) will tend
decrease EERs for workers, since the odds of finding another
at-least-as-good offer in a relatively short period of time will be
high. Coversely, tight labor markets will tend to increase EERs for
employers, since it will be relatively harder for them to find
additional players to make their offer to. However, this will only
be true for some employers, i.e. those that require a continual
stream of revenue to maintain their standard of living. Employers
with large personal fortunes may have an EER of zero, regardless of
labor market conditions; the same is true for wealthy workers.
Accumulated savings and assets are what largely determine a players'
EER, since they are what must substitute for an income or profit
stream in the absence of achieving a 'successful' ultimatum game
outcome (which is why we would expect EERs to be highest for poor
workers and lowest for rich employers).
One last thing that seems pertinent to this analysis is that workers
and employers face different 'transaction costs' in finding opponents
(or, perhaps, partners) with whom to repeat the labor market
ultimatum game. While workers generally must seek out potential
employers, employers can generally wait for potential employees to
come to them. For many low-wage employers, even the simple expedient
of a classified ad is unnecessary as unemployed workers will
regularly present themselves for consideration whether the business
is advertising a vacancy or not. The result is that these kinds of
transaction costs will tend to lower the ATRs of workers more than of
employers.
Having a high EER means having a low ATR, and having a low ATR means
that you will accept pretty much any offer that is made to you. If
your bank account is flirting with zero and rent is due in a week,
you are much more likely to accept wages and conditions that, in
other circumstances, you would not even consider. In the labor
market ultimatum game then, having a low ATR means being ripe for
exploitation. For all of the reasons stated above, it seems
reasonable to assume that, on the whole, a worker will have a lower
ATR than an employer in any given iteration of the labor market
ultimatum game.
Informational Asymmetries
In the standard version of the ultimatum game, both players are aware
of the full amount being divided. This informational symmetry has
obvious implications for the outcome of the game. If I am in the
position of player two, i.e. I have to decide whether to accept or
reject the offer, and I know that the ten dollars being offered to me
is only 10% of the total amount at stake, I may reject the offer to
punish my opponent/partner for their unfairness. However, if I am
offered the ten dollars without knowing the full amount in play, i.e.
without knowing whether my opponent/partner was given $20 or $1000 to
divide, I will be more likely to accept it, since I cannot judge the
“fairness” of the deal.
In the labor market ultimatum game, the total amount to be divided
between the employer and the employee is any revenue left over after
all of the non-labor operating expenses (inventory, rent, power,
licensing, etc.) have been covered. In general, employees and
potential employees can have only a weak grasp of what the total
amount in play actually is. Because the firm's accounting is not
usually made available to employees either before or after being
hired, employees are placed at a necessary disadvantage in wage
negotiation ultimatum games. Employers will always be able to claim
that “we can't afford” increases in wages or benefits and
employees will not be in a position to verify, much less gainsay,
these claims. The workplace taboo against employees discussing their
relative wage levels creates further informational asymmetries, as
only employers know what the total wage bill for the firm is, while
employees are left to speculate. In the absence of this taboo,
workers might be able to piece together some idea of the company's
overall accounting, but in it's presence this is almost impossible5.
The asymmetries also flow in the other direction, so to speak,
although to an apparently lesser degree. Employers, as noted above,
have no way of knowing ex ante whether
a worker will be more or less efficient than average. Having been on
a couple of hiring committees in my day, I know from experience: the
description of goods given in a job interview does not necessarily
have anything to do with the actual goods that will eventually be
delivered.
However, employers can mitigate this
problem, especially in low-wage jobs, through routinization and
automation; something the fast-food industry seems to have refined to
an exact science. Employers can also monitor the productivity of the
worker after hiring, which will be discussed below.
Looking
for a Job/Employee as Repeated Ultimatum Game
As
I said before, unlike the usual ultimatum game experiment, players in
the labor market ultimatum game play repeatedly, both with different
partners, while in the search mode, and with the same partner, after
hiring has occurred. The manner in which this repetition is
performed differs for employers and employees. While employees tend
to entertain employment offers sequentially (one at a time),
employers generally make their offers in batches, interviewing many
candidates for a position and selecting from a group of interested
individuals. This makes “comparison shopping” easier for
employers than for employees and thus serves as another advantage for
employers (although this might not be the case in a tight labor
market).
Another
disadvantage faced by employees is that difficulty in comparing
different wage and benefit packages (if one is lucky enough to have
multiple options). Suppose a worker is offered three jobs: one with
a relatively high wage but no health benefits and inconvenient hours,
a second with some health benefits but a lower wage, and a third with
an even lower wage but full health coverage and convenient hours.
How is the worker to estimate the relative values of the different
health plans, or determine how to weigh wages and benefits against
being available for family members, friends and children? It becomes
a matter of trying to compare apples with oranges, bananas and
pomegranates.
Employers,
however, do not face this conundrum, since they are the ones
structuring the offers. If an employer cannot find any takers for a
given wage and benefit package, they can simply increase the wage by
a given amount and try another iteration. Once again, we find that
informational asymmetries inherent in the structure of the game tend
to favor employers over employees.
Repeating
the Game After Acceptance
In a sense, the labor market ultimatum
game is continually repeated even after employer and employee have
reached a mutually acceptable division of revenue. This is true
because the effective offer from the employer goes down if pay-raises
do not keep pace with inflation, work requirements are increased ex
post, or rises in productivity are not reflected in wage and
benefit gains. Here again
we have informational asymmetries that favor the employer, since
workers do not have direct knowledge of the revenue created or their
overall contribution to it.
Conversely, an employer's effective
offer goes up if pay increases outstrip inflation, if workers
successfully “slack off,” or if workers can bargain for a greater
percentage of revenue (through unions, exploiting the value of their
personal experience to the firm, etc.).
In general though, it would seem that employers will be able to
get a better idea of a worker's productivity than the worker
him/herself, and thus ensure that the employee's remuneration never
exceeds their contribution to the value of the finished product or
service. Workers, however, have no direct way of observing their own
contribution to said value and thus no easy way of knowing what
percentage of the value they create that they are receiving.
Conclusion
The
labor market can be conceived of as a modified, repeated ultimatum
game between employers and employees. Most the of the divergences
between the real-life labor market and the idealized experiment,
serve to advantage employers and disadvantage employees. As a
result, in the labor market ultimatum game it's easier to get away
with under-paying than it is to get away with under-working.
1Professor
of Law, Wayne State University Law School
2https://en.wikipedia.org/wiki/Dictator_game
3https://papers.ssrn.com/sol3/papers.cfm?abstract_id=524382
4https://en.wikipedia.org/wiki/Ultimatum_game
5Some
of these asymmetries, of course, can be addressed through union
tactics in workplaces where workers are organized. Trade union
representation, however, seems to be decidedly on the decline and,
at any rate, cannot ameliorate all of the asymmetries and
disadvantages that workers face under the current, capitalist
arrangement.
