Labor market power from the Austrian perspective

Daniel Kuehn wrote a post about the effects of minimum wage laws in the context of market power and fixed costs. He presents the issue of market power as if it were unambiguous. I would like to raise a brief Austrian dissent.

The question of market power is probably one where the contrast between the mainstream and the Austrian approaches is starkest. From an Austrian standpoint there is no way to objectively measure the marginal product of an employee and compare it with the salary.

But a more important point is that there are strong dynamic mechanisms that will push employers toward paying employees in accordance with how much value they add, although of course this convergence isn’t going to be perfect. In particular, there is an opportunity for potential competitors to discover that certain employees are underpaid and to lure them away from their current employers. This will induce current employers to keep salaries close to the marginal product level.

Another mechanism arises from the fact that it is in entrepreneurs’ own interest to try to pay employees as close to the marginal product as possible because if they do not do that it will falsify their profit calculations.

Neither of the points I mentioned can be captured by mainstream models, no matter how sophisticated mathematically. And the upshot is that it is not at all clear that employers will exercise whatever the market power they might have in particular hiring transactions.

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