Competition is typically a topic which economists and non-economists have opposing views. Economists see it as a force which pushes firms to innovate, which contributes to keeping prices as low as possible and encourages people to give the best of themselves. Non-economists often put forward the fact that competition increases the volatility of markets and imposes additional pressure on workers.
I just found a study that will probably help reduce the gap between economists and non-economists. It dates from 2004 and its author, Marianne Bertrand , was entitled "From the invisible handshake to the invisible hand?". What does she mean by that?
A little theory: risk sharing between employer and employee
Imagine a perfectly competitive labor market. In this scenario unrealistic, there are a large number of employers and a large number of potential workers. Thus, a worker can take advantage of competition between firms. As long as we pay him a salary less than its actual productivity, another company's interest to offer him a salary slightly higher for the debauch. After all, a company has no reason not to take the opportunity to recruit someone who brings in more than what it costs. Therefore, in this fictional world, wages are always equal to the productivity of workers.
In practice, the productivity of an employee is not a fixed and invariant in time. The economic environment is changing very fast. The manpower needs as well. One type of jurisdiction may be sought at a very time T but abandoned by the same company at a time T +1. If wages were to be always equal to productivity, there are permanent changes. An employee could never predict how it would be paid next month.
For a company employing a large number of employees, it would not be very disturbing to adjust salaries every day (except for administrative costs that would entail). If the risk is spread a large number of workers, the law of large numbers shows that the risk will be relatively diluted with enterprise-wide *. In contrast, across the employee, the uncertainty is unbearable. The events following the attempted introduction of CPE show that many people hate working in an uncertain environment.
In economists' jargon, we say that the employee is more risk averse than the firm, because the variation of wages has a much bigger impact on him than on the company.
The consequence of this is that at the time of hire, the employer and the worker have an incentive to enter into an implicit contract. The employer will offer the following deal:
"Ok, I'll pay a little less than what you are worth, but in exchange, I can guarantee the stability of your salary."
is why some economists say the labor market is governed by an "invisible handshake" by an "invisible hand".
This implied contract is to transfer some risk to the employee's employer which I think you will agree, is more desirable.
What relationship with the competition ?
How competitive pressure disrupts the implicit contract
A firm that stabilizes the wages of its employees taking a risk. It will not reduce wages if economic conditions are unfavorable. In doing so, it runs the risk of being robbed market share from other firms with more flexible wage policies. Thus, increased the intensity of competition may jeopardize the firms that adopt a wage policy is too rigid and particularly those who spent an implied contract.
How do I know if this mechanism work in practice? The author tells us that if it does, we should observe the following phenomenon:
- When competition is less intensive, salaries are influenced by conditions at the time of hiring and vary little by on.
- When competition is intensive, salaries are relatively independent of the economic situation at the time of hire and depend mainly economic fluctuations.
To test this theory, it uses the variations in exchange rates (which affect the consumer prices of imported products and therefore the degree of competition) and look determine if these fluctuations wage policies.
And indeed, she found that when competition becomes more intense, wages become more sensitive to economic fluctuations and gain instability, which is detrimental to employees.
Typically, this study highlights a cost associated with the creative-destruction process that is often overlooked by economists in theoretical models. Typically, we teach by example, models of international trade by making a comparison between before and after the opening of borders. In the standard case, we conclude that the "total welfare" is greater after open borders. However, a strict minimum teacher must not only specify that some are winners and others losers but also that changes in the economic environment imply a cost for a non-negligible number of individuals as seen in this study.
* This analysis is not entirely accurate. The law of large numbers holds only if the variations in the productivity of individual employees are all independent. However, in practice, companies may suffer shocks that affect productivity of all employees at a time. For example, suppose that the company undergoes a demand shock that causes it to lower its prices. As each product is cheaper, all employees see their productivity drop if it is assessed by value. The simplified proof in the body of the ticket is simply to show that the risk is greater in scale than the employee's company-wide.
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