Reuters
If you want to understand why the United Auto Workers union has evidently won its strikes against Detroit’s Big Three, it helps to return to the work of a 20th-century economist named Richard Lester.
Lester, a longtime Princeton professor, coined a phrase to describe wage negotiations between an employer and a worker: the “range of indeterminacy.” It captures the fact that wages are not a reflection simply of market forces, like a worker’s productivity or a company’s profits. In the real world, similar workers often earn different wages. Their wages fall somewhere in Lester’s range of indeterminacy.
Why? Most workers don’t know exactly how valuable their contributions are and therefore what their true market wage should be.
Company executives typically don’t know either, but the executives do have more information — about how much money different workers make and how productive each is. Employers also have more leverage. Companies employ many workers, and losing one of them is usually manageable. For most workers, by contrast, quitting over a pay dispute can create financial hardship.
For these reasons, workers’ pay often settles at the low end of the range of indeterminacy. In the relationship between an employer and an individual employee, the employer has more power. But there is an important adjective in that previous sentence: individual.
When employees band together, they can reduce the power imbalance. They can share information with one another and exert some leverage of their own on the bargaining process. A business that can afford to lose one worker over a pay dispute may not be able to lose dozens.
Of course, there is a term for a group of workers who come together to increase their bargaining power: a labor union.