Mainstream Economists and the Price for Labor

Mainstream economics has had many theoretical and practical mistakes: Giffen goods and its reluctance to suppose all markets are perfectly competitive; they also overvalue ceteris paribus. However, the most prominent is the price of labor.

In mainstream economics, the price of labor (Salary) is assigned by the market forces: the invisible hand. On one side, labor supply is found in the hands of the workers. How many workers are willing to work for a certain payment. It, thus, creates a positive slopped curve of labor supply. On the other hand, employers decided how many workers to hire at each salary, and this creates a negative slopped curve of labor demand. One can equal these two functions and "magically" we find the salary for each worker in each profession. But, reality is different.

I do not pretend to discredit this theory, not even diminish its influence when setting salaries, but it is important to notice that salary is not in function of solely two variables. In the real world, even arbitrary facts define salary. For instance, the huge gap between the salaries of men workers and women workers. Even merit is not always the main variable to select a CEO. What about nepotism, blackmailing and opportunism? They play an important role in assigning salaries too.

Another important case that discredits this classical theory of price of labor is the role of unions. I do not pretend to play politics here, but unions exert some sort of pressure in employers to achieve higher salaries of their members.

This brings me to the most recent victory of unions. Walmart decided to inquire the minimum wage of thousands of its employers; from 9 dollars to 10 dollars per hour. Although a dollar increase seems insignificant considering that California is going to rise its minimum wage during this year, the importance isn't the increase per se, but is meaning. This proofs that salaries are assigned by something else than an invisible hand. Unions, employers and people now know that salaries can be higher, and it is on their hands to change it.

Paul Krugman wrote for the New York Times an article title "the visible hand". It is basically what I've been writing here but more logical and with more authority. I hope you enjoy his article:

http://www.nytimes.com/2015/03/02/opinion/paul-krugman-walmarts-visible-hand.html?_r=0