The Problem of the Backward-Bending Supply Curve of Labour


Dr. Nicholas Partyka I Labor Issues I Analysis I February 12th, 2015



The backward bending supply curve of labour is a phenomenon well known to economists. This curve models a situation where workers choose to substitute leisure time for work time, ie. wages, thus reducing the pool of labour available. Let us think through this "problem", and consider in what sense, and for whom, it is problematic. Why indeed should there not exist a backward bending supply curve for labour, especially if capitalism allows for workers to truly improve their station in life? If workers are empowered, and achieve a certain level of material independence, and can thus make their own decisions about how to allocate their time, they will strike a balance between consumption of leisure time and labour time. The problem is that the balance of these that is optimal for the worker will likely be sub-optimal for capitalists, in that it reduces the supply of wage-labour for sale on the market. A glut of supply of labour-power on the market is what enables the capitalist to control bargaining with workers, and thus also to control the product of labour. Control over workers' labour, and the product of that labour is the foundation of capitalists' surpluses.

In the traditional supply & demand model of a competitive market the supply of any commodity, be it wheat, snow tires, nuclear bombs, or labour-power, should increase as the price of it increases. If there is a large degree of aggregate demand for some good or service, the ensuing volume of business for the existing firms will bid up the price of that good or service. The more money being made by firms in this market should attract new firms, also hungry for profits, into this market. New firms should be attracted to this new industry until the combined output of all the firms meets the level of aggregate demand in the community, and prices then stabilize, ie. reach their competitive equilibrium position. When the total combined output of the industry outstrips the level of aggregate demand in the community, then the glut of output over demand will lead producers to bid-down the sale price of their particular good or service.

For workers this same story implies much tumult and insecurity. As demand rises for the good or service in question, existing firms expand production and new firms attempt to enter the market, and both scramble to hire workers, whose labour-power will animate their entrepreneurial designs. As firms compete among themselves for workers, they bid-up the price of labour-power, ie. the wage rate. However, the reverse happens when the productive output of the whole industry exceeds the level of aggregate demand in the community, firms seek to shed workers whose productive energy is no longer required given the lowered level of output of the firm. As the price for their product drops, producers restrict output to match the new level of aggregate demand. The increasing scarcity of jobs works to bid-down the price of labour, that is, the wage rate. The surplus of supply of labour over demand for it results in a declining rate of wages.

In the traditional picture, workers' pay rate can move up with a higher equilibrium positions, and it can move down with a lower equilibrium position, and these oscillations in the price of labour move in line with the business cycle. However they move, up or down, the supply curve in the traditional model remains a linear progression; just as it is for every other commodity in the market. This implies that workers act on their "rational" market incentives and their budget constraint in making their decisions about employment and their labour-leisure tradeoff. This is to say, that workers choose to supply more hours of labour-power as the price of labour-power rises. This requires, moreover, that workers act this way regardless of the particular moment in the business cycle. Yet, when the business cycle is in the upswing, when wages are increasing relative to the price level, workers are most likely to want to substitute consumption of leisure for labour. And conversely, when the business cycle is in its down-swing, workers are likely to supply many many more hours of labour than can be profitably consumed by capitalist entrepreneurs.

The situation modeled by the backward bending supply curve for labour is one in which workers choose to reduce their "consumption" of labour time and increase their consumption of leisure time, that is all time not devoted to laboring for wage remuneration. Indeed, in a market economy dominated by wage labour, one can understand the choice to work for wages as basically the same as the choice to consume labour time. What this situation entails is one in which worker's wages are increasing in real terms, ie. their actual purchasing power is increasing. Workers are thus getting richer in the sense that they can either maintain their current standard of living for less money, and save the surplus. Or, they can get richer by using the increasing value of their wage remuneration to increase their present level of consumption, either by consuming more expensive versions of products they already consume, or increasing the range of products they consume. This situation is thus one in which quality of life, and/or standard of living, is increasing for workers. In the context of an economy in which the value of workers' wages are rising workers will choose at a certain point to work less, and consume more leisure.

Though workers desire to do many things with their lives, they can only legally access these things by exchanging cash (and now increasingly credit) payment for them, and acquiring cash implies working for wages. Though workers would rather spend more time with their families, ie. not working for wages, because they love their families very much, or they detest their work conditions very much, they must continue to trade their labour-power for wages. The structure of an economy based on free wage-labour inherently attaches a "cost" to not working. One must sleep; it is an essential activity, if one may call it that, in reproducing one's labour-power. But, in pure economic terms, sleeping has a cost. This cost to the worker is whatever the total amount one would have earned if one had worked at the prevailing wage rate in a particular industry for as many hours as one slumbers. This is, again in economic terms, a type of loss to the worker. The same goes to time devoted not to wage remuneration, but to the social reproduction of the individual and his/her family. Economically speaking, this time is also "lost" because it prevents one from doing what is in their interest, ie. earning wages. Living one's life, the ostensible reason most individuals work in the first place, costs money under capitalism.

This situation is a result of the fundamental monetization of time under capitalism. The structure of opportunity costs, and the constant presence of scarcity and uncertainty, incentivizes workers to work more than they would ideally prefer. That is, workers might prefer to work fewer hours if they were not forced to obtain the means of subsistence through monetary transactions, the means for which one can get only through "voluntarily" selling one's labor-power for wages, or by living on the charity and benevolence of willing others.

When workers are getting wealthier, when the economy is working for workers, when it empowers them to make decisions based on their own needs and situation and not on the need to earn remuneration to reproduce one's own existence, they will choose to supply less labour once a certain threshold of wealth is passed. Workers' rising wages relative to prices enables them to make a choice trading off consuming more, and or working less. One of the ways that workers will choose to increase their consumption is through increased leisure, ie. non-work time, since as we saw all time in monetized under capitalism. This increased "leisure" time, as mentioned above, may not necessarily be what one immediately conceives on when one hears the word 'leisure'.

This time spent not working is likely, at least for the majority of workers, to be occupied with activities related to reproduction; eg. laundry, cooking, care giving, sleep, medical care, et cetera. With some combination of increased material consumption and leisure time most workers lives could very reasonably be said to be improved. If one had more and/or better quality goods, as well as more time to both do necessary work related to social reproduction as well as some potential 'free time' in which to indulge in hobbies, or relaxation. This increased leisure time amounts to the increased ability of workers - of the persons that workers are in reality, in addition to aspects of the apparatus of production- to live their lives, to be and become the people they want to be, and to have and to cultivate relationships of their choosing.


The Problem of the Backward-Bending Supply Curve for Labour

How is this scenario a problem? From the above it might seem like there is no problem here. Workers getting wealthier, and living lives in which more of their time is their own seems like a very desirable situation. And indeed it is, for workers, for most people in society. However, this is indeed a problem, and a big one, for the capitalist class. Above the threshold at which workers chose to substitute more leisure for labour there is less labour supplied overall. A smaller labour pool shrinks the labour market. A labour market with less labour to offer tilts the balance of power inherent to supply/demand based relations in favor of suppliers of labour, that is workers.

Those workers remaining in the labour market receive increased bargaining power relative to employers. This increased bargaining power puts employers in a position to have to compete against each other for the remaining labourers. This competition bids up the price of labour, ie. the level of wages. Or, as may also be the case, keep wages hovering around a relatively high level, a level which enables workers to save, and maintain the real value of those savings. This situation is problematic for the capitalist class, the employers, because the increased price of labour erodes the profit margin of the employer. A lower rate of exploitation reduces the level of profit received by the employer. It is not necessarily the case that the increased cost due to higher wages will lead a particular industry to collapse from being uneconomically inefficient. In some situations a reduction in profit might be unpalatable to the capitalist, but nonetheless something that would not ruin the industry. This loss of some profit is very likely in most cases to not lead the enterprise to be to no longer be productive or worthwhile on the whole.

This situation, which is unfavorable to the capitalist class, is forestalled by the devious tactics of the ruling capitalist class. These are explained by economists with technical sounding explanations that do little more than obfuscate the economic reality. "Wage pull" inflation is a concept well-known to economists. What this claims is that the price level will rise because wages have risen. When workers make more money in real (not just nominal) terms, firms respond by increasing the price of their products, thus eroding the real gains made by workers. What is going on here then? Noticing that certain economic actors, ie. workers, have increased purchasing power firms respond by charging more for their products. Increased purchasing power for workers will lead to increased consumption, which in turn will lead to increased prices. An increase in demand in the market signals to producers that they can 'afford' to charge more since the level of demand in the market will bear an increase. Of course, one must concede that different markets will function differently due to factors like elasticity of demand, among others.

Inflation dilutes the value in real terms of the increase in workers' wages. This helps the capitalist class keep the supply curve for labour from bending backwards. This is a boon for the capitalist class since a larger pool of labour means more competition among labourers for existing jobs, and hence a declining wage rate. A declining share of production costs going to labour increase the profit margin of the producer. This is of course directly in the interest of the capitalist class. As the wage rate dips further and further, more and more labour-power is thrown onto the market as workers, aware of the scarcity of employment, vie ever more aggressively for the few opportunities that arise. The supply curve for labour is straightened in this way by the force of economic compulsion.

Given the relative levels of consumption and standard of living in the society and economy in question, the level of wages at which a majority of people could reproduce themselves and their families will vary. We should expect that where laboring conditions are low, where workers labour for the private benefit of others, ie. the capitalist class, that workers will begin to substitute leisure for labour at the earliest possible opportunity. Under conditions of alienated labour we should expect workers to choose not to labour as soon as they can afford materially to do so. By diluting the value of saving through inflation, which is normal during the upswing in the business cycle, the capitalist class works to keep the supply curve for labour for bending backwards.

In the case of the backward bending supply curve of labour, what we can see is that in a situation in which workers are economically empowered, ie. materially liberated, to make free choices about their time, they will choose to not consume any more alienated labour than is necessary for the reproduction of their desired level of material consumption. This is telling considering that as the price of labour increases, so too do the opportunity costs of not working. The higher the wage rate, the more value one foregoes in deciding not to work for wages. Leisure time becomes more expensive in this sense as the wage rate increases. That workers would continue to buy increasingly expensive leisure time testifies to the aversion workers have to their workplaces, and the way they are organized. I have discussed the way the typical capitalist firm is organized in another article for The Hampton Institute.

One of the main assumptions of most capitalist economic models is that workers choose their hours. Free employment or free labour is one of the most essential conditions for defining the nature of the competitive market. Workers in capitalist economies are technically free to dispose of the commodity they possess, ie. labour-power, in whatever way they find most conducive to their individual advantage. When workers actually have this choice what we see is a rejection of the conditions of labour in the form of a decreased supply of labour. What devices like wage pull inflation serve to do is help to create and recreate a situation in which workers never attain the material bases of the freedom to make a free choice about how much time to devote to labour versus leisure.

Now we can see the answer to an old question, Why do workers continue to work in conditions they would never consent to if they bargained with employers like equals? The brief answer is that they're forced to. First, they do not at all bargain with employers as equals. Second, the monetization of time in a system based on exchange, as well as the dominance of wage-labour as the form of work makes reproduction costly in terms of one's time. And third, producer-initiated market dynamics straighten out the supply curve for labour by preventing accumulation in real terms by the working class. In this way, among others, workers are forced to submit to working conditions that are unsafe, unhealthy, inhumane, or degrading.

What this shows us is that there is indeed little free about "free labour" in the history of capitalism.


Emergence of a Market for Labour-Power

The development of a labour market has an inherently historical aspect, in that a ready pool of labour power that is available for purchase did not always exist, and hence had to be created. As Polanyi asserts, "No market economy was conceivable that did not include a market for labor". [i] We saw in the case of feudalism, that large quantities of labour-power were not readily available for entrepreneurs because of the pervasiveness of social obligations, combined with an economy centered around more or less self-sustaining socio-economic units. It was necessary then, that a transformation take place as a result of which emerged a class of labourers unattached to the land, and possessing only their labour-power, and this could only occur over time. The pace of this historical process of labour market formation was marked by uneven development across physical regions as well as in time.

The transformation of society from feudalism to that of the market was long and turbulent. Traditional modes of social organization were undermined by state intervention designed to help unleash the productive, capacities of the implements of production. [ii] This is specifically the case with the main means of production, land, labour, and capital. As Heilbroner observes, the rise to dominance of market relationships "hinges on the appearance of a class of workers who are dependent for their livelihood on access to the tools and land that can legally be denied to them by their owners".[iii] So it was that peasants' traditional privileges, regarding access to the commons, were increasingly restricted and eventually abolished entirely. While at the same time, large landowners were transitioning away from the peasant self-production model and toward larger scale production. This required large amounts of formally free labourers, and more importantly their labour-power, to be available for hire.

The Enclosure movements in England in the 18th and 19th centuries, progressive consolidation of landholdings in the hands of a wealthy elite, was also a process of excluding precisely such labourers from access to the means of production, forcing them to seek remuneration which could subsequently be turned into the means of subsistence. This process of exclusion and consolidation destroyed the traditional ways of life of large sections of the population. The destruction of these traditional patterns of social reproduction was thus coextensive with the process of labour market formation. This process culminated with the establishment of a modern labour market in England in 1834. [iv]

This process of expropriation was successful, in the main, because of government intervention in society and the economy. [v] Governments secure the fundamental pre-conditions of market activity, e.g. legal enforcement of the system of property rights, building and maintaining infrastructure that facilitates commercial economic activity, among other functions. Governments, as agents in civil society, historically achieved, and then deployed a social apparatus based on a monopoly on the coercive use of force. This enabled governments to play the central role in securing and maintaining the basic social conditions necessary for the market pattern to be the dominant mode of production.[vi]

The individual worker faces a redoubtable situation bargaining with employers over acquiring a remunerative position, salary, and work conditions. This is, in the first instance, because one is required, in a capitalist market economy, to use money to legally obtain the things one wants and needs; including importantly the very means of subsistence.[vii] This applies also to things wanted or needed by family members, or other loved ones, who may not be able to obtain wage remuneration. One is also forced, in a market economy, to find employment which pays wages in order to obtain the money needed for satisfying one's needs and hopefully some portion of one's desires. [viii] The very nature of a market economy forces those who don't own enough capital to trade to meet their basic needs to seek wages in return for the one valuable commodity one always possesses, i.e. labour-power.

The kinds of communal subsistence production that dominated among European peasants, as well as the poor in many places of the world today, are no longer viable options for denizens of more advanced industrial economies. Cutting the masses of poor people off from these bases of production is exactly what characterized the processes of urbanization and proletarianization that occurred in western industrialized nations during their industrial revolutions.[ix] Former peasants were turned, sometimes violently, into industrial workers, disrupting the traditional flow of peasant life. However, this process was important for entrepreneurs, who needed a source of readily available labour-power for hire to combine with other elements of production in their pursuit of profit.


Enforced Competition among the Working Class

In addition to finding themselves constrained by the nature of a market economy, workers find themselves in a position of mutual antagonism among themselves, because there is an enormous surfeit of labourers over and above the remunerative positions currently available in the economy. [x] This dynamic has increasingly characterized industrialized nations since at least the middle of the nineteenth century. The abundance of the supply of labour-power over demand for it applies a downward pressure on workers' wage and benefit demands. This means that workers as a class are highly vulnerable to employers.

The existence of an enormous reserve of unutilized, or underutilized, labour-power means that, in the employment contracting situation, workers will be forced to lower their reservation prices in regards to the level of wages and working conditions.[xi] Workers will do this for fear of losing out on a potential source of income to a more desperate worker willing to accept less in order to get something at all. Employers take advantage of this enormous surplus of labour-power to decrease wages, and exploit a vulnerability workers face primarily as a result of the creation of labour as a commodity.

In a market economy, capitalist employers are always competing with each other, and this reality quite naturally leads the entrepreneur to look to the site of production itself as a place to economize and attempt to out-compete his or her rivals. Employers' focus on the labour-process is thus the result of a systemic force in market economies. This is because the employer has all the appropriate rights and powers which due the owner of any legal property in a market economy. Since the entrepreneur is this common contracting agent, he or she becomes responsible for organizing the actual work that goes on during the production phase of the circuit of capital.

In a market economy, production begins with money, which buys the means of production, which then produces products that are sold, i.e. turned into money.[xii] This means that each competitor in a market has an interest in finding ways to reduce costs wherever possible. One of the first ways that efficiencies of this type are pursued is to contrive machines that replace human labour, or make human labour more productive. The fact of inter-capitalist competition also means that innovations of this sort are likely to be diffused widely throughout a particular industry as competitors adopt, or even steal, the innovation in order to avoid being left behind. The effect of these technologies is often to reduce the need for human labour, which is or can be expensive. Even when labour is not expensive, it always constitutes a savings to the firm to spend less on labour, and hence there is a strong systemic force pushing firms toward automation where feasible. The reduction in the need for labour-power also has an advantageous consequence for the firm, in that any increase in the amount of surplus labour-power available only further depresses wages as inter-worker competition correspondingly increases.


Inequality

Further compounding this problematic situation are the "prior distributions" of wealth the parties to the potential employment contract bring to the contracting situation.[xiii] As a result of structure of the distribution of wealth and resources prior to a specific transaction, employers enjoy a special advantage when bargaining with workers on employment contracts. This is the idea of "threat advantage" that Alan Wertheimer discusses.[xiv] In real life, there comes a point at which material necessity presses up against the weaker party and forces that party to either die or capitulate.[xv] In a capitalist labour market, both employer and worker know that labourers will be the ones that must eventually relent. Individual workers face homelessness and starvation without wages, and it is precisely this threat that forces the class of labourers to seek wage remuneration for their labour-power from employers as a class. This is the condition of vulnerability that characterizes labourers as a class.

Employers are able to achieve sometimes extremely large profits because they are able to control the workplace, and with it the labour process. Employers obtain this control through the terms of the employment contract they make with workers. The content of the employment relationship is what is being bargained about in the contracting situation. Employers take advantage the vulnerability of workers in the labour market to make employment contracts in which they acquire the control needed to generate a profit.[xvi] The structure of a market economy, the existence of a reserve army of unemployed persons, and persistent basic needs all conspire to undermine to bargaining position of workers relative to employers in the labour market, and thus the employment contracting situation that occur within it.

As a result, individual employers, as well as employers as a class, possess a credible threat of exit from the contracting situation. The worker seeking employment, in most cases, possesses no similarly credible threat. This is because the worker most likely does not possess the means to physically subsist until a more favorable contract can be struck. Because the employer can credibly hold out longer, she obtains a superior bargaining position, and can thence make a contract more favorable to her own interests than to the workers'.

This superior bargaining position of employers is only enhanced by the differential mobility of capital and labour. In a market economy, especially with developed credit and banking systems, capital can much more easily be moved across great distances than can labour. The threat advantage of employers is thus bolstered by the credible threat to relocate their capital, and or their productive business enterprises. This is an instance of employers using inter-worker competition to leverage a more advantageous deal with labourers by pitting geographically dispersed pools of labour-power against each other. Given the often limited ability of labour to move to new locations, where employment is more abundant, workers are further pressured into making employment contracts they would otherwise reject because their access to the means of subsistence, and perhaps that of their families as well, is at stake.

Threatened with loss of access to the very means of subsistence, workers are routinely forced to accept wage levels and work conditions that they would otherwise very likely judge inadequate, or even totally unacceptable. The employer as owner also has the ability, as a last recourse, to choose to not employ any of her assets productively at all. The owner, given the market capitalist conception of the right of ownership, is perfectly within his rights to shut his business down, if the local labour force expects too high a level of either wages or work conditions.


Conclusion

The power asymmetry between employer and worker artificially alters the structure of reservation prices to the workers detriment by forcing the worker to lower, often very substantially, his or her reservation price as regards wages and work conditions in the employment contracting situation. This power asymmetry enables employers to offer workers a lower level of wages, work conditions, and control over labour or the product of it than the latter would likely be inclined accept in a labour market situation where the structure of worker's reservation prices more accurately reflected their actual preferences.

So we can see now that the notion of free wage labour in capitalism is a myth. There has never been much free about the freedom of the wage labourer in capitalism. Force has been applied to the worker at almost every stage so that he or she must continue to need to consume many hours of labour. Only by creating a situation in which workers have to be willing to consume a great many hours of wage work can the capitalist class maintain the kind of competition between workers than puts downward pressure on wages, and thus upward pressure on profits. As we saw technological innovation is one key driver of the creation and expansion of the reserve army of labour. The existence of a massive supply of unused but readily available labour-power is, and has been for some time, an important structural feature of our capitalist economy.



Notes



[i] Polanyi 2001, 81.

[ii] Examples of the kind of turbulence to be found in the transition of peasants into wage labourers can be found in Stephen Marglin's excellent article "What Do Bosses Do? The Origins and Functions of Hierarchy in Capitalist Production". Review of Radical Political Economics. Vol.6 (1974): 60-112. Also see Polanyi (2001).

[iii] Heilbroner 1986, 41.

[iv] This date of birth for the modern labour market comes from Polanyi (2001: 87).

[v] For an excellent discussion of the role of governments in creating and sustaining the conditions for successful markets see Neil Fligstein The Architecture of Markets. Princeton, Princeton University Press: 2001.

[vi] For a closer look at this historical process see Beaud, Michel. A History of Capitalism. 1981.Tr. Dickman, Tom & Anny Lefebvre. New York, Monthly Review Press: 2001. Also see Arrighi, Giovanni. The Long Twentieth Century. 1994. New York, Verso Press: 2006

[vii] This is of course lest one should find some way to persuade others to provide all one's essentials as free gifts.

[viii] Government sponsored welfare programs, and access to the means for subsistence farming, or independent wealth for example can effect whether or not and to what extent one must seek remunerative employment.

[ix] For an excellent discussion of this process in the context of experience of England see Thompson, E.P. The Making of the English Working Class. Vintage Books, 1963.

[x] This is sometimes not the case for bounded periods of time in specific industries in specific countries at specific times. On the macro-level, the persistence of unemployment in developed industrialized countries testifies to the permanent surplus of labour-power available over the demand of employers for it.

[xi] A "reservation price" is the lowest price at which the owner of commodity is willing to sell that commodity. In this case, the reservation price is the wage rate below which the worker would reject the offer of employment.

[xiii] We owe this terminology to Charles Lindblom (2001). He describes "prior distributions" as the pattern of ownership of valuable resources that obtains in society prior to, i.e. temporally before, any individual instance of bargaining between economic agents over a potential transaction. These 'prior distributions' are what specific economic agents bring to any particular transaction, and what helps define the bargaining situation between them.

[xiv] Wertheimer 1996, 67.

[xv] Or perhaps revolt.

[xvi] To see the link between employer control and their ability to produce benefits for themselves, i.e. profits, see Stephen Marglin's article in Review of Radical Political Economics. Vol.6 (1974): 60-112.