‘Exit, Voice, and Loyalty’ in the Labor Market

29 Oct 2017 9:10 AM | Mike Lillich (Administrator)

By Oren Levin-Waldman

First published online in the Yonkers Tribune

In his famous treatise Exit, Voice, and Loyalty, Albert O. Hirschman discussed the options that consumers had in the face of deteriorating quality of goods. Of course, they could remain loyal and continue to buy these goods. But they could also express their displeasure through voice in the hopes that producers would respond by improving their quality. As a last resort in response to a non-responsive producer, they could exit whereby they would purchase from somebody else.

These alternative actions clearly have application in the labor market and help us to understand why they really cannot function without wage floors. First of all, let’s consider the neoclassical assumption that employers and workers freely negotiate over wages and working conditions. Each is assumed to be equal in bargaining power, which is why workers when they are dissatisfied are always free to walk away.

The question, then, is what happens in the face of deteriorating working conditions and declining wages? The first option is for workers to remain loyal to their employers in the hope that both will improve. In the real world where it is understood that there is an asymmetrical power imbalance between workers and their employers, loyalty may be the only option, particularly for low-skilled workers in a labor market where there are few opportunities.

Loyalty, then, does not mean what it is conventionally assumed to mean; rather workers are loyal because they have no other choice. They are essentially prisoners to their employers and are subject to exploitation because neither voice nor exit is an option. The only negotiation on the part of the worker is to either accept or reject, whereby rejection may be tantamount to starving. How would they be able to acquire voice, and just what would voice look like?

Voice in the labor market might be seen as a situation whereby workers are able to seriously negotiate their pay and working conditions as true equals. But the only way to do that in the real world would be for them to negotiate collectively as part of a collective bargaining unit. Workers, in other words, acquire voice through unionization, which is historically how low skilled workers acquired voice.

If workers are organized they can exercise exit through the strike mechanism, which, of course, is a mechanism that only strengthens voice. Low-skilled workers cannot really exercise the exit option because there are few opportunities, and hence no place to go. Skilled workers in a market where there is a high demand for skilled labor by contrast can more easily exercise the exit option. If they become dissatisfied with their working conditions or wages, they can pick up and go elsewhere. That they can even threaten to do so in and of itself gives them a degree of voice that low-skilled workers simply don’t have.

Neoclassical economists might respond that low-skilled workers always have the option of exit when their working conditions become exploitive. Moreover, they also can seek training in order to acquire the type of skills that will really enable them to exercise their exit option. And yet, if they cannot afford the necessary training, or they simply do not have the natural endowments that would enable them to develop, they are left with no choice but to continue barely subsisting in the low-wage economy.

Given the realities of the low-wage labor market, there are perhaps two paths open to them. Unions could attempt to organize low-wage service workers on an industry-wide basis so that exercising the exit option (striking) would truly give them voice. If all workers in say the fast food industry went out on strike, as opposed to a couple of stores, employers might be forced to take notice.

Organizing low-wage service workers might be difficult because low-wage workers fearing retribution might be reluctant to join. Walmart, for example, is well known for closing down entire stores in response to unionization efforts, thereby making it even more difficult in other stores. Moreover, low-wage workers may be reluctant to exercise an exit option because striking is more costly to them. Already earning barely subsistence wages, losing wages during a strike becomes even more expensive.

Of course, low-wage workers could be afforded a measure of voice through a wage floor. By creating a floor beneath which employers cannot pay them, they are given a degree of monopoly power. Voice may be achieved when workers feel that they are in a position to freely negotiate with their employers. But voice might also be achieved when workers feel more confident because they behave more autonomously, which has only been possible because higher wages indeed enabled them to be more autonomous.

A wage floor can certainly afford low-wage workers greater voice to the degree that earning a more liveable wage will enable them to be more autonomous. Just feeling better about themselves because higher wages will contribute to their self-esteem can go a long way towards making them more autonomous. A wage floor, however, does not necessarily afford them exit. Although they can always technically exit for other jobs, what awaits them will still be in the low-wage labor market.

It is possible, however, that a wage floor that is sufficiently high, such as $15.00 an hour, for instance, might increase their exit options. Though other jobs out there would only be paying the same $15.00 an hour, they might be more likely to exercise that option, especially in the face of otherwise exploitive working conditions.

What of the employer? We have already said that low-wage workers don’t have real loyalty to their employers; rather their loyalty is only a function of their fear of losing their jobs. Employers do have the ability to build loyalty among their workers by paying them efficiency wages — wages that make workers want to stay. A sufficiently high wage floor could be conceived of as an efficiency wage and could go a long way to enabling them to exercise exit, in which case they will achieve greater voice.

A good labor market where there would not be domination is one where workers will enjoy voice. In an economy where labor market institutions, most notably unions, continue to decline, wage floors may be the only means by which workers can be afforded a degree of voice. Of course, a more expansive one like a universal basic income, whereby low-skilled workers would no longer have to work unless they wanted to, would offer even more voice because it enables them to exercise exit. In the face of these options, employers might in turn find that they have no choice but to build loyalty.

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