Smith on Wages and Inequality
Smith analyzed the power dynamics between workers and employers with a clarity that surprised both free-market advocates and their critics.
The Asymmetry of Bargaining Power
Smith was remarkably clear-eyed about the power imbalance between workers and employers. In a famous passage, he observed that 'masters are always and everywhere in a sort of tacit, but constant and uniform combination, not to raise the wages of labour above their actual rate.' Employers, being fewer in number and legally permitted to collude, held structural advantages over workers, who were legally prohibited from organizing.
Smith noted that employers could hold out far longer in any wage dispute because they had accumulated wealth to fall back on, while workers who lost their wages for even a week faced destitution. The law, moreover, was stacked against workers: it prohibited workers' combinations (early unions) while ignoring employer collusion. Smith called this an obvious injustice.
