So a thought-provoking new paper putting power centre stage is rightly making waves. It asks why managers’ earnings vary with the productivity of their firms, while lower earners’ pay is largely unaffected.
It’s because the former have power, rooted in their ability to “hold up” production via quitting. Hold-up power is where a worker’s role is essential and they have specific skills so replacing them will take time. A waiter is essential but only the chef has hold-up power, given that a replacement will take time to learn recipes. Where those conditions exist, more productive firms that have more to lose from being held up pay above-market rates to stop us leaving.
The authors rather ghoulishly examined which roles were likely to have hold-up power by observing the hit to Danish firms when individuals in different roles died. They fell most for a manager at a high-productivity firm, an involuntary sign of hold-up power.
Men are more likely to be in roles with hold-up power. This also explains why superstar firms such as Apple choose to pay above-market rates, increasing inequality. So power matters and is getting more attention in our economics. Now it just needs to feature in our economic policymaking.