I am currently teaching my students the standard theory of how wage rates are determined in a market economy.
Whenever I teach this theory, I have a serious unease that I am teaching right-wing dogma. It all sounds plausible in theory but struggles under closer scrutiny. It is based on several unrealistic assumptions about the real world.
It assumes there is no power imbalance between employees and employers. It assumes that in all occupations there are many workers competing for jobs and many employers competing for workers. It also assumes firms are operating in competitive markets for their output. They are not making excessive profits and therefore cannot afford to pay their workers more.
This theory seems plausible at first glance. According to the theory, the employer must pay the worker a pay rate that reflects his or her productivity, otherwise the worker can easily find other employment with competing firms …