Explain each of the following phenomena using the invisible hand or social or political forces:

a. Firms often pay higher than market wages.

This is an example of a failure of the invisible hand. These firms are X-inefficient and can only stay in business if they are a monopsony or a bilateral monopoly.This is an example of how political forces, such as comparable worth laws, affect the wages that firms pay. Comparable worth laws lead to higher inefficient wages and are therefore a hindrance to the invisible hand.This is an example of social forces modifying the result of the invisible hand. Firms pay above-market wages because they want to establish close personal ties with their workers. Doing so can lead employees to work at maximum efficiency, and the gain in efficiency may exceed the additional cost. If so, it is known as an efficiency wage.This is an example of how labor unions, which have become more prominent in the United States over the past three decades, are a strong political force. They use their power to demand efficiency wages for their members, leading to higher wages than under a simple invisible hand.

b. Wages don't fluctuate much as unemployment rises.

This is an example of how the invisible hand is altered to arrive at derived demand. In the derived demand model, wages only change when marginal factor costs change, not when unemployment fluctuates.This is an example of how labor unions, which have become more prominent in the United States over the past three decades, are a strong political force. They use their power to keep firms from lowering wages during periods of higher unemployment.This is an example of a failure of the invisible hand. These firms are X-inefficient and can only stay in business if they are a monopsony or a bilateral monopoly.This is an example of social and political forces modifying the result of the invisible hand. Firms do not change wage rates much when demand fluctuates, both to keep good social relations with workers and, in some instances, to avoid violating contracts that determine wage rates.

c. Pay among faculty in various disciplines at colleges does not vary much although market conditions among disciplines vary significantly.

This is an example of the failure of the invisible hand. Because they are non-profits, colleges are X-inefficient and only remain financially viable because of huge government grants that come from taxes.This is an example of social forces modifying the result of the invisible hand. Colleges keep wages of various disciplines roughly equal to keep good social relations with faculty so that the faculty does not fight about issues of fairness.This is an example of efficiency wages. Colleges pay higher wages than they would in a pure supply/demand model in order to make sure that good professors do not leave to go to other institutions.This is an example of the negative influence of comparable worth laws. Such political forces force colleges to pay inefficient wages, which leaves less revenue to provide other important services to students.