Sidney and Beatrice Webb's Institutional Theory of Labor Markets and Wage Determination

Sydney and Beatrice Webb were among the most influential institutional labor economists of the pre-World War II period yet this portion of their work has fallen out of sight for more than a half-century. This paper reconstructs the Webbs' theory of labor markets and wage determination and explains how it differs from the rival neoclassical labor theory of Alfred Marshall. Key institutional components of their theory are developed, such as rent theory, institutional pyramid, chain of bargains, inequality of bargaining power, unemployed residuum, and common rule. The Webbs' theory is then used to explain the operation of labor markets and why in the absence of regulation they generate numerous social problems, including widespread poverty wages, excessive work hours and injuries, substantial unemployment, and human capital exploitation. Also described is the set of labor policies the Webbs advocate to solve these problems. Implications for modern labor theory and policy are developed.