> In a free market you would be bidding up worker salaries to hire and retain the most efficient workers. Demand would often increase the price of labor and perhaps the output.

That's not necessarily true. You assume that demand for workers exceeds supply. That is true for some vertical skilled labor. The often unspoken truth is that most jobs are commodity positions and people can be interchanged (from a labor standpoint). There is no upward trajectory of salaries for those positions.