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Unions, wages & the H R Nicholls Society
Gerard Jackson
The principle reason why the right down here founders, particularly the H R Nicholls Society, when it comes to defending free labour markets is that it refuses to directly challenge the myth that unions can raise real wages for everyone. One is left with a sneaking feeling that the reason for not throwing down the gauntlet on this issue has more to do with ignorance than good manners.
Stuart Wood’s A wreath for Reith: we'll miss you (The Australian Financial Review, 26 March 2001) is a good example of what I mean. Wood writes at length on the benefits of labour market reforms and how they have raised productivity and real wages.
The problem with Wood's approach is that being purely descriptive it tells us nothing about what drives labour markets. He gave the distinct impression that free labour markets always drive up real wages. No competent economist ever made such a claim.
What an economist — at least a competent one — will tell you is that unhampered labour markets will always tend to clear. This obviously says nothing about the forces that raise real wages. Although this will evidently come as a surprise to Mr Wood, there is nothing incompatible about a free labour market accommodating a continuous fall in real wage rates.
In other words, in certain situations one can have falling real wages even as labour markets are continually clearing. Failure to grasp this fundamental point should automatically disqualify anyone from trying to write in a knowing fashion about labour markets. But as Mr Wood is a leading member of the HRNS (H. R. Nicholls Society), one should expect neither modesty nor, I’m sad to say, much in the way of economics.
The fundamental force behind rising real wages for everyone is capital accumulation. Without capital there is only mass destitution, the common lot of mankind before the advent of capitalism. It is capital that raised the value of labour’s marginal product, not unions.
It should be apparent that if the capital structure contracts or the labour supply exceeds the quantity of capital real wage rates must fall if persistent widespread unemployment is to be avoided. Therefore, in this situation free labour markets not only maintain full employment they also maintain payrolls. Any attempt by unions or governments to halt the slide in real wages without causing unemployment to rise will be utterly futile.
(It should be noted that the number of firms in existence is irrelevant to wage rates. This point needs to be raised as some are now arguing that it is the number of competing firms that put a floor under the price of labour. No it isn't — it's the capital structure).
This brings us to Mr Wood's claim about labour reforms raising productivity. Once again Mr Wood indicated that he had no genuine understanding of what had really happened here. Labour and capital are complementary factors. That is to say that capital goods have to be combined with labour services if they are to produce anything.
This means that mispricing factors leads to suboptimum combinations which lowers productivity. So any process that allows labour to be allocated according to the value of its services will raise productivity. But these productivity increases will eventually work themselves out unless additions are continuously made to the capital structures.
Therefore, though free labour markets are vital it needs to be understood that it is capital accumulation that is at the root of rising productivity. Another fact to which little attention is paid.
From this line of reasoning we can conclude that when unions or governments raise real wages above labour's market clearing values unemployment emerges. It is this fact that our self-appointed defenders of free labour markets should hammer home at every opportunity. And yet they don’t. Why?
It should take little economic understanding to realise that part of the union myth of raising real wages for everyone tacitly assumes the indeterminacy of wage rates. According to this there is a range of wage outcomes along the demand curve for labour (and it is clearly meant labour in general) where any increase in wage rates will not cause a rise in unemployment.
The figure to the left illustrates what such a demand curve would look like.
In this situation firms would have no choice but to compete against each other until wage rates were bid up to point A. In addition, our level of unemployment makes a mockery of any such union argument.
Finally, we must face the dismal fact that regardless of the HRNS's self-gratulatory annual love-ins it continually fails to come to grips with the fundamental fact that the union myth must be directly challenged with economic theory, not conference papers attacking labour laws and meddling judges, as self-satisfying as this may be.
So long as the myth prevails that unions are the principal cause of rising living standards damaging labour laws will always be with us.
Gerard Jackson is Brookes’ economics editor
BrookesNews.Com
Monday 7 May 2003
The points between A and B represent the indeterminate zone. However, even if such demand curves existed they would not justify union wage-raising activities. It is clear from the curves that any wage rate below point A would represent a pure profit to the firm.