Unions, wages and labor surveys
Gerard Jackson
The present union push for a higher minimum wage brought me back to November 2001 when the media reported that a union sponsored study carried out by Dr Christina Cregan, a University of Melbourne lecturer, found extraordinarily low wages and long hours of work among textile outworkers.
Cregan even reported some workers earning 50 cents an hour and working 19 hours a day. Naturally, our journalists never asked themselves how anyone could continuously work for 114 hours a week with only one day off and still not end up in hospital. Nor did they ask who would be dumb enough to work for 50 cents an hour when they can claim social security, which pays vastly more and for no work.
(According to the Industry Commission: While piece rate payments equivalent to as low as $2 per hour have been reported in the media, it is thought that typical piece rates are currently equivalent to around $7 per hour .... it is believed that payments to homeworkers are often in cash and rarely declared as income for taxation or social security purposes).
Of course, we couldn't talk with most of these poor people because, according to Dr Cregan, they were too frightened to speak out. And how many were there of these exploited and frightened workers? About 330,000 according to the union. Funny that, because the Australian Bureau of Statistics put the figure at 7,000 for 1991 while for the same year the Australian Tax Office calculated that there were 50,000 outworkers. Again, none of these figures were mentioned by our media.
Of course, the natural outcome of this union sponsored study is a call for the Government to protect these workers against 'exploitation'. This amounts to calls for the government to impose union rates and conditions of work, the very same thing that creates sub-optimal employment. (This occurs when factors, usually labour, are priced out of their most valuable lines of production).
As Professor W. H. Hutt put it: "The 'Standard Rate' is essentially an excluding rate" (The Theory of Collective Bargaining). He went on to point out: "Every insistence on an artificially high rate will tend to reduce the number it will be profitable to employ." Well, if this is the case, why do unions moan about outworkers? Because they compete with unionised shops.
The union's claim for protection for these workers is a cynical attempt to destroy the competition that its own policies created, a point that did not escape Professor Hutt's scathing analytical eye: "They [the unions] can claim that they are raising the standard of living of the very ones whose competition they wish to eliminate, and even get the support of legal enactment to enable them to carry out their policy." And this was written in 1930. Some things just never change.
What is needed here is a little economic analysis. Frequent readers will recall that when writing about wages rates and employment I always stress that in a free market there exists the tendency for labour to be paid the full value of its marginal product.
Therefore, an exploitation argument must assume that these workers are being paid below market rates. However, former Democratic Senator Sid Spindler argued that garment manufacturers and retailers were using "their superior power to exploit outworkers" by paying them $2 - $3 an hour instead of the minimum rate of $12.
From this he concluded that employers are making $9 an hour profit per worker. Using these figures and Spindler's 'economic' approach we conclude that employers are making a clear profit of at least $162 per day per worker.
But Spindler's simpleminded argument overlooks the fact that profits are caused by maladjustments between supply and demand. When this happens factors of production become underpaid in relation to the value of their product because demand exceeds supply.
This generates economic forces that will eliminate the maladjustment, so long as the market is free. The emergence of profits induces competitors to enter the industry — and the clothing industry is very competitive — and increase output which in turn exerts a downward pressure on prices.
Obviously, the increased competition raises the demand for labour which exerts an upward pressure on wage rates. These two forces would eventually squeeze the profits out of the industry.
(The only way that profits could be squeezed out of the industry without wage rates rising is if the supply of labour was so abundant that it completely offset competitive pressure on wage rates. This means that wage rates would remain low even though profits had been competed away.
It also means that any attempt to legislate for higher wage rates would still generate unemployment in the industry as marginal workers were priced out of their jobs, perhaps to return as outworkers).
The fundamental question regarding outworkers is like the dog that didn't bark — no one heard it. This is because no one, including, Christina Cregan, asked: "Why are there so many outworkers?" Economic analysis provides the answer.
Where any type of factor, including labour, is overpriced a surplus will emerge. If, like labour, the factor is non-specific it will go into other lines of production at a lower price: In other words, sub-optimal employment jobs will be created. (In my opinion, this explains why Australia did not create any net full-time jobs during the 1990s).
Therefore, pricing these people out of work forced them into lower-paying occupations, hence forcing down their wages rates. The other effect of this employment shift is to cause more marginal companies to emerge in these areas of production as wages rates fall.
I believe this is what has really happened. But to direct our attention to the real cause of the problem would be to put a spotlight on our anti-social wage-fixing laws — something that our unions and their mates in the Fair Wear organisation certainly will never do.
Now Pamela Curr (Fair Wear coordinator) claimed that those who oppose the union's employment proposals are condemning these workers "to continued exploitation [and it's] an act of unmitigated bastardry." I'd be the first to agree that there is certainly exploitation and bastardry afoot — and it's the sanctimonious likes of Curr and her union mates who have created it.
Outworkers are not the victims of callous market forces and greedy capitalists. They are the victims of callous ideologically motivated economic illiterates.
It seems the union's study was a response to the Institute of Public Affair's study (Why Has the Arse Fallen Out of the Clothing Manufacturing Industry? October 2001) which came to the opposite conclusion.
This is the kind of situation that has cynics muttering that studies only supply what their sponsors want to hear. The real problem is that these types of studies can never tell us anything about market processes, only economic reasoning can do that.
What is absent from these studies is an economic explanation of what happened. The IPA should have provided an economic explanation of why union accusations about outworkers' wages were wrong. It did not.
In other words, why not start by accepting the union case and then going on to explain what economic forces would bring about such conditions? (Perhaps the IPA thought that approach was too much like hard work).
In turn, Christina Cregan should have used economics to explain how employers are able to drive down wage rates, and why the industry seems to have substituted outworkers for direct employees.
The story here is that no survey of any kind of economic activity can ever be a sensible substitute for economic reasoning.
See The Institute of Public affairs gets it wrong on unions and wages
Gerard Jackson is Brookes' economics editor
BrookesNews.Com
Monday 13 December 2004