Wages and labor markets
Gerard Jackson
Today is not the first time that Keith Hancock has tried to discredit labor market reform and wages. On 8 January, 2001, The Australian Financial Review published an article by Keith Hancock (Fiction of labour market deregulation) which, to be blunt, was nothing but economic claptrap that parroted the discredited myth that workers needed wage protection because capitalists possessed superior bargaining power.
This, according to Hancock, is what produced "sweated labour, long working hours, unsafe and unhealthy factories . . ." in the nineteenth century. (Hancock is apparently as knowledgeable about the industrial revolution as I am about brain surgery).
The facts are that factory conditions and wages at the end of the nineteenth century were far superior to any working conditions that the masses had ever endured previously. This was not brought about by unions, bureaucrats or politicians but by capital accumulation.
The so-called unequal bargaining argument that Hancock relies on cannot stand up to economic theory nor is it supported by economic history, of which Hancock apparently knows nothing.
Hancock's historical ignorance is revealed by a telling quote from Adam Smith who admitted that: “[T]here is, however, a certain rate below which it seems impossible to reduce, for any considerable time, the ordinary wages even of the lowest species of labour.” (Wealth of Nations, Vol. I, ch. VIII). In other words, you cannot keep wage rates below market rates for long.
But Smith is not the only commentator upon whom we can rely on regarding wages and markets. The Black Death reduced England's labour supply to such an extraordinary level that by 1377 average real wages had at least doubled.
Writing in 1375 John Gower, a country gentleman, lamented: "Labour is now at so high a price that he who will order his business aright, must pay five or six shillings now for what cost two in former times...the poor and small folk...demand to be better fed than their masters".
This happened despite the Crown imposing maximum wage laws based on the average wage for the period 1325-1331. Every attempt was made, to no avail, to enforce these laws. Men were imprisoned for accepting wages above the maximum while others were imprisoned for paying them.
We then had the Tudors trying to set maximum wages rates and the Stuarts trying to set minimum rates. Nevertheless, the market rate eventually prevailed, that is why in the late seventeenth century Pepys complained about having to pay higher wages for domestics, while in the early eighteenth century we find Defoe making the same complaint. All of which is lost on the likes of Professor Hancock.
But why do attempts to control wage rates fail? To provide a brief history of arbitration, as our right sometimes does, is no explanation at all. And to merely make the statement that arbitration sets minimum wage rates above market rates is to merely beg the question — not answer it.
The argument against Hancock's economic illiteracy is a simple one, but one that our rightwing commentators never deign to state: when any factor, including labour, is priced above the value of its services part of the supply will be rendered unemployed.
So what determines the wage rate? It is that point at which the supply of a particular type of labour intersects the demand curve for that labour. In turn, the demand curve consists of a descending array of marginal productivities.
In simple English, when a wage rate is raised above the level set by the market (consumers) unemployment emerges. Ultimately, real wage rates are raised for everyone by increasing the amount of capital per head. That is why capital rich countries have higher living standards than capital poor countries.
At this point it is instructive to compare late fourteenth century England with late nineteenth century Australia. By killing off about 40 per cent of England’s population the plague considerably raised the ratio of land to labour thus raising real wage rates. In Australia it was the immense ratio of land to labour that raised real wages. This is also why real wages in colonial America were higher than in England.
But our self-appointed rightwing refuses, for some reasons of its own, to employ economic history and basic economic theory in its defence of free labour markets. Instead we get lengthy pieces on the history of arbitration and turgid articles labour labor and rents.
God help us, we even get articles based on the fallacy that rising wages can cause inflation when they can do nothing of the kind. What we should be getting is a historical perspective combined with a straightforward explanation of wage rates.
Genuine economic reasoning leads to the conclusion, as it did with the Spanish Scholastics*, that the fair wage is the market wage, regardless of what Hancock and his fellow anti-market ideologues claim.
Now he also argued that the idea that regulation causes unemployment is contentious. This is another issue on which our free market defenders still let us down. Labour regulation in itself need not raise unemployment.
What matters is whether it raises the cost of labour above its market clearing price. Even heavy oncosts, i.e., super payments, holiday allowances, workers' compensation, etc., will not raise unemployment in the long run if the market is allowed to factor these costs backwards into lower take home pay.
On the other hand, if regulatory policies prevent direct factoring then indirect factoring will occur in the form of rising unemployment, which amounts to redistributing income from those who would have had jobs to those get to keep their jobs. These are other basic points that I have never seen one of our free marketeers ever make.
Hancock contended that the relation between our limited deregulated labour market policies and rising productivity is "problematic". Not really. This leaves me making further important points that seem to elude our free market paladins. Only the market can allocate to the margin, and labour and capital are complementary.
When regulations or union interference prevents capital and labour from being employed in their most valued combinations a suboptimal situation is created and capital and labour are prevented from being allocated to their most valued ends.
Once the interference is terminated optimal combinations tend to emerge which reveal themselves in the form of rising productivity. (It should go without saying that this will also encourage additional investment).
It all amounts to the simple fact that Hancock has nothing to stand on but ignorance and prejudice.
*The late Spanish Scholastics were a group of Spanish Schoolmen who made remarkable progress in the field of economics. Unfortunately, this is another group that our free market club thinks it’s beneath them to study.
The Institute of Public affairs gets it wrong on unions and wages
A Marxist economist screws up on wages and living standards
Gerard Jackson is Brookes' economics editor
BrookesNews.Com
Monday 29 November 2004