Unions, unemployment and wages
Gerard Jackson
Union leaders, social workers, clerics, labour politicians and certain ‘journalists’ are claiming that the Government’s proposed labour market reforms will have terrible consequences for real wages. This is the same old dreary line that enemies of the market trot out every time meaningful labour market reforms are proposed.
Writing in the Australian Financial Review in August 1996 Malcolm McGregor made the vicious assertion that labour market deregulation “means reduce wages, and rely on a pool of able bodied unemployed to frighten those with jobs into acquiescence . . . It is a formula for economic stagnation and social decay.” (This is the kind of ‘journalism’ that would give prostitution a good name).
It completely eludes the likes of McGregor that it is his union dominated regulated ‘labour market’ that gave us a massive “pool of able bodied unemployed”, not the free market. Not only that, by pricing people out of work the regulated labour system imposed 100 per cent wage cuts on them. Yet he saw nothing wrong with this.
What needs to be stressed is that the services of labour are everywhere and at all times subject to universal economic laws. No so, according to the brilliant Mr Grant Belchamber, senior research officer for the ACTU. He has asserted that “labour market ‘deregulation’ is essentially an abstract notion . . .” (Australian Financial Review 7 February 1994)
This is a damning indictment of the economic illiteracy of the unionocracy. Clearly, Mr Belchamber and his allies need a serious lesson in economic history and elementary economics.
In the free market there is always a tendency for every factor of production to receive the full value of its product, especially labour. If unions set wage rates above the value of labour’s marginal product then unemployment is inevitable.
It is a vicious myth that unions raise real wages for everyone. There is only one to do that and that is by raising the amount of capital invested per head of the population. Increased capital accumulation raises labour’s marginal product which in turn raises its purchasing power.
This happens because an expanding capital structure makes labour scarce relative to capital thus raising real wages. Should the capital structure shrink or population growth exceed capital growth, real wages must fall. Any attempt to resist this wage movement will create unemployment, probably followed by calls from unioncrats and their mates to use subsidies to cut the cost of labour, i.e., wages.
It is vital to remember that because capital is heterogeneous, expanding the capital structure means that not only does the structure become more complex as new capital combinations emerge (frequently embodying new technologies) but an increasing division of capital develops as more and more capital items become more specialised. It is this process that enables capital growth to overcome the law of diminishing returns.
It should now be clear that the division of capital is just as important as the division of labour. And this is where the unions are at their most insidious. Labour and capital are complementary factors. Therefore any process of uniform wage-setting not only hinders the division of labour it also hinders the division of capital. This is guaranteed to keep living standards lower than they would otherwise be. In short, it lowers productivity.
Not only does economics mock the unionocracy’s phoney claim that they raise living standards but so does history. Fourteenth century England provides a graphic example of a rapid increase in real wages. Between 1348 and 1377 the population was slashed from 4.8 million to about 2.9 million by successive waves of the Black Death. This caused a massive increase in the ratio of land and capital to labour resulting in real wages rising by about 50 per cent.
In 1351 the crown passed maximum wage laws based on the average for the period 1325-1331. They were a complete failure. Employers were actually fined or imprisoned for breaking these laws, i.e., for paying high wages. By 1377 average real wages had at least doubled. Writing in 1375 John Gower, a country gentleman, lamented:
Labor 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.
In the late sixteenth century Samuel Pepys bitterly complained in his diary about how much he had to pay his cook: “...the first time I ever did give so much”. Sometime later he wrote:
Wages are very considerable; a fat Welsh girl who has just come out of the country, scarce understood a word of English, capable of nothing but washing, scouring and sweeping rooms...[received] six guineas a year, besides a guinea for her tea. (Pepys’ Diary).
In 1725 Defoe expressed disgust that the scarcity of women servants was driving up wages. In his own words:
Women servants are so scarce that...their wages are of late increased to six, seven, nay eight pounds per annum and upwards....But the greatest abuse of all is that these creatures are become their own lawgivers; they hire themselves to you at their own will. That is a month’s wages or a month’s warning.”
The supply of these servants was maintained by a steady flow of young black girls from the South and young women from Ireland and Germany. Early in the war these girls’ wages began to rise as the restricted supply forced employers to compete against each other for their services.
By 1918 they were being paid $18 per week. After the 1920-21 depression their wages dropped to $14 to $15 a week. Adjusting for inflation, their real wages had increased by about 180 per cent. According to our union apologists these girls should have been viciously exploited and paid a miserable pittance.
The nineteenth century saw real wages accelerate in Britain. Between 1810 and 1850 average real wages doubled. And if it had not been for the French Wars the increase would have been very much greater. Overall, the century saw Britain’s output of consumer goods increase by 1600 per cent, the labour force by 400 per cent and real wages quadruple.
This continual increase in British living standards was entirely due to capital accumulation, not any union body or wage-fixing government agency. The same process (only to a larger degree) happened in America, where unions have always been weaker than their European counterparts. And now we find the same process accelerating living standards in Asia.
It ought to be crystal that capital accumulation raises living standards, not unions, and that the free market is the only institution capable of creating the conditions in which capital accumulation can thrive and living standards continually rise, regardless of unioncrats and their friends preach.
As for so-called social justice, perhaps Mr Belchamber will be kind enough to tell us what is just about distributing income from those who had jobs to those with jobs.
Gerard Jackson is Brookes’ economics editor
BrookesNews.Com
Monday 4 July 2005
But Defoe also delighted in describing the rising living standards of the English masses. (See Plan of the English Commerce, 1728). It has been estimated that real English wages at the time were twice as high as those of the French. A more modern version of wages and servant girls is the situation of New York maidservants from 1913-1921. Their average wage in 1913 was $US3.50. (Living expenses were provided by the employer.)