With Wm as the market rate full employment is reached at Em. At this point the market wage gives an average productivity of Pm. When the restrictionist wage rate Wr is imposed widespread unemployment represented by the grey U emerges while the appearance of area E represents the excessive wage rate.

The most important feature of this figure is that it shows how a restrictionist wage rate raises productivity by artificially restricting the supply of competing labour. What is not immediately apparent, however, is the fact that though the wage rate has risen for those lucky enough to keep their jobs payrolls will have fallen. We can now easily see that freeing the labour market would lower productivity, increase GDP and raise payrolls.

Critics of free labour markets frequently point to Europe as proof that free labour markets do not raise productivity. True enough. As I have already pointed out, only capital accumulation can bring about a continuous increase in productivity. However, what these critics do not realise is that the European employment situation actually supports the market view.

I have already discussed Belgium with respect to US living standards: I should like to now draw attention to its productivity record. Belgium is considered one of the top performers in output per hour. But some people have credited its productivity performance to its low employment-population ratio 44 per cent compared with the American ratio of about 50 per cent.

In other words, it has, unlike the US, raised productivity by restricting the supply of labour. This fact, however, does not tell even half the story. Since 1990 America’s population has increased by about 21 per cent as against 3 per cent for Belgium; America’s labour force rose from 126 million in 1990 to 148 million today. Over the same period Belgium’s labour force rose from 4,210,000 to 4,531,000.

The point of these figures is to ram home the fact that one cannot really debate free labour markets in the context of rising productivity without considering the vital role of capital accumulation and demographic changes. Unfortunately our rightwing completely ignore these factors in favour of the argument that freeing the labour market will bring about a sustained rise in productivity –– despite the fact that neither history nor economics supports it. No wonder the union movement and its allies have been able to blow holes straight through it.

I have pointed out to rightwing that that productivity can rise even in badly hampered labour markets is nothing strange to economists or economic historians. Ludwig M. Lachman remarked on this phenomenon in his book Capital, Expectations, and the Market Process (Sheed Andrews and McMeel Inc. 1977). Sydney Pollard’s The Development of the British Economy, Third Edition 1914-1918 (Edward Arnold 1988) discusses how productivity rose in the 1920s and 1930s in the face of high levels of unemployment. William Ashworth noted that despite heavy unemployment real national income in England increased from 1920 to 1939 by 40 per cent and that in 1936 productivity was about 20 per cent higher than in 1929 (An Economic History of England 1970-1939, Methuen and Co. LTD, 1982).

Despite economics and the lessons of history we still get the likes of Stuart Wood and Hugh Morgan from the HR Nicholls Society fatuously arguing that a free labour market in itself will raise productivity. Australian labour markets have never been so free for some 100 years yet productivity has been falling for more than 12 months. Obviously, little things like facts and elementary economic analysis are certainly not going to sway this lot.

Their narrow-minded approach seems to have infected some Liberal Party officials. Julian Sheezel, state director of the Liberal Party of Victoria, also argues that free labour markets are “essential to economic growth” and will raise productivity. When I pointed out his error he had his secretary send me a terse eff-off letter. No wonder Sheezel and his ilk cannot win the labour market debate on its merits, of which it has an abundance. If this economic ignoramus is incapable of holding an intelligent exchange with someone who supports free labour markets what damned good is he against its opponents?

By creating a productivity fallacy our rightwing created its own Achilles heel which opponents of labour reforms have successfully targeted. As expected, our free marketeers just sat back and took it.

A reader did suggest to me that the productivity decline is “a statistical trick caused by a swift increase in employment” and that “when GDP picks up again and employment growth slows productivity will rise again”. But this line only confirms my argument that cutting unemployment by quickly reducing a restrictionist wage rate will lower productivity if not offset by a very rapid rise in capital accumulation.

I sometimes wonder if our self-appointed guardians of the free market are capable of getting anything right.

Gerard Jackson is Brookes’ economics editor

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