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How Australia’s rightwing managed to discredit labour market reform
Gerard Jackson
I have had numerous emails from people asking whether our rightwing is telling the truth when they argue that further labour market reform will raise productivity and wages. No, they are not telling the truth. On the other hand, they are not lying either. The actual truth is that they are so incompetent when it comes to labour markets that they honestly believe their own propaganda. (Stuart Wood and Hugh Morgan are pathetic examples of men completely out of their depth on this subject).
A competent economist would have immediately pointed out that there is no economic law that says free labour markets are sufficient or even necessary to promote productivity and economic growth. The 1960s is ample proof of this fact.
The decade 1960 – 1969 saw annual GDP average 5.1 percent while per capita GDP averaged 3.1 percent and unemployment averaged about 1.6 percent. And yet labour markets were far more hampered than they are today. The UK in the 1920s and 1930s is another historical example whose existence our rightwing has refused to acknowledge. Sydney Pollard noted in his The Development of the British Economy, Third Edition 1914-1918 (Edward Arnold 1988) how productivity rose in the 1920s and 1930s despite the high levels of unemployment.
William Ashworth pointed out 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).
Economics teaches that the market prices for labour, the price at which the market clears, the point at which the supply curve for labour intersect the demand curve. It is very important to bear in mind the demand curve is a schedule of the value labour’s marginal product. As one move up the curve, the value increases and vice versa. The figure below illustrates this fact.
BrookesNews.Com
Monday 19 December 2005
We-E is the market clearing rate while Wu is the restrictive wage rate. The grey area represents unemployment caused by the excessive wage rate. One should note the restrictive wage rate raises the productivity of employed labour by restricting the supply of labour. It follows that for the market to clear productivity must fall, even as total output expands and payrolls rise.
Now it is true that if restrictive practices have significantly affected the ability of firms to optimise their factor combinations, any policy that eliminates or reduces those practices will raise productivity and probably also lift the demand for labour. Eventually, however, the productivity effects will work their way out and further falls in unemployment will be accompanied by falling productivity. And productivity has now been falling for more than 12 months.
Nevertheless, despite the historical evidence and the teachings of economics the likes of Morgan and other HR Nicholls Society luminaries still insist on arguing that free labour markets are essential to economic growth and productivity.
Is it possible for real wage rates to rapidly rise in a free market in which there is no state or union intervention? Economics categorically states that it is and, fortunately, history provides the evidence.
The average weekly wage of New York maidservants in 1914 wage was $3.50 (living expenses were provided by employers) and by 1922 they had risen to about $14: in the meantime the consumer price index rose from 30 to 50. This means that these girls’ real wage rate rose by more than 140 per cent. (1967 = 100, Handbook of Labor Statistics, US Department of Labor Bureau of Labor Statistics).
How could this happen in the absence of a minimum wage and unionisation? Before the war the supply of maidservants had been maintained by a steady flow from Ireland, Germany and the South. The war cut off the foreign supply of girls while raising the demand for female labour thus raising the real wages of maidservants by reducing the supply.
So why didn’t demand for maidservants collapse after the armistice and drive down their wage rates? Because from 1914-1918 the US accumulated an enormous amount of capital, a process that continued for some years afterwards. It was this change in the capital-labour ratio that maintained the girls’ wage rates, a process that was further strengthened by strict immigration controls.
Let me tell you about a very close friend of mine who works as security guard and who is conservative by inclination and conviction. This is a man who rightly believes in the benefits of capitalism. One would expect such a man to be impressed with the Liberal Government’s labour market reform policy. He’s not. To put it mildly, he’s outraged –– and he’s not the only one. The last straw for him was to see the very rich Hugh Morgan appearing on the ABC to tell people on the minimum wage that they are making too much money.
Yet Morgan and his pals will do this at every opportunity. If the definition of stupid is doing the same thing over and over and expecting different results, then this crowd definitely qualifies as stupid.
Unfortunately, the damage this lot have done is not going to be repaired any time soon.
Gerard Jackson is Brookes’ economics editor