The ACTU gets it wrong on labour market deregulation

The Australian Council of Trade Unions gets it wrong on labour market deregulation

Gerard Jackson
BrookesNews.Com
Monday 9 October 2006

I have been arguing for years that the refusal of Australia’s free market club to use economic theory and economic history to explain the benefits of deregulated labour markets will give the ACTU (Australian Council of Trade Unions) the moral and political high ground. Moreover, I pointed out that the unions will try to strengthen their case by attacking economic theory. This is precisely what they have done. In his response to Des Moore’s defence of deregulated labour markets (The Age, Pain for poor in minimum wage, 5 September 2006 ) Grant Belchamber, the ACTU’s senior industrial officer, falsely asserted that the free market case against the minimum wage “ derives from simple economic theory” (Fair go needed for low-income families, 28 September 2006).

This will be news to generations of economics students who struggled to master marginal productivity theory. But this is not the first time that Belchamber has tried to pull this stroke. In December 2004 the ACTU released the Impact of Safety Net Adjustments on Wages and Jobs, a ‘report’ written by Hristodoulidis and Andrew Watson, both of whom are union researchers. The introduction was written by Belchamber and claimed that.

[a]ward wages have increased by over $100 per week in nominal terms and by over $40 in real terms since 1996. According to Neo-Classical economics, these increases in award wages should have resulted in a fall in employment especially for award reliant workers. However, Australia has experienced strong employment growth since 1996.

Belchamber is either obtuse or mendacious because neo-classical economics has never made such a claim. I have pointed out numerous times that orthodox economic theory makes it very clear that unemployment emerges as a problem when gross wage rates (this includes all oncosts) raises the cost of labour above the value of its additional output. It follows that if the minimum wage rate is fixed at or below the market rate it will have no impact on the demand for marginal labour. This is why I argue that the “effective minimum wage”, the rate that exceeds the market rate, is the one that matters. Marginal productivity theory also makes it clear that wage rates will tend to rise in tandem with increases in productivity. Even Paul Krugman noted that

[h]istory offers no example of a country that experienced long-term productivity growth without a roughly equal rise in real wages. (Pop Internationalism, The MIT Press, 1997).

As Phillip Henry Wicksteed wrote 112 years ago labour

...will be hired up to the point where the added product just covers the added cost. The sensible employer will take on more men as long as the last one earns at least as much as his wage, but no longer. (An Essay on the Co-ordination of the Laws of Distribution, 1932 edition, London: London School of Economics, first published 1894).

So if both history and economics refute Belchamber’s assertions why does he and his fellow unioncrats keep making them? The answer lies with Australia’s self-appointed guardians of the market, particularly the H. R. Nicholls Society upon whose board Mr Moore sits. His response to the union case is the argument that the existence of about 1.1 million firms puts a floor under wage rates. But the number of firms has nothing to do with the level of real wage. It is the capital-labour ratio that determines the height of real wage rates. In Austrian terminology wages rise because more productive stages of production are being added to the capital structure.

This means that if capital consumption occurred real wage rates would fall even if the number of firms increase and vice versa. Anyone who adopted Moore’s quantitive argument would put themselves in the invidious situation of opposing all mergers on the fallacious grounds that they reduce the competition for labour and hence lower real wages. Moreover, the logic of this approach leads to the conclusion that large firms should be broken up in order to increase the demand for labour. (This is also the ineluctable logic of the perfect competition model). The HRNS also asserts that because the minimum wage is 58 per cent of the median pay packet this is proof that it destroys jobs. The truth is that it proves nothing. It is a suggestive statistic with no explanatory power whatsoever.

We can now see why Belchamber is so confidant of not being successfully challenged by the HRNS. Now he argued that “Australia's employment growth record tops the OECD league table over the past 100 years”. So what? What matters to us is our own unemployment rate — not Europe’s or America’s. But if Mr Belchamber wishes to play games I am only too happy to oblige him. Let me start with the 1920s when unemployment averaged 8 per cent. And what caused this? The very system of wage-fixing that Belchamber is defending.

Professor C. Benham did a statistical study of unemployment in Queensland for the period 1916 to 1924 . He found an inverse relationship between the value of output, wages and unemployment. When wages fell back as the value of output rose unemployment fell. No wonder he was moved to say: “It would be hard to find a clearer proof of our thesis [that excessive wage rates cause unemployment]”*. (The Prosperity of Australia, P. S. King & Son, LTD, Orchard House, Westminster, 1928). Even during WW I unemployment remained fairly high. Professor Benham commented that in North America

[w]omen and juniors are within the ambit of wage-regulation to a smaller extent than adult males, yet during recent years their wages have risen more than those of adult males. In the United States and Canada where there is relatively little wage-fixing, average real wages have risen more than in Australia. (Ibid).

When he made this observation union membership in Canada was 11.6 per cent while it was 46.2 per cent in Australia and only about 8-9 per cent for the US. What is puzzling about this is not Belchamber’s refusal to acknowledge the historical evidence against his case but the refusal of the HRNS to use these facts against the enemies of deregulated labour markets. This outfit, along with its handful of media supporters, has adamantly refused to enlist history as an ally. What is even more perverse has been their rejection of standard economic theory in favour of the ridiculous quantitive approach to labour markets.

It’s time this mob got the message that vacuous intellectual grandstanding is no substitute for economic theory and history. No wonder Belchamber felt free to state that “moderate minimum wage increases are neutral with respect to employment”. He knows that the HRNS cannot see just how dangerously flawed this argument is.

*An inverse relationship emerges when wage rates exceed the market rate. In a situation where labour markets are free and productivity is increasing wages would rise and full employment would be the norm.