Wage rates and risk: more economic nonsense
Gerard Jackson
Bad ideas never die: they just lie dormant until a more favourable political climate awakens them. I have been giving a series of talks on free labour markets and the Liberal Party. (I want to make it clear that the talks were not to Liberal Party officials, very few of whom have ever exhibited an interest in ideas — even ideas concerning labour markets).
As a result of one of these talks it was seriously put to me that labour market reform was just a devious attempt by the government to allow businesses to shift their risks on to their employees. This is another hoary union fallacy. Some years ago Stephen Long, who used to write economic rubbish for The Australian Financial Review, pushed the identical line, arguing with little logic and much fervour that labour flexibility and productivity schemes were merely crafty schemes to shift the risks of doing business from the firm to its employees.
His reasoning, for want of a better word, was that these arrangements allowed firms who suffer losses to pass them on to their employees in the form of lower wage rates, thereby forcing them and not the owners to incur capital losses. Only someone utterly ignorant of economic theory, as Long clearly is, could mouth such economic nonsense. (Long now works for the Australian Bolshevik Corporation where such economic gibberish is de rigueur).
So allow me to focus on Long’s argument, mainly because he is a union poodle. He completely overlooked the obvious economic fact — or perhaps he never knew it — that market wages rates are determined in the market place and not the individual firm. In a free market individuals, as are all factors of production with the exception of specific factors, are faced with a downward sloping array of values, i.e., marginal productivities, otherwise known as demand curves.
The wage rate is obviously determined at the point where the supply of labour intersects the demand curve for labour. Forcing gross wage rates (which includes all oncosts) above this point will raise unemployment. Conversely, trying to force rates below it will only create labour shortages. Therefore every firm has to offer wage rates that correspond to market clearing values — regardless of its state of profitability.
The above clearly demolishes Long’s nonsense that capitalists can shift entrepreneurial risks on to their employees. It should have been obvious, even to someone as dim as Long, that if a firm can no longer pay market rates it will lose its employees to other firms. (It also escaped Long’s keen intelligence that this kind of wage flexibility could allow time for a firm to recover or for its employees to find alternative employment rather than be simply dismissed).
But what if these productivity schemes, for example, were to dominate the market? Surely that would allow firms to force down wage rates? No. Attempts to keep wage rates below market rates would create profitable opportunities that companies could only exploit by bidding wage rates back up to their market clearing levels.
What Long’s argument (really his union mates’ argument) ignored is that if flexible wage arrangements dominated an economy unemployment would not be so high during a depression and recoveries would be accelerated. This is because firms’ wage rates would be moving in tandem with the state of demand for their products.
It is painfully obvious that the pathetic likes of Long have no conception of the nature of entrepreneurial risk, nor do they have any understanding of markets. This is why they cannot grasp that employees cannot be made to share a firm’s entrepreneurial risks, provided they have not invested in the firm. (No wonder unioncrats love journos like Long).
To argue otherwise is to argue that the entrepreneur can literally force his employees to bear his capital losses. This proposition should be too ludicrous for anyone to take seriously, including someone with Stephen Long’s meagre intellect.
Gerard Jackson is Brookes’ economics editor
BrookesNews.Com
Monday 26 June 2006