Tim Colebatch is the economics editor of The Age, which means that readers get a great deal of anti-market nonsense and very little economic analysis. Colebatch is one of those weird ‘economists’ who argue that that labour costs have nothing to do with widespread persistent unemployment. From he concludes that minimum wages do not cause unemployment. As proof of this proposition he quotes sources that support it while ignoring every economic study that contradicts it. And this is what he and his comrades on The Spencer Street Soviet, aka The Age, call honest reporting.
In Wage cuts won’t boost jobs (20 June 2006) he excitedly wrote that findings by Professor Gruen show that there are two ways to deal with wages: One was the American route: weak unions, individual wage bargaining, minimal protection of employees, and minimum benefits or retraining for the unemployed. Employers could basically pay what they liked, hire and fire at will, and workers took what they were given or quit.
If Colebatch were a genuine economist he would not have written this nonsense. If it were true then highly unionised countries would have higher real wages than the US. But economic history debunks this view while economics explains why it is wrong.
The 1920s are particularly interesting when comparing real wages in the US with those of highly unionised economies. This era in the US was marked by high levels of investment, remarkable increases in productivity and improvements in technology, rising living standards with an increasing proportion of GDP going to wages, and more or less consumer price stability. The key, as always, to living standards is not unions but investment.
Three factors accelerated wage growth in the 1920s: 1) rapid capital accumulation, 2) new and improving technology (which is always embodied in new investment), 3) a deceleration in the growth of the labour force. By no stretch of the ideological imagination (at least not yet) can union supporters or advocates for regulated labour markets claim that unions are responsible for investment or technological improvements. In fact, until 1900 union membership in the US was negligible, after which it rose to about 6-9 per cent of the work force until 1936 when Roosevelt used the power of the state to raise union membership.
Comparing the situation in Australia in the ‘20s with that of the US blows Colebatch’s argument out of the water. Throughout the 1920s Australian unemployment averaged more than 8 percent, rising from 6.5 percent in 1920 to 11.2 per cent in 1921, and then falling to 8.8 per cent in 1925. Even during WW I unemployment was remained fairly high, thanks to the sort of policies that Colebatch supports. As Professor Benham noted about North American wages:
Women 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. (The Prosperity of Australia, P. S. King & Son, LTD, Orchard House, Westminster, 1928).
When Benham 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. So how does Colebatch explain this discrepancy? After all, did he not assert that American employers can pay whatever they like? If this is so why didn’t they drive wage rates down to a subsistence level? And while we ponder that question let us bear in mind that in the 1920s America was rightfully considered a high-wage economy. (See what I mean about Colebatch ignoring evidence that contradicts his anti-market ideology. No wonder I consider him to be an economic quack).
Colebatch is really saying that there are no economic laws — and if they do exist they don’t apply to labour. This is an old anti-market argument and — like Colebatch — thoroughly discredited by economics. In the 1900s the American Federation of Labor flaunted a book by William Trant in support of their argument that if it were not for their activities real wages would still be at the level of 1850. But as Professor Fetter pointedly observed at the time:
Many well-known facts should cause such an opinion to be accepted with hesitation, to say
the least. Only about one tenth of the workers in England are unionists and of the twenty-two million workers in the United States, far less than ten per cent. are organized. Can it be
maintained that one tenth of the labor supply fixes the value of all? In many lines where labor is not organized, as in teaching, clerical positions, professional and domestic service, wages have risen even more than in organized trade. (Principles of Political Economy, New York The Century Co, 1905).
My favourite, as frequent readers will know, is the Mysterious Case of the New York Maidservants. And believe you me, according to Colebatch’s “economic logic” it truly is mysterious. Just before WWI the average wage of a New York maidservant was about $3.50 which by 1922 had jumped in real terms to about $18. Of course there is nothing mysterious at all about this rise in real wages.
The war served to slash the flow of cheap labour from Ireland and Scandinavia while the demand from industry absorbed female labour from the South that would have normally gone into domestic service. But another and vital factor was also at work. The US economy rapidly accumulated capital which raised real wages for everyone. It was this factor, combined with immigration restrictions, that significantly raised real wages for everyone.
But the forces of supply and demand are never mentioned by Colebatch, at least not with respect to wage rates. Instead he makes the absurd argument that American workers are exploited by callous capitalists. Naturally, the considerate Mr Colebatch saw fit not to burden his readers with any figures to support his assertion. This is not surprising when we consider that in 2005 the per capita GDP of the US in terms of purchasing power parity was $42,000 as against $32,000 for Australia. Although I — unlike Mr Colebatch — am not brilliant I can still work out per centages. And figures show that the US leads Australia in per capita terms by nearly 32 per cent. In 2003 the US led France by 36 per cent, Germany by 42 per cent and Italy by 44 per cent.
How can any of this be true when Mr Colebatch himself — the very epitome of journalistic ethics — has assured us that the US has taken the low-wage road to full employment? Now the likes of Colebatch could argue that per capita GDP, not matter how it is calculated, does not tell the whole story. This is absolutely true. It is also true that these gaps in GDP are far too large to be dismissed as meaningless. I am also sure that if the situation were reversed Colebatch would ceaselessly remind us of it.
Let us now direct our attention to even more damning statistics. In 1997 90 per cent of US households had a clothes washer as against 88 per cent for France; for dishwashers it was 53 per cent to 32 per cent; microwaves: 86 per cent to 19 per cent; clothes dryers: 82 per cent to 12 per cent; VCRs: 83 per cent to 35 per cent; personal computers: 40 per cent to 20 per cent; phones per 100 people: 63 to 56; cell phones per 1000 people: 128.4 to 23.8; TVs per thousand people: 776 to 579; cars per 100 people: 57 to 42; financial wealth per capita: $64,402 against $28,388. The situation was similar with respect to Belgium, Demark, Germany, Italy, Holland, Spain, Sweden, Switzerland, UK and Japan.
Although these figures are 9 years old it has to be borne in mind that even then Colebatch and other enemies of the market were damning the US because of its “poverty wages”. Needless to say, they never provided any statistical support for their charges against US capitalism. And this brings me to a fundamental economic fact that in the free market there is a tendency for every factor of production to receive the full value of its marginal product. As Phillip Henry Wicksteed put it 112 years ago:
Everyone knows that units of a factor 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, 1894).
It follows from this that so long as a country accumulates capital at a faster rate than the rate of population growth real wages will rise, a fact that Chart 1 tends to support. It shows that from 1960 to 2000 gross wages, what Americans call “real compensation costs”, moved in line with productivity, measured as output per hour of labour in the business sector. (The data is from the Council of Economic Advisors 2001).
