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The H. R. Nicholls Society torpedoes the case for deregulated labour markets
Gerard Jackson
The Fair Pay Commission recently ordered a $27 a week increase in the minimum wage. This pay rise is another slap in the face for the self-appointed proponents of deregulated labour markets. Two of whom are Ray Evans and Des Moore, both members of the H. R. Nicholls Society. These gents made the sacrifice of preparing their own submissions for the Fair Pay Commission. Having read them I can easily see why they had no impact on the commission’s reasoning: hence the $27 pay rise.
Evan’s used the opportunity to attack Cardinal Pell and to insinuate that the Cardinal was influenced by Marxist thinking. (In fact his attack had undertones of anti-Catholicism). He then attacked the “Marxian idea of the imbalance of power”. The problem here is that there is no such idea. According to Marx’s ‘dialectic’ as capitalism progressed capital would be concentrated in fewer and fewer hands as the smaller capitalists were driven out of business and into the ranks of the proletariat. This inexorable process would lead to increasing immiseration as the industrial reserve army of the unemployed expanded, thereby driving down wage rates for those with jobs. Because labourers had been displaced by mechanisation there was no way they could be employed — no matter how low the wage rate.
This is why in the classical Marxist framework there is no room for bargaining. To argue otherwise would be to accept the view that immiseration of the masses could be avoided by collective bargaining. This view would be anathema to Marx and Engels1. So if the unions are not taking their cue from Marx from whom are that taking it? Adam Smith, that’s who. According to Smith employers can force labour into “compliance with their terms. The masters, being fewer in number can combine much more easily”. (An Inquiry into the Nature and Wealth of Nations, LibertyClassics, 1981).
It should be clear that in this passage Smith is viewing wage rates as indeterminate. That is to say, a situation in which there exists a zone with an upper limit and a lower limit. If the wage rate exceeds the upper limit the demand for labour will fall. If it drops beneath the lower limit the demand for labour will rise. Therefore wage rates can be raised within the zone without increasing unemployment. (This notion is as far from Marx as one can get). Moreover, even in a world ruled by indeterminacy market processes would drive wage rates up to the upper limit2.
Evans and Moore overlooked the obvious fact that if the unions and their supporters are right then countries with the most militant and powerful unions would have highest wage rates. They don’t and they never had. For example, Professor Fetter pointedly observed that
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).
The picture is even more grim for Australia when we reach the 1920s. Professor Benham noted that North American wages for
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).
At the time of writing union membership “per 100 non-agricultural workers” in Canada was 11.6 per cent while it was 46.2 per cent in Australia and about 8-9 per cent for the US. So much for the union myth of raising real wages for Australians without destroying jobs. In the first part of the 1920s Benham made a study of the link between unemployment in Queensland and changes in the value of output. He found that whenever wages fell relative to the value of output unemployment also fell. But when wages rose relative to the value of output unemployment rose3. (Ibid). No wonder he said that “[i]t would be hard to find a clearer proof of our thesis”, meaning the marginal productivity theory of wages. I could produce more statistical evidence but I think it would be pointless at this stage. If Evans insists on only making a meagre use of supporting historical data then nothing can be done about it.
As for Mr Des Moore’s submission, what can I say. As expected he draws attention to the statistic that the minimum wage is 57 per cent of the median. He follows with a call for “a lower minimum wage ratio”. Ratio’s have got nothing to do with it. What matters is the cost of labour relative to the value of its marginal product. And this is something that Evans and Moore ignore. By doing so they missed the vital fact that why really matters it not the ratio of the minimum wage to the median wage but the effective minimum wage: the rate that exceeds the market rate. If the minimum is set at or below the market rate there will be no increase in unemployment among marginal workers.
Moore has evidently accepted the theory of monopsony (Minimum Wages: Employment and Welfare Effects, or Why Card and Krueger were Wrong, HR Nicholls Society XXIII Conference 2006). He says, however, that “[i]t is highly unlikely that monopsony power is sufficiently pervasive or strong to lead to higher employment overall following an increase in a minimum wage”. Monopsony is about as valid for the real world as is the model of perfect competition4.
However, my point is not monopsony theory but the fact that the ACTU (Australian Council of Trade Unions) destroyed their own case by using it to argue for higher wage rates. In December 2004 the ACTU released the Impact of Safety Net Adjustments on Wages and Jobs. This report was written by Hristodoulidis and Andrew Watson, both of whom are ACTU researchers. Belchamber wrote the introduction in which he asserted that the fall in unemployment since 1996 and the rise in wages refutes the “Neo-Classical” position. Not only is this nonsense it also contradict the report because on page four it uses monopsony theory to justify its conclusions4. But monopsony theory is an extension of marginal productivity theory, which is what Belchamber was attacking5.
Taking on the ACTU’s researchers and media allies is like using a shotgun to shoot fish in a barrel. It’s a great pity, therefore, that Moore and Evans insist on firing blanks.
1. Labour market reform and the dismal failure of the HR Nicholls Society
2. Unions, wages & the H R Nicholls Society
3. Liberal Party stuffs up its workplace reform arguments against the unions
4. Monopsony v labour: our rightwing lets us down again
5. The Australian Council of Trade Unions gets it wrong on labour market deregulation
Gerard Jackson is Brookes’ economics editor
BrookesNews.Com
Monday 30 October 2006