What Labour Markets Are Really Like

It should come as little surprise that many libertarian capitalists lack a nuanced view of labour market economics. After all, they lack a nuanced view on pretty much everything else as well. One does not have to go far to find utterly trite arguments [1] that suggest that a "libertarian" approach would mean "that human beings should be free to undertake exchanges with each other free from force, fraud or coercion" which, from their astoundingly simplistic interpretation of such things, means an end to such horrific interventions in the free market such as minimum wages, occupational health and safety, anti-discrimination laws, penalty rates, sick leave, and holiday pay.

Unsurprisingly people who are otherwise sympathetic to a political ideology that argues for greater personal liberty and less state intervention in their lives often draw a line at labour market regulation. From the other side from the big business backers such policies are among their most popular. Capital delights at the opportunity to reduce the cost of labour, and if it can do so under the name of 'freedom' and find people simple enough to believe it, all the better. Forbes, for example, positively gushes with joy at the status of the unregulated and deunionised U.S. labour market and expresses horror at the situation in Europe.

Bureaucrats- especially Eurocrats - love to muck with the seamless operation of supply and demand in the labor markets. They interfere with hiring and firing and mandate everything from vacation time to minimum wages. Unions terrorize management into concessions - say, Norway’s 35-hour workweek or France's 25 vacation days - that market forces would never support.

Whilst the 'seamless operation' is worthy of chuckles, it is indeed a far more unwitting revelation on their part that without government intervention the "free market" would never support 25 vacation days or a 35 hour work-week. Their 'Forbes Free Labor Indicator' is an expression of their opposition to government-mandated vacation days, union coverage, and support for ease of dismissal. Their metric of long-term unemployment is a fudge; based on the percentage of unemployed who have been so for more than a year, doesn't even account for actual unemployment rates.

Grudgingly, some agree - on the basis of freedom of personal association - that workers should be allowed to form unions. Some even go so far to say that the worker may withdraw their labour, albeit as readily as the employer may fire them. Even fewer (and by this point they're the "left-wing" of the libertarian-capitalist perspective) even support the right to collective bargaining, holding to the same principle that firms can be allowed to form cartels. But even within this right they reject it as a strategy, claiming that the higher and minimum wages that the unions demand causes unemployment among the worst off [3].

In contemporary Australia the Productivity Commission, adopting this 'free market' approach, argues that penalty rates for hospitality workers ought to be reduced. That is, an attempt to financially harm what is already the lowest paid semi-skilled labour force [4]. Whilst suggestion is relatively modest - bring Sunday penalty rates down to the same level as Saturday penalty rates - it is obvious to all that this is a stalking horse for the removal of all penalty and overtime rates. Already the spectre is being raised - that Australia can be heading down a US-style low-wages system for hospitality where direct service staff are reduced to undignified levels of obsequiousness as their wage depends on "their race and age, their customers' moods, the weather and other factors that have nothing to do with performance" [5].

Fundamentally, this is bad in theory and bad in practice. The Australian Productivity Commission is rather surprisingly aligning itself with a rather old economic ideology that most thought was dead and buried. John Quiggin's phrase 'zombie economics' is quite appropriate in this situation; the necromancer-priests of the Productivity Commission have raised the idea of a 'free labour market' from the dead and it's making its first tentative steps in the search of brains. Obviously it will first have to leave the office of the Commission.

How dead was this idea? Hardly a screaming radical, but one who managed to occasionally say some sensible things on economic matters, Winston Churchill made a very insightful speech in 1909 on the Trade Boards Bill to the House of Commons, noting a rather mortal flaw in the idea. Part of the speech reads:

But where you have what we call sweated trades, you have no organisation, no parity of bargaining, the good employer is undercut by the bad, and the bad employer is undercut by the worst.... where those conditions prevail you have not a condition of progress, but a condition of progressive degeneration.

[6]

Economists, in this case a little slower that politicians, began to realise and incorporate the notion that naive market models bore little resemblance to how real markets operated. Joan Robinson in particular was a leader in this field with the rather bluntly titled The Economics of Imperfect Competition [7]. This has special relevance to labour markets. In perfect competition, the number of buyers and sellers are sufficiently large on both sides (ideally equal) that neither can significantly influence market price. There are of course other idealised components (zero transaction costs, perfect parity in information, mobile factors of production etc), but for labour markets this is the main one to consider.

Now this is demonstrably not how most - indeed nearly all - labour markets operate. Most labour markets operate with a few buyers of labour (employers) and many sellers of labour (employees). This put enormous market advantage in the hands of the buyer, especially given that the need for employment has relative inelasticity. The power of employer is greatest in the absence of a welfare safety net, and when the potential number of employees is greatest (such as in semi-skilled and unskilled labour). A particularly ugly but correct term, 'a monopsonistic market', describes this situation. John Steinbeck gave the experience a more literary feel in the famous scene in Grapes of Wrath [8].

"Look," the young man said. "S'pose you got a job a work, an' there's jus' one fella wants the job. You got to pay 'im what he asts. But s'pose they's a hunderd men." He put down his tool. His eyes hardened and his voice sharpened. "S'pose they's a hunderd men wants that job. S'pose them men got kids, an' them kids is hungry. S'pose a lousy dime'll buy a box a mush for them kids. S'pose a nickel'll buy at leas' somepin for them kids. An' you got a hunderd men. Jus' offer 'em a nickel - why, they'll kill each other fightin' for that nickel. Know what they was payin' las' job I had? Fifteen cents an hour. Ten hours for a dollar an' a half, an' ya can't stay on the place. Got to burn gasoline gettin' there." He was panting with anger, and his eyes blazed with hate.

Monopsonistic labour markets have effects, as Steinbeck graphically illustrates, are clearly deleterious to a worker's welfare, but also with aggregate social costs. In such markets, wages and employment are lower than what they would be in a more competitive market with greater equality between the buyer and seller of labour. Economic welfare is distributed away from the employee to the employer. However this net gain is less than the loss to the employee, resulting in an aggregate loss overall. The greater the difference between the monopsonistic wage and the competitive wage is a genuine rate of exploitation, at an inverse value to elasticity of the labour supply. To put it bluntly, monopsonistic labour markets mean lower wages and greater unemployment. That's why, counter-intuitively, increasing the minimum wage can actually improve employment rates.

Whilst economic welfare transfer from the employee to the employer can be reversed through taxation policies, the social cost cannot. Only through mechanisms which ensure that monopsonistic market wages do not occur can such economically damaging events be prevented - for example by mandating minimum wage levels above the monopsonistic level (but, obviously, not higher than what it would be under perfect competition). This is of course contrary to the naive market model adopted by most advocates of libertarian capitalism. They incorrectly assume a market of equality between the buyers and sellers of labour, where in such circumstances a minimum wage would indeed cause greater unemployment (as a percentage of workers would have a labour productivity below that level). But that is trying to shoehorn reality to fit the model, rather than have a model accurately reflect reality, and with all the tragic events that follow.

It is true that some labour markets are less monopsonistic than others. In general, it is higher skilled jobs that command greater market equality, particularly in a technologically-advanced society where not only is greater wealth available ("the Solow residual") but there is also a number of independent complex labour parts. In some very high-skilled jobs it is even possible that there may be less employees trying to sell their labour than employers wanting to buy it (a monopolistic labour market, where the seller can be more of a price-maker than price-taker). But in general, most labour markets are persistently monopsonistic. That is why it is important to ensure a high minimum wage, and to encourage wage improvements (e.g., penalty rates) for the poorest of workers, as it has overall the greatest beneficial effect socially and to the recipients.

This discussion is not about socialism or capitalism - differing models of ownership are not even discussed. But rather it is about a political tendency that is very strong within libertarian capitalism that assumes minimum wages, penalty rates etc, are bad for the economy and drive businesses out [9]. Hopefully at least a few will realise that this is not the case, and indeed the reverse is the truth. Apart from a handful of hired guns one can take their motivation (for "freedom") as being genuine - it is just that they are terribly mistaken. Perhaps consideration of what empirically constitutes 'freedom' for working people is worthwhile; is a worker more or less free with higher wages on weekends and public holidays? Are they more or less free with a guaranteed minimum wage and social welfare safety net? With occupational health and safety and anti-discrimination laws? 'Freedom' cannot be just portrayed in the negative sense, the absence of government intervention, but it must also be considered in the enabling and positive sense. A high-wage, high-skill labour market is the ideal - but if existing labour market structures will not generate this, it must be introduced from without.

Endnotes

1] Henry Hill, "A free market in labour: libertarians, employment and the unions", Adam Smith Institute, September 12th, 2011
http://www.adamsmith.org/blog/regulation-industry/a-free-market-in-labou...

2] Ari Weinberg and Davide Dukcevich, The World's Freest Labor Markets, Forbes, January 30, 2003
http://www.forbes.com/2003/01/30/cx_aw_0129labor.html

3] Jacob T. Levy, "Thoughts On Unions", Bleeding Heart Libertarians, June 6, 2012
http://bleedingheartlibertarians.com/2012/06/3087/

4] Penalty rates: Productivity Commission recommends changes to weekend pay for entertainment, hospitality and retail workers, Australian Broadcasting Commission, December 22, 2015
http://www.abc.net.au/news/2015-12-21/productivity-commission-recommends...

5] Cynthia Karena, Without penalty rates, Australian workers may be at mercy of tipping jar, The Age, November 9, 2015
http://www.theage.com.au/comment/without-penalty-rates-australian-worker...

6] Winston Churchill MP, Trade Boards Bill, Hansard House of Commons (28 April 1909) vol 4, col 388

7] Joan Robinson, The Economics of Imperfect Competition, Macmillan and Co, 1933. See also Alan Manning, Monopsony in Motion: Imperfect Competition in Labor Markets, Princeton University Press, 2005

8] John Steinbeck, Grapes of Wrath, The Viking Press-James Lloyd, 1939.

9] For their part, libertarian socialists have to be careful of a tendency to always support wage and economic welfare increases for workers, even beyond what a perfectly competitive market would indicate as that would cause unemployment and lower wages overall.