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Liberal Party labour market reform founders on ineptitude
Gerard Jackson
Because I am in the process of packing and moving I have had no time to write articles for this week’s edition. This is why I am posting previously published articles. However, these articles have been chosen because their content is still highly relevant. The following article was published on 18 July 2005. Unfortunately the level of intellectual debate on labour markets is still as bad as ever.
Liberal Party supporters have emailed me about the Government’s proposed labour market reforms. Unfortunately none of them were even slightly acquainted with the economics behind the legislation. I suspect that this is true of the Liberal Party in general and its MPs and advisers in particular. A suspicion that the Government’s propaganda blitz strongly confirmed.
Liberal Party advisers have clearly failed to grasp the fact that significant and lasting labour market reform is unlikely to be implemented unless the union myth of raising real wages for everyone has been demolished in the public mind. Alas, I have yet to meet a Liberal Party staffer or adviser who had the slightest awareness of this fact.
This is one of the reasons why the party has been unable to provide supporters with the necessary intellectual ammunition to defend the Government. The result has been, at least for the moment, a successful counter campaign by unions and their allies in the media and the churches.
So let me, in my own modest way, try to compensate for what the Liberal Party has failed dismally to do, and that is try to educate its supporters. Economics shows that it is not unions that raise real wages (by wages I mean wage rates) for everyone but capital accumulation, otherwise called economic growth. (If anything, unions have proved an impediment to capital accumulation).
The following diagram is taken from Samuelson’s Economics (chap. 37, p 731, 10th edition, 1976). It shows that when labour is very scarce relative to land real wages can still be maintained even as the population increases. Eventually, however, population growth will drive real wages down and cause the price of land to rise.
We can see from the diagram that real wages are the result of the labour-land ratio and have nothing whatsoever to do with the number of landlords that compete for labour. Fourteenth century England provided us with a graphic example of this situation. After the Black Death struck in 1348 the population was drastically reduced. This resulted in wages rising and rents falling. Samuelson’s diagram neatly illustrates this point.
Let us now jump to the present where we substitute capital for land. It can be easily seen that it is now the ratio of labour to capital that determines real wages, not unions or the number of employers. We conclude that if the population increases while the capital stock remains constant the return to capital will rise while real wages will fall. It follows that any attempt by unions or government’s to resist this process will result in rising unemployment.
(Instead of saying that when wages fall the return to capital rises we could simply say that the price of labour has fallen relative to the price of capital. It is at this point, sad to say, that some nitwit is bound to conclude that the fall in real wages caused the capital stock to shrink and hence real wages to fall).
Simon Crean, former union leader and now a Labor Party MP, had a letter published on 7 July in the Leader, our local paper, in which he stated that Liberal Party Government reform would exert a “downward pressure on the minimum wage” and make “jobs less secure”.
However, Samuelson’s diagram illustrates why Crean is talking nonsense. It is the labour-capital ratio that puts a floor under wages, not union bosses or Labor politicians. (By wages I also mean the gross wage which includes all oncosts, i.e., superannuation, workers compensation, etc.) Union supporters could argue that wages are indeterminate. The diagram clearly shows that wages would still correspond to labour’s marginal product.
This result was confirmed by studies that tracked wages and productivity. Without exception, they found that wages moved in line with productivity. In any case, even if indeterminacy were the norm market processes would still force employers to bid wages up until they reached the upper limit of the indeterminate zone, at which point the demand for labour would become elastic.
Liberal Party activists have argued that the Government has the numbers. What these people are missing is that though numbers are necessary they are not sufficient. For any reforms to be lasting they must receive public approval otherwise they can be repealed by another government.Professor Ludwig von Mises wisely wrote that the masses
… may reject the good ideas, those whose adoption would benefit them. But if they choose what is worse, the fault is not theirs alone. It is no less the fault of the pioneers of the good causes in not having succeeded in bringing forward their thoughts in a more convincing form. (Ludwig von Mises, Theory and History, Arlington House, 1985, p.371).
Ludwig von Mises also observed that classical liberals failed to grasp the fact
that in the eyes of most people, even when they are able to recognise the truth, a momentary, special advantage that may be enjoyed immediately appears more important than a lasting greater gain that must be deferred. (Liberalism: A Socio-Economic Exposition, Sheed Andrews and McMeel Inc., 1978, p. 157).
I think this observation explains why several members of the coalition appear ready to jump ship on labour market reform. It also helps explain why many unionists might strongly oppose Howard’s reform even if they had been persuaded that the reform would benefit the economy. Mises observations about the public were certainly along the same lines as John Stuart Mill who said:
Man is capable of rectifying his mistakes by discussion and experience. Not by experience alone. There must be discussion, to show how experience is to be interpreted. Wrong opinions and practices gradually yield to fact and argument; but facts and arguments, to produce any effect on the mind. Must be brought before it. Very few facts are able to their own story, without comments to bring out their meaning. (On Liberty, Oxford University Press, 1984, p. 27)
So where is the discussion on labour market reform? There hasn’t been one. More than once I warned our insulated rightwing that reform would eventually founder unless they made a serious attempt to reach out to the public instead of snuggling up to politicians.
That the right still doesn’t get it was made clear in the latest issue of the
IPA Review that contained an article by Ken Phillips arguing that it was up to executives to lead the charge. With advice like this who needs enemies.
Gerard Jackson is Brookes’ economics editor
BrookesNews.Com
Monday 7July 2008
acres of land
man-days of labour
output of food
wage in food per day
labour's share of GNP (%)
rent in food per acre
501
4008
1001
8008
3001
20,005
6001
33,604.2
8001
39,000
TABLE 37.1
Diminishing returns from populaton growth ends golden dawn of development
Higher labour-land density reduces output per man, lowers marginal product wage; hence land rent per ever-scarcer acre becomes increasingly positive.