On the labour market

This is the speech I gave recently to the Liberal National State Council on the labour market.

Ladies & Gentlemen,

The labour market is a particularly important issue facing our society at the present time. It affects many different areas of our society, including the unemployment rate, workplace conditions, people’s income and job satisfaction.

In particular, I’d like to discuss the ups and downs of different approaches to the labour market and what I think is the optimal approach.

The labour unions have long advocated a highly regulated approach to the labour market. They strive to enshrine workplace conditions, salaries and the content of workplace contracts in law.

One area in particular that unions actively try to enshrine in law is salaries. The unions have long tried to regulate incomes in the form of minimum award wages. This approach is fundamentally misguided. Legislated minimum conditions achieve only one thing – to make it illegal for people to work. If someone has a productive capacity of $6 an hour and the minimum award wage is $5 and hour, that person will have no difficulty getting a job. If we now increase the minimum award wage to $8 an hour, that person is not going to get a salary increase to $8 an hour – they’ll be out of work. And all other labour market regulations have a similar outcome. They price people out of jobs, undermine their ability to negotiate the terms of their workplace contracts, and make the labour market extremely inefficient and uncompetitive.

I advocate a different approach altogether. There should be only one workplace law, and that is to enforce contract. The contents of a contract ought to be something that is freely negotiated between the employee and the employer. But once that contract is signed it needs to be respected – by both parties. And enforcing this contract should be the role of government.

The unions are very critical of this approach. They argue that people deserve better conditions than what they agreed to in their contracts and they resort to extortion tactics to achieve these better terms of contract. They engage in strike action, immoral political lobbying, rallies and sometimes even violence to achieve this objective.

The unions also argue that they are there to represent workers. Let there be no mistake, unions do not represent workers – they represent paying members. They represent people who pay a significant amount of money to be represented by these organizations. As a result, people who choose not to join a union are left at a competitive disadvantage. Even worse, people without jobs are at a huge competitive disadvantage because not only do they not receive any union representation, but they are priced out of the market by artificially high minimum award wages.

Essentially what unions do is to artificially pump up salaries and conditions that are not commensurate with productivity gains. This has exactly one effect, and that is to create inflation. When people earn more, without a corresponding increase in productivity, people have more money to buy goods with, but the amount of goods to buy hasn’t changed. So money loses its value, which is inflationary and results in higher interest rates. And when interest rates increase, people are paying more on their mortgages, more on their car loans, more on their credit card debt, and so any gains made by increasing their salaries is completely wiped out by the higher interest rates. This is completely counterproductive.

There is no better person to decide the terms of their contract than the prospective employee. Employees don’t need to have their terms, conditions, and salary dictated by either unions or the government. In a free society, people should be at liberty to negotiate these things for themselves.

14 thoughts on “On the labour market

  1. There is one fallacy in this, and one material error of omission (at least).

    The fallacy is thinking that union activities as such create inflation. In themselves, they do not, since inflation actually derives from increases in the money supply. What they actually do is create pressures encouraging the increase of the money supply through political channels, as they notably did in the UK under a Labour government in the 1960s. What then happens at the political level is a choice between inflation and union-derived trouble, and at the employer level it remains practical to raise nominal wages as long as inflation keeps raising nominal positive cash flow. With a different political response, as under Thatcher, different things happen and the union activity chokes off – but the direction of cause and effect doesn’t go from that choking off to the reduced inflation. Rather, without inflation, there is no way to meet union demands across the board even if employers be willing.

    The error of omission is the assumption that the labour market is near enough to a perfect market for practical purposes. It is not, since there is an externality favouring unemployment. In Australia, this works out as the spread cost of the unemployed to the taxpayers, via Social Security, but it even happens in countries without that sort of thing, taking the form of Vagrancy Costs. (This could be fixed in various quicker or slower acting ways, e.g. with the fast acting Pigovian approach I described here and that I tried to get the Liberal Party to study here.) In any case, since this has not in fact been corrected, it is not necessarily true that “[t]here is no better person to decide the terms of their [sic – should be singular] contract than the prospective employee”, precisely because “[i]n a free society, people should be at liberty to negotiate these things for themselves” is not accurate for the labour market.

  2. I think PML is wrong in one regard- people should be at liberty to negotiate these things for themselves. At the moment, we can’t, but ideally, we would have that freedom.

  3. I guess we should abolish companies, because after all, companies are unions of shareholders negotiating together to get the best return.

    And by your logic, all companies do is cause inflation.

    Of course, this is silly.

    Unions and companies are important mechanisms a free market. We need stronger unions, and weaker government.

    There should be no legislated minimum wages.

    Will people get exploited with no minimum wages? Well, they won’t, if there are strong unions to protect their wages.

    Unions should be able to negotiate almost any contract they wish with employers. And employers should be free to get their labor elsewhere.

    Whilst I wouldn’t go as far as allowing closed shops, I think unions should be able to sign agreements to companies that require those companies a certain sum of money, possibly per employee or on other factors.

    Abolishing industrial relations laws that place artificial restrictions on unions (by example, forcing them to pay the AEC for elections, and criminalising certain agreements) results in the situation where it is argued that the minimum wage is necessary for workers.

    For the market to work properly, two restrictions on workers need to be removed. Firstly, the restrictions on their ability to negotiate collectively, and secondly, the restriction preventing them from accepting wages below a certain level.

    Freedom works both ways, and only if it’s allowed to work both ways is it effective.

  4. Clinton, the problem is people don’t like strikes.

    Just like they don’t like market fluctuations that result in them being unemployment.

    People like stability more than the net positive of freedom. Freedom, of course, is superior, but convincing people of that is unfortunately, quite the task.

  5. I agree that there is a place for unions who represent the best interests of their members in a free market system, but the trouble is that most trade unions are so anti-free market that they prefer to pursue statist policies over looking after their members interests. e.g. I cannot believe that the AWU would ever think that a punitive mining tax will ‘create jobs’. I thought the AWU was one of the more sensible unions (or at least not militantly left-wing like the CFMEU)

    In a true free market system for labour, union members should be allowed to strike whenever they wish, but equally an employer should be allowed to sack the lot of them immediately for striking, with no notice, and get replacement workers in.

    People should be free to negotiate the terms of their employment individually, or have a union do it for them, or indeed choose between competing unions to do it for them if they wish. Just as the government should not interfere with this process, neither should the unions engage in any form of coercion, whether it’s closed shops or harassing people who are willing to work under terms they don’t agree with.

    In general, labour market deregulation is a tough sell for libertarians. Most people acknowledge that the old days of closed shops and unions holding entire workplaces and industries to ransom were bad, but shy at the prospect of abolishing minimum wages, and repealing so-called ‘unfair dismissal’ laws.

    The union propaganda about exploiting the vulnerable workers is pretty strong. It’s what cost the Liberals government in 2007.

  6. NG, you have misunderstood me. I wasn’t describing the ethical position of what people ought to be able to do, but whether they are actually in the best position to know what to do – best in an engineering rather than ethical sense. Because there is a thumb on the scales distorting the labour market, the individuals concerned aren’t necessarily best placed for that the way they are in a proper free market. They might be, or they might not be, but we no longer have the same support for it.

    CM, your reductio ad absurdum has pointed you in the wrong direction. Rather than companies being sound showing that unions are, the reasoning actually shows that both are unsound. Neither is a free market construct, with both being artificial things with a lot of state assistance and intervention. For more on this, you could start with the material and links at Kevin Carson’s mutualist blog.

  7. If unions negociate better salaries for their members, that money must come from somewhere else. It does not cause inflation! 🙂

  8. The only objection I have to unions is that they are monopolies. They should also have a free market in unions.
    PML, the original article was hypothetical, but you seemed to treat it as though it were describing current reality. hence my criticism of your criticism.

  9. NG, Rohde’s first two substantive paragraphs make it clear that he is trying to address the actual situation, not to discuss an abstract hypothetical situation.

  10. PML, the statement in your last sentence in #1 has a quote which has the word ‘should’ in it. The quotee, to my understanding, is speaking about a hypothetical perfect economy, not the real one we are in.
    I agree with him that we should be free, though we are not there now.
    I agree with you that unions do not directly cause inflation- their wage claims put pressure on the government, which prints extra money. The government creates inflation because of factors like union pressure for more money, etc.

  11. Rohde’s first two paragraphs make it clear that he is describing the factual situation as he sees it. That means that things like “should” later on are his “ought” descriptions, giving his ethical view.

    Probably you should just ask him, maybe at his site where he has also posted this.

  12. Let me enter the debate and clarify my position. When I wrote this piece I in fact had two interpretations in mind, so you are both correct. On one hand I describe how I see things in reality. But on the other hand, the views I express pertain to the hypothetical situation also. I do believe, in reality, that unions distort labor markets, undermine freedom, and (either directly or indirectly) cause inflation. Whether this is, in reality, the case, is debatable.

  13. A union cannot cause inflation, because they cannot create money. Now as to if they can distort prices and supply, well that’s different. If a union artifically makes prices higher, and gets more pay, they are basically shifting wealth from the consumer to themselves. For example if the unions were able to lobby for an increase in minimum wage, which raised the price of good, and raised the amount of taxes paid to welfare for the people who wouldn’t find work anywmore. But it could not cause inflation.

    Unions are so economically ignorant, that it is mindblowing to me that anyone would even be a member. I guess the lay person really is that stupid. For example go to actu.org.au, on the main page alone you can usually read at least a dozen statements that are utter non-sense. Talking to the union members at work is like talking to a child. There knowledge of how a buisness works, how profits ultimately drive increased standards of living are appauling. No matter what the situation you always hear the same stupid things:

    1. Their labour is always forth a ‘fair’ value, and that value is set by the cost of living to a certain standard, and has nothing to do with the value that the work produces. Such concepts are completely alien to them.

    2. Following on from 1, they resent anyone who gets more pay than them, as they see the extra money as above the ‘fair value’ of labour. A manager who gets a bonus for making his workers more efficient is evil.

    3. The workers will complain about pay cuts or pay decreases, even when there is literally 0% chance of getting the same job anywhere else. I would say that 95%+ of the union members I know would never EVER leave their jobs. Yet all of them seemed unhappy with there conditions.

    4. Not a single union member I have ever spoken to would agree with me saying that they are only worth what someone else would do their job for.

    The most appalling thing of the unions – is that they actually hurt hard working people, and most of them do not even realise it. For example:

    1. Unions despise performance pay. This ensures that lazy workers get the same amount of pay as hard working people. Ultimately it forces everyone to be lazy.

    2. They teach people that their labor and skills are always worth a certain amount, not matter how many people have those skills and no matter how scarce or abundant a replace is.

    3. They make people content with CPI pay rises or just above CPI pay rises. For living standards to increase, pay must increase above CPI. But because unions drive pay for reasons other than increased efficiency, they are almost universally unsuccessful at gaining pay rises much above inflation.

    4. The tell their members that things like the extra 3% super, is money that is coming out of the employers pocket, and not out of the employees own pay.

    I could go on about them all night….

    *end rant*

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