Prof.
Bryan Caplan
bcaplan@gmu.edu
http://www.bcaplan.com
Econ
321
Weeks 3-4:
Labor Market Regulation and Labor Unions
I.
Unemployment As a Labor Surplus
A.
Intuitively, we often think of "unemployment" as a situation
where people who are willing and able to work are somehow denied the chance to
do so.
B.
At the equilibrium wage, there are neither labor shortages nor
surpluses; unemployment is voluntary (not in the sense that it is cause
for celebration, but in the sense that people do not want to work more at the market wage for jobs they are able to do).
1.
Analogy: Voluntary datelessness.
C.
So how is involuntary unemployment possible? Only if
the prevailing wage is too high!
D.
This is no different from any other surplus
good. "Surplus" means
"surplus at the current price."
E.
More generally, there are only three
possibilities:
1.
Market wage=equilibrium wage; the labor
market clears.
2.
Market wage<equilibrium wage; there is a
labor shortage.
3.
Market wage>equilibrium wage; there is a
labor surplus.
F.
Note: there is no case where workers are both "under
worked" and "underpaid."
If they are under worked, they are overpaid; if they are underpaid, they
are overworked.
G.
This simple application of S&D runs contrary to almost all popular
beliefs about labor. But there can be
little doubt that it is correct.
H.
The general solution to all involuntary unemployment boils down to:
reduce the market wage until the surplus disappears.
I.
The "buy-back-the-product" fallacy. Does reducing wages "reduce
demand"? Of course not. Lower wages may mean less income for employees,
but also mean more income for employers.
II.
Unemployment on the Free Market: Wage Fairness and Unionization
A.
Economists standardly assume that unregulated markets clear. Could this assumption be wrong in labor
markets?
B.
Case 1: Wage fairness. There is
good evidence that workers regard wage cuts as "unfair."
1.
Review: real versus nominal wages.
C.
Perceived unfairness hurts morale, which typically leads to lower
productivity. So employers are reluctant
to cut wages when labor demand decreases or labor supply increases.
D.
The result: if equilibrium wage is below prevailing wage, jobs will be
"rationed." Qualified, willing
labor remains unsold because workers are overpaid.
E.
Interesting: employees seem to resist nominal wage cuts much
more fiercely than real wage cuts.
Nominal wage cuts hardly ever happen; real wage cuts are far more
common.
F.
How serious would the problem of surplus labor be under
laissez-faire? It would definitely
exist, but the historical record suggests that it would be fairly mild.
G.
Case 2: Unionization. Unions are
basically labor cartels; their goal is to push wages up by restricting
competition between workers. Unions are
"price-fixers."
H.
The natural side effect is to create labor surpluses. Ideally (from the union's point of view), the
surplus workers won't belong to the union anyway, so none of the members
suffer. In practice, though, the
unemployment often spills over onto union members.
I.
In economic terms, what are "scabs"? They are workers who undersell the cartel. If enough scabs exist, unions have little
success.
J.
Assuming the government prevents violence and threats of violence, it
is difficult - though not impossible -
for unions to keep wages up. They
succeed best when:
1.
Labor demand and labor supply are highly inelastic. Small, highly skilled craftsmen are a good
example.
2.
The social stigma of "being a scab" is very high.
K.
Under laissez-faire, involuntary unemployment created by unions would
again exist, but not much of it. As long
as employers can legally hire non-union workers, and non-union workers feel
physically safe to accept such offers, market forces sharply check the power of
unions.
III.
Unemployment on the Free Market: Corrective Government Policy
A.
Is there anything government could do about the preceding
problems? In principle, yes.
B.
For real wage rigidity, intervention could help by pushing wages down. If workers blame the government instead of
the employer, presumably they don't blame the employer for being
"unfair."
C.
For nominal rigidity, the government has an easier solution: print more
money to raise the price level until the nominal wage clears the market. If workers are clueless, they may never
"see what hit them."
D.
Similarly, unions might be banned, much as other cartels are illegal
under the antitrust laws.
IV.
Government Policy in the Real World, I: The Minimum Wage
A.
In the real world, government policies bear little resemblance to the
kinds of "corrections" economic theory points toward.
B.
It is almost impossible to find governments that try to force wages down. Instead, governments around the world
deliberately push wages up and prevent market adjustment.
C.
Classic example: the minimum wage.
D.
Suppose the equilibrium wage is $10/hr.
If the government imposes a minimum wage of $15/hr., there will be unemployment. Employers will want to hire fewer people than
want to work at the market wage.
E.
Simple question for proponents: Why not $1,000,000/hour?
F.
Interesting: Unions of skilled workers often support the minimum wage
strongly. Altruism for unskilled workers,
or masked self-interest?
G.
In the
H.
Even though most governments deliberately try to push wages up, at the
same time many also try to erode real wages by inflating. (Whether they think of it in these terms is
another matter).
I.
Yet reducing unemployment with inflation often fails. Employed workers catch on and negotiate cost-of-living
adjustments, leading to spiraling inflation.
J.
In some cases, one arm of the government actively tries to undo the
harm done by the other arm. One branch
raises the (nominal) minimum wage, the other tries to reduce the (real) minimum
wage via inflation!
1.
What does the real minimum wage look like when inflation is always
positive?
V.
Government Policy in the Real World, II: Pro-Union Laws
A.
It is much more common for governments to encourage unionization than
it is to make it illegal. Pro-union
efforts by governments take a variety of forms.
B.
One of the most common is to "look the other way" in the face
of union violence against strike-breakers, employer property, etc. Laws limiting union liability serve the same
function.
C.
Some more explicit regulations:
1.
Require employers to "recognize" and "bargain in good
faith" with any union that gains the support of a majority of workers in a
firm.
2.
Making it illegal to fire workers for striking or union organizing.
3.
Banning "yellow dog" contracts, where employees are non-union
as a condition of employment.
D.
When governments strictly enforce pro-union regulations, levels of
unionization - and unemployment - can
reach high levels.
E.
Other countries with the same laws on the books may escape most of the
bad effects by weak enforcement.
1.
Alternate book title: "Why
VI.
Additional Labor Market Regulations
A.
There are numerous other laws that work much like the minimum
wage. Even if their short-run effect is
to increase labor demand, the long-run effect is exactly the opposite.
B.
What happens if the government adopts the following measures, while
forbidding wages to fall? (Alternately,
if strong unions prevent wages from falling).
C.
Case 1: Mandated benefits. What
if the government mandates new benefits (safety, health, family leave, etc.)
and forbids wages to fall?
D.
Case 2: Regulations against lay-offs and firing. How will employers respond if they know that
they must continue employing workers they don't need? Are bad at their job?
E.
Case 3: Plant-closing laws. What
if the government penalizes firms for (or forbids) closing plants?
F.
Case 4: Employment lawsuits.
What if employees can sue their employers for discrimination,
harassment, unfair termination, etc.?
G.
Case 5: Mandatory overtime. What
if employers are legally required to pay "time-and-a-half" for
overtime?
H.
How do these results change if wages are flexible?
I.
Related regulation: Unemployment insurance, welfare, and so on reduce
the supply of labor. If they are
generous enough, they can "convert" involuntary unemployment into
voluntary unemployment. This in turn
reduces downward pressure on wages.
1.
How can this be graphed?
VII.
Application: European Unemployment
A.
Labor market regulations in Europe are typically very strict. Over the last twenty years, the average U.S.
unemployment rate has been roughly 6%, versus 9% for Europe.
B.
Most economists blame European countries’ stricter labor market
regulations.
C.
What have European labor policies been like?
1.
High legal minimum wages. (E.g.
34% of median in U.S. vs. 60% in France).
2.
High unemployment/welfare benefits with long durations.
3.
Firing/layoff regulations.
4.
Mandatory benefits (vacation, sick leave, maternity leave, etc.) (How does the interaction between mandatory
benefits and nominal and real rigidity work?)
5.
High unionization rates with strong legal support for unions. (Note: In some countries like France,
non-union workers still have their wages determined by union negotiations).
D.
Apologists for European labor marker were quick to note that in March
2009, U.S. unemployment surpassed Europe’s.
But:
1.
This was only a blip. European
unemployment is once again more than 2 percentage-points worse than ours.
2.
You should expect more
flexible labor markets to respond more rapidly to negative shocks. The key question is long-run performance.
E.
Since 2008, U.S. labor policies have moved in a sharply European
direction, and our recovery has been extremely slow. We may be next.
1.
99 weeks (!) of unemployment insurance.
2.
Obamacare health insurance mandates combined with rapidly rising health
care costs.
VIII.
Occupational Licensing
A.
Most econ textbooks discuss labor unions at length, but at least in the
United States, occupational licensing is much more important.
1.
Almost 30% of American workers now need a license to legally do their jobs. Only about 12% belong to unions – and more
than half of them are government employees.
B.
Licensing clearly raises the wages of licensed workers; they make about
15% more than you’d otherwise expect.
(Roughly as big a bonus as unionized workers get).
C.
People often claim that occupational licensing raises quality and
protects the public, but:
1.
For many licensed occupations – barber, interior decorator, athletic
trainer – this argument fails the laugh test.
2.
The average study of the effect of licensing on quality finds a
moderately negative effect on
quality. (Not so surprising: Licensing
inhibits innovation).
3.
Higher quality is often not worth the extra price. Markets (or government certification!) let consumers decide for themselves. Licensing makes everyone pay full price.
D.
Unregulated markets have simple mechanisms to ensure quality:
1.
Reputation
2.
Guarantees
3.
Lawsuits (much less important, but a useful last resort)
E.
We already heavily rely on these mechanisms – see eBay and Amazon
Marketplace. Why can’t we rely on them
in labor markets?
F.
Medical licensing: Is this really such a hard case after all?
1.
Medical licensing clearly raises medical prices.
2.
Many medical tasks now performed
by doctors could easily be performed by less-trained (and cheaper) workers. The same goes for other medical
professionals.
3.
HMOs and insurance companies make reputation work much effective than
you’d initially think.
IX.
Regulation Under Slavery
A.
A great deal of supposedly "pro-labor" regulation is actually
counter-productive. Would the same hold
under slavery?
B.
For the most part, no. Under
slavery, the popular intuition turns out to be exactly correct.
C.
Example #1: A minimum wage for slaves.
If enforced, this means that slaves get more than subsistence. At the same time, it decreases the demand for
slaves, which reduces the incentive to hunt for additional slaves.
D.
Example #2: Worker health and safety regulation for slaves. Due to regulation, slaves have more safety
and health, and still receive the same subsistence earning they would have gotten
anyway. This also reduces the demand for
slaves, which hurts the slave trade.
E.
Example #3: Banning or regulating the punishments that owners can
inflict on slaves.
F.
Example #4: Boycotting products of slave labor.
G.
With sufficiently strict regulation, slave-owners will want to free
their slaves! Thus, the "Why not a
minimum wage of $1,000,000?" argument can be easily answered under
slavery: "The higher the better."
X.
Slavery and "Wage Slavery" Compared
A.
Socialists and defenders of slavery alike have frequently derided free
labor markets as "wage slavery," equating the condition of slaves and
free laborers.
B.
This had cache in the emerging industrial economies like the
C.
As workers - free or slave - become more productive, labor demand
rises. The difference:
1.
Free laborers capture the benefits of rising labor productivity for
themselves.
2.
Under slavery, in contrast, it is slave-owners who capture the benefits
of rising labor productivity.
Slave-owners don't have to worry that slaves will leave them for a
better-paying offer.
D.
Free workers also get to make their own trade-off between income and
safety and comfort. When a master decides
to send his slave to mine diamonds, he only maximizes his expected income. A free worker makes a trade-off between
expected income and safety and comfort.
E.
The toned-down version of the "wage slavery" story is that
free workers are "exploited."
It is easy to see how slaves are exploited: They get less than their
free market wage. In what sense are free
workers exploited?
F.
Ex: Western observers look at "sweatshops" in poor countries
and cry "exploitation." This
is both false and harmful for
1.
False: Investing in the
2.
Harmful: If boycotts reduce the demand for
XI.
Why the Standard History of Labor Is Wrong
A.
Most history books tell a story something like this:
1.
In the days before the minimum wage, unions, etc., life was terrible
for workers because employers paid them whatever they felt like paying them.
2.
But then government became more progressive, and changed the laws.
3.
Life is now better for workers because employers' greed has been tamed.
B.
This makes no sense at all. Why?
C.
Employers compete with other employers; they care about their own
profits, not the profits of employers in general. Workers have always earned their marginal
productivity.
D.
Why then were workers paid less in the past? Their marginal productivity was lower! As technology progressed, the marginal
productivity of workers increased, and labor demand accordingly went up.
E.
Suppose government had imposed strict regulations when productivity was
low? The result would have been higher
wages for the lucky, but permanent unemployment (and probably starvation) for
the rest.
F.
The problem of workers in the