Gerard
Jackson
Now for
some light entertainment. A number of leftists absolutely adore Ross Gittins
(economics editor of the Sydney Morning
Herald and an economic columnist for The Age). While these leftists
rhapsodise over Mr Gittins’ unparalleled grasp of economics I find myself
less than impressed with his opinions.
So how
good is Gittins? On reflection, that should read: Just how bad is Gittins? Last
July he revealed his deep understanding of economics in an article in which
he basically agreed with certain so-called economists that there is no direct
link with the minimum wage and the unemployment rate of marginal labour1.
(Minimum wage rises don’t lift
unemployment, analysts agree, Sydney Morning Herald, 12 July
2014). However, this post is not about Gittins’ failure to understand what is
happening in the field of economics with respect to the minimum wage but his
history of sloppy economic reasoning, of which the aforementioned article is
one of his most recent examples.
I still
recall with a certain amount of glee his laughable prediction that as baby
boomers retire unemployment will fall. (Generation
gap to create jobs turnaround, Sydney Morning Herald. 4 April
2001) and that this process would begin in 2002 after which labour shortages
would emerge in about 2005 and then the shortages would worsen as the number
of retirees continued to exceed the number of people entering the workforce.
Yep, thanks to an army of cheery retirees happy days would be here again —
and that’s why the Australian economy is now experiencing a severe labour
shortage accompanied by rapidly rising wages.
Gittins’
was presenting a clear cut case of supply and demand in operation2.
What Gittins was saying is that fewer workers mean that the supply curve for
labour will shift upwards, widespread persistent unemployment will disappear
and real wages will rise. The problem will then be one of labour shortages.
Where will the labour come from to satisfy the demand of retirees? This is
where his argument collapsed.
The
supply and demand element of Gittins’ article was about the only thing he got
right, though to be fair, he did say that his argument came from Population Ageing and the Economy, a
paper produced for the then-Minister for Aged Care by Chris Richardson of
Access Economics. So let us look at what Mr Richardson and Gittins had to say
about the causes of unemployment. According to Gittins “people of working age
may not have jobs: because they’re full-time students, because they’re at
home rearing children — or because they’ve retired before they turned 65.”
All of
this is perfectly true. It’s also totally irrelevant. What we are concerned
with are not people who simply volunteer to leave the workforce but those who
are able and willing to work but can’t get jobs. This brings us to
Richardson’s fatuous opinion that “levels of unemployment through the 1980s
and 1990s were partly explained by demography.”
Gittins’
statement about a “shortage of work” was just as fallacious as Richardson’s
assertion about demography and unemployment. I’ll even go so far as to call
them economic absurdities. Economics tells us that so long as there is
sufficient land and capital available and labour markets are allowed to clear
there can be no such thing as persistent widespread unemployment, despite
Keynesian fallacies to the contrary.
That
Australia has always had more than sufficient land and capital to employ
everyone is indisputable. It also follows from this that the idea that there
can be a shortage of work is ludicrous. How can such a situation exist while
human wants are unsatisfied? To go any further on this matter would be to
unnecessarily labour the point. It becomes clear, then, that the problem is
one of over-priced labour. In other words, gross wage rates are above their
market clearing values. (The gross wage is the total cost of labour to the
firm). That the problem is one of over-pricing was tacitly admitted by
Richardson when he said that “slowing down the labour supply will reduce
underemployment”.
The
question of underemployment was also raised. But underemployment is merely
another name for sub-optimal employment, of which there are basically two
forms. The first one occurs where factors are driven into alternative lines
of production where the value of their output is less than the lines of
production from which they have been excluded. This means that workers are
underemployed when they have been priced out of jobs where their marginal
product is more highly valued by the market. The second form emerges when
short-time working is introduced. This sometimes involves work-sharing. This
happened extensively under the Roosevelt administration.
So what
Gittins’ argument amounts to is that the supply of labour will fall as the
number of retirees increase. This fall in the labour force will then
eliminate unemployment. Looked at in this light there is nothing special
about this situation. On the contrary, once we apply economic reasoning to
explain it we come to immediately understand the root cause of persistent
widespread unemployment. We then find this glaring fallacy in Gittins’
article. He stated:
When
the demand for goods and services runs well ahead of the supply of workers
available to produce them, you get wages being bid up as businesses try to
pinch each other’s employees, inflation taking off, profits being squeezed
and an explosion in imports.
This is
sheer nonsense. As I said earlier, a reduction in the labour force leads to
an upward shift in the supply curve of labour (I use labour figuratively
because the reality is that labour is not homogeneous and there are only
labour markets, not one single market) which means that the supply curve will
rise to meet the demand curve. Now the demand curve is no more than a
descending schedule of labour’s marginal productivities, meaning that as you
move up curve the value of labour services rise.
It
should also be clear that the employers cannot pay more than the value of the
worker’s service. That real wages actually increase is entirely due to being
employed in higher valued lines of production. Those firms whose revenue is
squeezed to the point of bankruptcy are firms that the new labour situation
rendered sub-marginal. There is nothing inflationary about this. (The
situation in England after the Black Death struck in 1348 provides a graphic
historical example of this process at work). However, a situation where
capital accumulation exceeds the rate at which the workforce grows is one in
which real wages rise for everyone despite an increased labour supply. This
is because capital accumulation lifts the demand curve for labour and shifts
it to the right.
Now the
only way that prices could rise is that if output lagged behind the money supply
or there was a drop in total output relative to the money supply. Therefore,
demand can never run ahead of output or labour services: the reason being
that outputs are demands. Put another way, supplies constitute demands.
Goods, not money, pay for other goods. Money is merely an indirect way of
bringing these exchanges about. But what can run ahead of output is the money
supply. This is what could cause prices to take off and imports to explode,
not Gittins’ mythical labour shortage.
However,
a genuine labour shortage could appear when a country’s capital structure
expands at such a rate that the labour supply fails to keep up with it. I
believe such a situation may have occurred in Germany during its period of
rapid capital accumulation in the 1950s and 1960s. During the ’50s and ’60s
with the result that the country imported what it called ‘guest workers’3.
This leads to the conclusion that the only real and sensible way of
continually raising real wages for everyone, and hence the standard of living,
is to encourage capital accumulation.
Note:The subject of growth and real wages
certainly requires a more detailed treatment. For example, the classical
economists understood that economic growth is forgone consumption. Therefore,
if governments implemented policies that successfully encouraged greater
consumption at the expense of business spending then at a certain point the
accumulation of capital would not merely have been significantly slowed down
but will have gone into reverse, bringing about a process of capital
consumption. Real wages would then have to fall. John Stuart Mill was
expressing the classical view on this matter when he wrote:
The
circulating medium existing in a country at a given time, is partly employed
in purchases for productive, and partly for unproductive consumption.
According as a larger proportion of it is employed in the one way or in the
other, the real capital of the country is greater or less. If, then, an
addition were made to the circulating medium in the hands of unproductive
consumers exclusively, a larger portion of the existing stock of commodities
would be bought for unproductive consumption, and a smaller for productive,
which state of things, while it lasted, would be equivalent to a diminution
of capital; and on the contrary, if the addition made be to the portion of
the circulating medium which is in the hands of producers, and destined for
their business, a greater portion of the commodities in the country will for
the present be employed as capital…4
If the
classical economists had only examined this process in detail, particularly
in the light of John Rae’s path breaking work on capital, I doubt that the
world would be in its present economic predicament. However, all is not lost.
This crucial classical insight is one that the Austrian school of economics
continually endeavours to bring into the public arena.
* * * * *
1The
first thing to note is that the only minimum wage that matters is the
effective minimum wage, the wage set above the market clearing rate. Secondly,
the minimum wage equals the gross wage. This includes all additional costs of
hiring labour. If these costs are sufficiently flexible cutting them can
reduce the damaging effects of an increase in the effective minimum wage.
As
expected, Gittins approving referred to the now discredited 1994 Card and
Krueger study allegedly proving that there is no link between the minimum
wage and youth unemployment. The eminent economist George Stigler’s take-down
of Card and Krueger was devastating. He sarcastically noted of their approach
that by “using these methods you could prove that no soldier was killed in WW
II — a comfortable conclusion but one whose validity is open to considerable
doubt.” (Thomas Sowell, Basic Economics:
Citizen’s Guide to the Economy, Basic Books, 2000, p. 155).
In
addition, Benjamin Zycher, vice president for research at the Milken
Institute for Job and Capital Formation in Santa Monica, pointed out that
their study had a very deep flaw: “The survey data upon which it depends are
lousy”. This was confirmed by the Employment Policies Institute and David
Neumark of Michigan State and William Wascher of the Federal Reserve. Neumark
and Wascher concluded in one study that
In sum,
we view the literature — when read broadly and critically — as largely
solidifying the view that minimum wages reduce employment of low-skilled
workers PARA (Minimum Wages and
Employment, Foundations and Trends in Microeconomics, Vol. 3,
No 1–2, 2007).
To be
fair to Card and Krueger they were actually cautious about their findings.
Nowhere did they emphatically state that raising the minimum wage above the
market level would not cause unemployment. Now if Gittins is unaware of these
facts then he is incompetent and lazy. If he is aware of them but chose to
ignore them then he is dishonest. Either way, this reflects very badly on him
and his unthinking supporters.
I
personally believe that studies claiming to prove that raising the minimum
wage above the market clearing rate does not cause unemployment are mainly
ideologically motivated and designed to confuse the issue and discredit free
labour markets.
2It’s
rather amusing to find that in Gittins’ world the law of supply and demand
works flawlessly with respect to retirees and the labour force but not with
respect to minimum-wage workers.
3In
the 1950s I recall a great deal of commentary concerning Germany’s ‘economic
miracle’ and how the country was outpacing the British economy. This was a
period in which Britain was marked by “stop-go” policies and labour
shortages. (It really wasn’t much different for most of the 1960s). In my
opinion Britain’s recurring current account problems and the so-called labour
shortages were the product of pernicious Keynesian policies.
4John
Stuart Mill, Principles of Political
Economy, Vol II, University of Toronto Press 1965, p. 528.
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