Bob Herbert, op-ed columnist for
The New York Times and perennial critic of the purported flaws of
capitalism, has an article in the Times of October 8, 2004, titled
“Working for a Pittance.” The article, drawing on a study "Working Hard,
Falling Short," complains about the low wages of 9.2 million working
families and the plight of the 20 million children in these low-income working
families. It goes on to detail the high cost of housing, food, utilities, and
transportation and notes the shock in store for such families this winter when
price increases for crude oil show up in large increases in home heating bills.
The clear implication of the article is that the federal government must do something
to alleviate the plight of these families, such as sharply raising the minimum
wage.
I accept the description of the
facts of widespread poverty cited by Herbert, but I have a radically different
solution for them than the kind that he and the rest of his colleagues at the Times
would likely offer.
If one wants to raise the wages
of the lowest paid workers, do not raise the minimum wage. Raising the
minimum wage would only add to forced unemployment and cause the lack of any wages at
all on the part of those added to the unemployment rolls. It would add to
unemployment, because every rise in price (a wage rate is a price) serves to reduce the quantity of the
good or service demanded. This is one of the best established laws of
economics.
An increase in the minimum wage
would also raise costs of production and thus serve to raise the prices paid by
all workers. In addition, the tax burden of workers at all levels of income
would be increased in order to support the increase in the number of unemployed.
(The higher tax burden would not be limited to higher personal income taxes,
which the poorest workers may not pay, but would also include higher sales
taxes and higher prices caused by higher taxes on business firms and individual
savers.)
Instead of raising the minimum
wage as the means of increasing the wage rates of the unskilled and poor, abolish
prounion legislation. Such legislation, above all, the Wagner Act of 1935,
which established the National Labor Relations Board, compels employers to
recognize and deal with labor unions and to accept union wage rates. This
enables the labor unions to impose the equivalent of minimum wages throughout
the economic system, including for semi-skilled and skilled workers, at much
higher levels than the government’s own minimum wage.
Just like the government’s
minimum wage, the higher wage rates imposed by the unions serve to reduce the
quantity of labor demanded, this time, of course, in the ranks of the
semi-skilled and skilled occupations as well as among unskilled workers. The
effect is that workers are displaced from occupations of their choice and
pushed into other occupations, enlarging the supply of labor in those other
occupations and either depressing wage rates in them or, to the extent that
that is prevented, causing unemployment in those other occupations.
For example, workers who might
have been carpenters, plumbers, or electricians but who are denied employment
in those lines by the height of union wage scales, are forced to seek work
elsewhere, say, in factories or stores. To the extent that the would-be
carpenters et al. who have been displaced are more capable than most of the
workers working in factories or stores, the carpenters et al. will be likely to
find employment in them. In order for the carpenters et al. to be absorbed in
these lines alongside those already in them, wage rates in these lines would
have to fall, to create the necessary increase in quantity of labor demanded.
If these wage rates are prevented from falling, the effect of the carpenters et
al. finding jobs in these lines is a further displacement of workers. Thus,
workers who might have found work in factories or stores are in turn displaced
and must find employment perhaps as busboys or gardeners. In an economy in
which reductions in wage rates have been made almost impossible by prounion
legislation, the ultimate effect is a displacement of labor to the lowest
levels of employment and a corresponding unnecessary, artificial increase in
the supply of labor at the bottom of the economic ladder.
This enlargement of the supply
of labor at the bottom that is the result of prounion legislation, is the cause
either of unnecessarily low wage rates at the bottom or unemployment, or some
combination of both, depending on the height of the government’s minimum wage.
The repeal of prounion legislation and the consequent increase of employment
opportunities higher up on the economic ladder would reduce the supply of labor
seeking employment at the bottom and thus make possible the employment of
workers there at higher wage rates.
It is important to realize that
the pernicious influence of prounion legislation is only very inadequately
gauged by the proportion of workers belonging to labor unions. The ease with
which businesses can be unionized, as the result of prounion legislation,
compels employers who want to avoid being unionized to pay wages as high or
higher than the union scales, so that they can tell their employees that
nothing is to be gained by unionizing. This way, the employers can avoid the
costs of union work rules and other obstacles the unions put in the way of
improving the productivity of labor.
In this connection, it should be
realized that the repeal of prounion legislation would make possible
substantial increases in the productivity of labor in the important industries
that the unions do directly control, such as automobiles, steel, construction,
and transportation. Increases in the productivity of labor serve to enlarge the
supply of goods relative to the supply of labor and thus to reduce prices
relative to wage rates, which is to say that they raise real wage rates. Repeal
of prounion legislation and thus the elimination of the power of the labor
unions to hold down the productivity of labor would bring about substantial
increases in the real wages of all workers.
The repeal or liberalization of licensing
legislation, which also serves artificially to reduce employment
opportunities in many fields, would result in the same kind of improvement in
wage rates at the bottom of the economic ladder as the repeal of prounion
legislation. Such legislation presently applies to doctors and dentists,
optometrists and pharmacists, barbers and beauticians, and liquor stores and
taxicabs, to name a few leading examples. In every case, it serves to hold down
the number of those allowed to pursue an occupation and thus to raise the wage
rates or prices of the smaller number remaining in the occupation, while
depressing wages in the lines into which the displaced workers are driven. And
if wage rates in those lines are prohibited from falling, the result, as shown,
is a further displacement of workers into still less desirable occupations,
with the process culminating in the displacement of workers into the least
desired, lowest paying occupations, and resulting either in the lowest paying
occupations becoming still lower paid or in unemployment. In either outcome,
the heaviest burden is borne by the least skilled, least educated, and poorest
members of the economic system.
Herbert and the authors of the
report he cites are totally unaware of these effects of prounion and licensing
legislation. He quotes the report approvingly when he writes: “Not
surprisingly, the problem for millions of families is that they have jobs that
pay very low wages and provide no benefits. `Consider the motel housekeeper,
the retail clerk at the hardware store or the coffee shop cook,’ the report
said. `If they have children, chances are good that their families are living
on an income too low to provide for their basic needs.’” It never occurs to
Herbert or the writers of the report that the wages of these workers are as low
as they are because of the downward displacement of labor caused by prounion
and licensing legislation.
As in the case of the repeal of prounion
legislation, the ability of more workers to be employed in the presently
licensed occupations would reduce the supply of labor needing to be employed at
the bottom of the economic ladder. And, both it and the repeal of prounion
legislation would bring about reductions in the cost and prices of all those
products and services requiring the employment of labor that presently must be
paid artificially high wage rates. The effect would be that the lowest paid
workers, whose plight Herbert and the rest of the left continually lament,
would earn higher wage rates while paying lower prices. Arbitrary inequalities
in wages would be eliminated. That is, inequalities resulting not from
inequalities in skill, ability, or the amount of work done, but inequalities
resulting from government intervention and the monopolistic protections it
gives to favored groups at the expense of the rest of the population,
particularly the poor—these inequalities would be eliminated.
The take-home wages of all
workers could be increased by the elimination of compulsory employee
contributions to various government
programs, such as social security and medicare, which now amount to over seven
and a half percent of a low-paid worker’s income. Perhaps surprisingly to many
people, take-home wages could also be increased by the elimination of
government or labor-union mandated employer contributions as well.
Imposing such contributions, whether for social security and medicare or for
medical insurance, family leave, retirement, vacations, and holidays, or
anything else, is tantamount to a forced increase in wage rates, i.e., it makes
an employer pay more in order to employ the same labor. As such it results
either in unemployment and higher prices or, if unemployment is to be avoided, in
equivalent reductions in take-home wages.
To the extent that these
reductions in take-home wages are not experienced by workers in the occupations
receiving the supposedly employer-financed benefits, they are experienced by
the kinds of workers described by Herbert and the report he cites—i.e., by
workers in lines experiencing the additional displacement of labor caused by
the increases in labor costs imposed by the mandated employer financing of
employee benefits.
Just as the wage rates of
workers, especially the lowest paid, could be substantially increased by the
reduction of government interference, so too the prices paid by all workers
could be substantially reduced by the reduction of government interference—in
additional ways than those already explained.
There is no good reason, for
example, for the price of oil to be over $50 a barrel and rising. In a free
market, that is, a market not hampered by such things as regulations driven by
environmentalist hysteria and a valuation of human well-being below that of
caribou, there would be a substantially increased supply of oil from Alaska.
There would also be an increased supply from offshore fields in the Gulf of
Mexico and off the coast of California. And added to this would undoubtedly be
major increases in the supply of oil from other parts of the United States, now
ruled off limits to exploration and development because they have been set
aside as wildlife preserves or wilderness areas. These increases in supply
would substantially reduce the price of oil.
The price of oil would also be
reduced by removing the obstacles in the way of the production of atomic power
and the strip mining of coal. Increased supplies of atomic power and coal would
serve to reduce the demand for oil and thus its price.
The price of food could be
substantially reduced by the abolition of government farm subsidies.
The cost of housing could be
reduced by the abolition of zoning laws and all other government interference
serving to make land artificially scarce, such as the restrictions on land use
imposed by the California Coastal Commission. It could be reduced by the
liberalization of government mandated building and safety codes and by the
withdrawal of government support for construction unions.
All of this would benefit
everyone, but it would especially benefit the lowest paid, poorest workers, who
can least afford unnecessarily high prices.
Just as there is no good reason
for the price of oil being $50 a barrel, there is no good reason for the cost
of a day’s hospital stay being $2,000. Give physicians the freedom to start
their own hospitals, specializing in whatever kinds of care they wish, and the
cost of hospital stays, at least for such conventional illnesses as pneumonia
and appendicitis, will be driven down, toward a level of cost comparable to
that of staying at a clean hotel, coupled with nursing care. At such low rates,
all but the very poorest members of society might be able to afford an
occasional brief hospital stay.
The enemies of capitalism and economic
freedom shed crocodile tears over poverty. Their policies do not alleviate it
but worsen it. They deprive many workers of the very possibility of working,
and when those workers are permitted to work, compel them to be confronted with
the needless competition of other workers driven from other lines of work by
the same kind of policies. And they compel all workers, especially the poorest,
to pay needlessly higher prices: all are compelled to pay higher prices insofar
as the productivity of labor is held down; and the poorest in particular are
compelled to pay higher prices as the result of the same monopolistic
privileges that drive their wages down.
As I have shown, economic
freedom, not government interference, is the means of overcoming poverty. It
would do so both by raising the take-home wages of workers, especially those at
the bottom of the economic ladder, and by reducing the prices paid by all
workers.
Workers, the poor, and the
public at large do not yet see the benefits of economic freedom. They have been
misled by generations of intellectuals, such as Herbert, into believing that
poverty is the result not of the failure to produce wealth but of the success
of those who do produce it, above all, businessmen and capitalists. And so they
have been led to believe that the means of alleviating poverty is the seizure
of wealth from the businessmen and capitalists, who use their wealth
overwhelmingly precisely in the production of wealth, and who produce less to
the extent that they are deprived of the means of producing it. And in much the
same way, people have been misled into believing that the means of alleviating
poverty is government policies that are nothing more than various forms of
prohibiting the production of wealth, or at least prohibiting substantial
numbers of people from producing this or that particular form of wealth.
If workers, the poor, and the
public at large understood their actual economic interests, they would rise up
in outrage at the injustices foisted upon them. They would rise in outrage not
against their usual targets, the businessmen and capitalists, who create the
demand for the labor they sell and the supply of the products they buy, and who
progressively raise real wages and the general standard of living by introducing
ever newer and better products and more efficient methods of producing all
products, but against the ignorant, incompetent politicians and intellectuals
who have so misled them that more often than not they have been duped into
positively yearning for the fetters that make them poor. It is time for
everyone to open his eyes to the knowledge provided by the science of economics
and to understand that it is economic freedom, not the government’s violations
of economic freedom, that is the way out of poverty and is the foundation of
prosperity for all.