Minimum Wage Laws

0:00This is Jeffrey Tucker. We're continuing our series on Economics 1 Lesson, the new edition from the Mises Institute. And I'm very excited to introduce George Reisman, who's joined us to discuss unions and wages. Dr. Reisman. Well, very glad to be here, Jeff. Thank you for having me. So we first tackled the issue of minimum wage laws, the almost universal confusion, even after all these years. What does Hesitant say about minimum wage? Well, his basic point is that minimum wage laws, or any legislation that raises wage rates above the free market level, causes unemployment.

0:47And both of his discussions, I think, are excellent, and I don't know of any better book as an introduction to economics. And I've taught from it for many years in the past, always with very good results. And if you put his chapters on minimum wage and unions together, one of his main points is that unions cannot raise wage rates for all workers taken together. The most they can do is raise wage rates for some groups of workers. They cause unemployment in those particular fields. For example, if a carpenters union raises the wage rates of carpenters, there'll be fewer carpenters employed. The unemployed carpenters will then have to seek employment somewhere else.

1:35That enlarges the supply of labor elsewhere and in order for them to be absorbed, wage rates in the new lines where they enter have to go down. So the unions make a gain for the carpenters who keep their jobs but impose a loss on workers elsewhere in the economy. And then, if we have unions throughout the economic system, the unions in the higher areas of skill force certain workers out into lower lines. That either depresses the wage rates in the lower lines, or if they have unions, the more skilled, better qualified workers cause less skilled workers to be unemployed. They then go down a rung lower, and then it concentrates at the bottom and where you have the minimum wage laws and then you simply end up with permanent unemployment now you know many people who advocate repealing the minimum wage laws don't realize they hear the opposition well that the wage rates would be horrendously low to absorb the unemployed the unemployed could be absorbed on much better terms if the

2:47The repeal of minimum wages was coupled with the repeal of pro-union legislation, because then more people would be employed higher up the ladder, that would take the pressure off at the bottom. Now back in 1946, unions were far more prevalent than they are today. Right. And I did a review of an edition of Economics in One Lesson that came out, I think, in 1981, and I reread the book at that time. And one of the things I noticed was that here and there there'd be some statement by Hazlitt, unions on the whole are pretty bad and destructive, except of course when workers are being underpaid or whatever. And I made the point that these statements seemed totally out of place and I got a letter from Hazlitt who acknowledged that they were, they didn't really make sense, but he had to put them in here and there just in order to have the book published when it appeared.

3:47Yeah. It was a different world, really. Yeah. Almost, how much of the economy was, how much of the labor force was unionized in 1946? It was 40%? Possibly. Much, much higher than today. And something had to happen, didn't it? I mean, it was on the verge of collapse. Yeah, well... Stagnation, extreme stagnation. Well, they were certainly a growing problem, I guess the Taft-Hartley Act set them back somewhat but the natural effect of unions especially if the industries in which they predominate are subject to foreign competition or non-union competition the unions effect is to destroy those industries so a major reason that the United States has lost so much of its manufacturing is the power of unions in such fields as automobiles, steel, you know people People complain or used to complain more about Monday morning cars, because the workers would come in hungover from the weekend, and that's a simple issue to solve, you tell them either you come in fit for work on Monday or don't bother to come in at all, and so they could

5:00have improved the quality, but they couldn't do that because such action would provoke a major strike. So the American automobile industry lost greatly in competition because of the poor quality of the cars produced by union workers, their work rules that lower productivity plus their wage demands, the pensions. I would say they're responsible in large measure for the destruction of our automobile industry, our steel industry and other major industries. I know here in Alabama we're benefiting from this in some way. We We keep getting auto plants moving down, machine small engines. So long as they remain non-union. Yeah, and they move here because we don't have these kind of, we have open shop rules.

5:46And so the same thing has happened on an international level, the capital chases, the places that have relatively less restricted... Yeah, places our industry is at a great handicap. Yes, right. Now what would you say to those, well, let me ask you this. Are there any conditions under which minimum wage laws or laws favoring union organizations actually help workers? I can't imagine any. I mean, they should be free to organize any voluntary association they want, but they should not have any right to prevent other people able and willing to do their jobs at a lower wage. This is a great confusion about this whole question of whether or not unions are voluntary or not. If you had a free market of labor, would we see anything like modern unions anywhere to your mind?

6:39I don't think we'd see unions organized for strikes and things of that kind. You might see fraternal associations, you know, maybe people who work in the same plant, maybe they want to have a softball team or something or a burial fund or God knows what. But I I don't think you would see anything where they're organizing strikes and stoppages because so long, it would not be possible for any one group of workers to get significantly higher wages than other workers able to do their jobs. Right. So the guild is just not likely to succeed over the long term, especially not in the modern age. Exactly. Not under economic freedom. Right. What about the next chapter? Hayek has the talks about this idea of enough to, the title is, enough to buy back the product. Right. What does he mean by that? Okay, well, it's a popular argument of the unions, widely accepted, that the source of demand for the products is from the payment of wages. Now, it's certainly true that the workers' expenditure of their

8:18to whatever inequality we might have had, it doesn't increase the inequality, it doesn't add to profits. Now as a matter of fact, suppose we started out, we had a total spending to buy consumers' goods of 400 units of money. Each unit can be however many hundreds of billions of dollars or whatever. And 300 units of money spent to pay wages. Well, we could make reasonably estimate profits at 100. Now, if we raised wages by 100 and the workers spent all the wages, now we'd have 400 of wages, 500 of sales, profits would still be 100, and as a percentage of sales and cost, they'd be lower. Now, profit margins would go up if total wages went down, and even if sales revenues went down, because we're subtracting Inequality equals from unequals, the amount of the inequality is unaffected and becomes a larger percentage.

9:17Now, also, one of the things I've discovered, suppose we have a situation where we're trying to recover from a depression and that there's substantial unemployment and wage rates need to fall. Now, suppose some of the funds previously used to pay wages are now instead devoted to the purchase of machinery. It's going to be the same total sales revenues. The wage earners might spend less for consumers' goods, but more is spent to buy the machines, and for a protracted period of time, costs in the economy will be less, because what you pay out as ordinary wages will show up as costs quite quickly, but if you're using those funds to buy a machine or construct a factory that lasts many years, the only element of cost is the depreciation. So profits would actually increase, This is what was typically believed, if you have mass on profitability, as in a depression, you need a reduction in wage rates, in part to restore profitability. And it does so to

10:22the extent that expenditures are diverted to such things as machines and factory construction. Yes. And do you expect that, right now we're entering in a recessionary environment, do you agree with that? It certainly seems so that the potential is there for a major deflation. And we're starting to see some response in the unemployment rate, right? It seems to be going up. So in light of your exposition and in light of what do you expect needs to happen? Well, as far as unemployment becomes an issue, all legislation, artificially propping up of Wage Rates should be repealed. But an even bigger issue that would need to be dealt with is the situation of the money supply and financial contraction. And the potential is there right now. We could have something worse than 1929. I'm not saying we will, but the potential is there. And that would have to be addressed.

11:26Does Hazard address the question of unemployment insurance? He might, but I don't recall it. I don't think so. Could you elaborate on unemployment insurance in particular? With unemployment insurance, if you mean people when they become unemployed are getting government funds. I should say benefits, really. All right, naturally. Well, that enables people to avoid looking for work for a while and it prevents the fall in wage rates. Right. You see, if you didn't have it, the pressure to reduce wage rates would be that much greater. Yeah. would occur more quickly. And in Britain, unemployment insurance, which was very elaborate in the 1930s, actually prevented restoration of normal economic times to even to a greater extent than the U.S.

12:16And yet, every time we go into a recession, Congress, Republicans and Democrats are ready to jump in. Right. And one other thing I think is very important in this context, even if you have unions just in a few key industries and they're in a position to prevent a fall in wage rates in those particular industries. That operates to necessitate a vastly greater fall in wage rates in other industries because when we try to expand production we need to have expansion occurring more or less throughout the economy. Like suppose we wanted to produce more automobiles but something was acting acting as a bottleneck in the production of copper. Well, then that greatly retards our productivity in every area that depends on copper. So, if you have unions in certain key fields whose expansion is being held back, in order to make the employment of people worthwhile elsewhere, you have to overcome this barrier of their productivity being artificially held down because of lack of supplies of complementary factors of production.

13:27That's a very interesting point. So that even if unions constitute only, say, five percent of the private sector workforce, they could still do a lot of damage. And now I think they presently, I think it's more than five now, I think it's about eight or nine percent, to the extent that it's possible for workers easily to unionize. don't want that to happen so many non-union employers routinely match the union scales to avoid giving the workers a reason to unionize which means that the union wage demands are much much wider, have a much wider influence than just in the unionized field. That would be an example of an unseen cost. Yeah, so they do in fact serve to raise wage rates very very broadly far are beyond indicated by the percentage of their membership.

14:20Now in the public sector, unions are far more prevalent, why is that? Well there the employers are not operating in a market, they're not concerned with matters of profit and loss, they can pay anything and the taxpayers end up footing the bill and they're buying votes at the public's expense and they can run bigger departments. So there I think a good case could be made, there should, no unions should be allowed certainly in working for the government, because they're taking unfair, it's like taking advantage of a person incapable of taking care of himself, you know, the government has no profit and loss incentive, it's not its money, so the unions are dealing with someone who can't offer appropriate resistance and the incentives are to constantly cater to them.

15:12So when we see those public sector unions out protesting and demanding more wages, they should hold on to your wallet. Yeah. And that's their area of growth because they destroy one private industry after another. In a way, the unions are vampire-like because they need to find fresh blood in order to prosper. Yeah. That's great. Well, thank you very much, Dr. Reisman, for your exposition today, which is very clear and wonderful. Well, thank you. Thank you very much. It's been my pleasure.