Consenting Marketplace Acts

Do you think full employment should be the prime goal of labour market policy?

Most people don't, you know.  Oh, they make noises about unemployment being terrible, but when it comes to actually doing anything about the shameful level of unemployment in Australia, it quickly becomes obvious that other things are much more important.  Keeping taxes down, keeping one's own wages up, protecting unions, holding on to fond beliefs, preserving traditional institutions and privileges. ...  All these things are regularly revealed to be much more important than achieving full employment.

How shameful is our unemployment record?  Very shameful.  Achieving 7.9 per cent unemployment in April after 5 years of economic growth was regarded as some great achievement.  Yet the US unemployment rate for the same month was 4.3 per cent.  The (January) Netherlands rate was 4.7 per cent, the (February) Austrian rate 4.4 per cent and the Danish 5.5 per cent, the (December quarter) Norwegian rate was 3.8 per cent.

Why are their rates of unemployment so much lower than ours?  Because they have reformed their labour markets and we have not reformed ours.

The proportion of the US population in employment is also higher than ours.  In 1970, 57 per cent of Americans 16 and over were in civilian employment compared to 60 per cent of Australians 15 and over.  In 1997, the relevant figures were 64 per cent of Americans and 58 per cent of Australians.  (And the American figure is almost certainly understated, as illegal immigrants are largely uncounted).

The US employment boom -- 30 million extra jobs from 1980 to 1997, a growth of 31 per cent -- is making major inroads into social problems -- companies are investing in the training of inner city black youths, because the shortage of labour is becoming so acute.  US wages are also generally higher.  The average starting salary of an engineering graduate in the US is $US40,000 -- in purchasing parity terms, about $A70,000.  This despite the fact that the US has a much higher proportion of its population graduating from universities than Australia and then imports still more graduates.

Despite the nonsense regularly claimed, low US unemployment rates are not being achieved through high prison populations and defence forces (the number of people in gaol, the defence forces or otherwise institutionalised has fallen from 6 million in 1970 to 3 million in 1997), low wages, poor social security. ...  They are being achieved through labour markets being allowed to work properly -- the same way Hong Kong achieves unemployment rates where 4 per cent is a record high.

What do we have to do to achieve full employment?  Allow the labour market to become a realm of capitalist acts between consenting adults.  If we are concerned some of those capitalist acts may result in unacceptably low incomes (even though many low incomes contribute to high-income households), then incomes can be "topped up" through devices such as the Earned Income Tax Credit used in the US.  And low income jobs -- which regularly lead to higher income jobs -- are much better than unemployment leading nowhere.  Those who decry the alleged results of a free labour market are either frightened of competition for their own jobs or have an ideological preference for telling other people what to do rather than letting them make their own choices.

If those consenting adults wish to associate together they should have every right to do so.  If they want to have recourse to arbitration procedures, these can be hired -- there is no reason for the taxpayer to subsidise a monopoly provider.  And, as the wharf dispute showed, real courts are perfectly capable of interpreting the law clearly and with speed (even law as unwieldy as the interaction between the 555-pageWorkplace Relations Act and corporate law).

The most important thing government needs to do to promote full employment is to stop doing things.  To stop setting wages rates by law through the award system.  To stop imposing a monopoly provider of arbitration services which plays grubby interest group politics under guise of being "the umpire" while sacrificing the prospects of the unemployed.  To stop raising the risks of employing people by unfair dismissal laws (no employer can sue a worker who leaves at a crucial time, after all), increased employer liability for actions by employees, etc.  To stop structuring the welfare system so it is destructive of the work ethic.  A classic example of the latter is a dozen years ago unemployment rates did not differ by family size -- it was a matter of indifference to employers how many children people had.  It still is, but now people with 3 or more kids have much higher unemployment rates than those with one or no children.  Why?  Because the family income support arrangements create massive disincentives to seek work if you have 3 or more children -- in the real world, the welfare system effectively sets minimum wages.

Why are so many actions by government so destructive of employment?  Because politics is an unrivalled mechanism for gaining benefits at someone else's expense.  Government action is coercive action -- you can force people to do things.  Relieved of the need to gain their individual consent (unlike market exchanges), you can impose costs on them to gain benefits for yourself.  Do it right, and it can be trumpeted as "democratic" and "in the public interest".  Awards are great devices for pricing competitors out of labour markets -- young people, migrants, women returning to the work force are likely to be less productive.  So one sets award wages sufficiently high that they find it hard to compete -- to the (short term) benefit of the unionised "insiders".  It is no accident that women are concentrated in industries with low rates of unionisation.

In the longer term, we all bear the costs of this:  through higher taxes to support unemployment benefits;  through living in a less productive, and a more insecure society -- insecure both because of high unemployment and insecure because of the belief that we "can't really cut it" unless big brother is looking after us.  But it looks like a good deal in the short term.  And union members whose children have problems finding work have reasons not to put two and two together.

Which is not to say that there is nothing positive that governments can do -- though extending economic freedom is pretty positive, actually.  Workfare ("work for the dole"), done correctly, can be an excellent way of re-socialising the long term unemployed back into work and preserving incentives to look for work.  It represents low cost job creation.

But we should be very suspicious of grand plans to do more than that.  Taxes are a very expensive way of funding something.  Not only do we have to pay public servants to collect the money and hand it out, there are all those accountants, lawyers, etc. kept busy ensuring their clients comply with the law;  all those commercial transactions which don't take place because of taxes;  all those changes from preferred behaviour due to taxes.  Because of these extra costs, we can only be confident of society winning on the deal if about $1.50 worth of value is created for every $1 raised in taxes -- and that is quite a big ask.  (And the bigger government gets, the less likely this criteria is to be met -- which is why it is not surprising a recent study found a strong correlation between bigger government and lower economic growth).  Market exchanges are much cheaper.

And it is very unlikely that spending taxes (which themselves cost potential jobs) on creating jobs needed because other taxes have been spent on activities which destroy jobs represents a net beneficial use of social resources.  Besides, which is likely to have more real value -- work created for the sake of creating work organised by people who have no personal stake in the value of the output?  Or something done because someone has voluntarily paid to have it done -- and paid someone with a personal stake in keeping customers satisfied?

That markets generally work better than command-and-control systems is not a matter of ideology, but of the inherent characteristics of each.

The real area of political art required for achieving full employment is not to find ways of spending yet more taxpayers' money in socially destructive ways -- the Commonwealth alone spends $8 to 10bn a year on labour market policies, or about $12,00 to $14,000 per unemployed person.  The real political art is to justify stopping spending taxpayers' money in socially destructive ways.  To convince people that full employment is the only proper goal.  That a few sacrifices have to be made to achieve it, sacrifices that will be shown to have been a lot more apparent and transitory than real.  That the labour market should indeed be the realm of capitalist acts between consenting adults -- not coercive privilege masquerading as promotion of the public good.

So, do you want full employment?  Really?  What are you prepared to give up to achieve it?  Are you brave enough -- and do you care enough -- to try a free labour market?

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