WEBVTT NOTE Minimum Wage Laws 1 00:00:00.000 --> 00:00:17.720 This is Jeffrey Tucker. We're continuing our series on Economics 1 Lesson, the new edition 2 00:00:17.720 --> 00:00:23.160 from the Mises Institute. And I'm very excited to introduce George Reisman, who's joined us 3 00:00:23.160 --> 00:00:26.320 to discuss unions and wages. Dr. Reisman. 4 00:00:26.320 --> 00:00:29.320 Well, very glad to be here, Jeff. Thank you for having me. 5 00:00:29.320 --> 00:00:36.320 So we first tackled the issue of minimum wage laws, the almost universal confusion, even after all these years. 6 00:00:36.320 --> 00:00:38.320 What does Hesitant say about minimum wage? 7 00:00:38.320 --> 00:00:47.320 Well, his basic point is that minimum wage laws, or any legislation that raises wage rates above the free market level, causes unemployment. 8 00:00:47.320 --> 00:00:55.320 And both of his discussions, I think, are excellent, and I don't know of any better book as an introduction to economics. 9 00:00:55.320 --> 00:01:03.320 And I've taught from it for many years in the past, always with very good results. 10 00:01:03.320 --> 00:01:10.340 And if you put his chapters on minimum wage and unions together, one of his main points 11 00:01:10.340 --> 00:01:16.280 is that unions cannot raise wage rates for all workers taken together. 12 00:01:16.280 --> 00:01:21.260 The most they can do is raise wage rates for some groups of workers. 13 00:01:21.260 --> 00:01:24.600 They cause unemployment in those particular fields. 14 00:01:24.600 --> 00:01:29.360 For example, if a carpenters union raises the wage rates of carpenters, there'll be 15 00:01:29.360 --> 00:01:31.640 fewer carpenters employed. 16 00:01:31.640 --> 00:01:35.640 The unemployed carpenters will then have to seek employment somewhere else. 17 00:01:35.640 --> 00:01:40.160 That enlarges the supply of labor elsewhere and in order for them to be absorbed, wage 18 00:01:40.160 --> 00:01:44.120 rates in the new lines where they enter have to go down. 19 00:01:44.120 --> 00:01:51.120 So the unions make a gain for the carpenters who keep their jobs but impose a loss on workers 20 00:01:51.120 --> 00:01:53.240 elsewhere in the economy. 21 00:01:53.240 --> 00:02:02.160 And then, if we have unions throughout the economic system, the unions in the higher 22 00:02:02.160 --> 00:02:09.060 areas of skill force certain workers out into lower lines. That either depresses the wage 23 00:02:09.060 --> 00:02:14.600 rates in the lower lines, or if they have unions, the more skilled, better qualified 24 00:02:14.600 --> 00:02:20.840 workers cause less skilled workers to be unemployed. They then go down a rung lower, and then it 25 00:02:20.840 --> 00:02:26.320 concentrates at the bottom and where you have the minimum wage laws and then you 26 00:02:26.320 --> 00:02:31.440 simply end up with permanent unemployment now you know many people who 27 00:02:31.440 --> 00:02:37.080 advocate repealing the minimum wage laws don't realize they hear the 28 00:02:37.080 --> 00:02:42.360 opposition well that the wage rates would be horrendously low to absorb the 29 00:02:42.360 --> 00:02:47.720 unemployed the unemployed could be absorbed on much better terms if the 30 00:02:47.720 --> 00:02:52.880 The repeal of minimum wages was coupled with the repeal of pro-union legislation, because 31 00:02:52.880 --> 00:02:56.760 then more people would be employed higher up the ladder, that would take the pressure 32 00:02:56.760 --> 00:02:59.200 off at the bottom. 33 00:02:59.200 --> 00:03:04.960 Now back in 1946, unions were far more prevalent than they are today. 34 00:03:04.960 --> 00:03:05.960 Right. 35 00:03:05.960 --> 00:03:14.040 And I did a review of an edition of Economics in One Lesson that came out, I think, in 1981, 36 00:03:14.040 --> 00:03:16.440 and I reread the book at that time. 37 00:03:16.440 --> 00:03:23.320 And one of the things I noticed was that here and there there'd be some statement by Hazlitt, 38 00:03:23.320 --> 00:03:28.720 unions on the whole are pretty bad and destructive, except of course when workers are being underpaid 39 00:03:28.720 --> 00:03:30.300 or whatever. 40 00:03:30.300 --> 00:03:35.920 And I made the point that these statements seemed totally out of place and I got a letter 41 00:03:35.920 --> 00:03:41.800 from Hazlitt who acknowledged that they were, they didn't really make sense, but he had 42 00:03:41.800 --> 00:03:47.240 to put them in here and there just in order to have the book published when it appeared. 43 00:03:47.240 --> 00:03:53.720 Yeah. It was a different world, really. Yeah. Almost, how much of the economy was, how much 44 00:03:53.720 --> 00:03:59.480 of the labor force was unionized in 1946? It was 40%? Possibly. Much, much higher than 45 00:03:59.480 --> 00:04:04.400 today. And something had to happen, didn't it? I mean, it was on the verge of collapse. 46 00:04:04.400 --> 00:04:10.440 Yeah, well... Stagnation, extreme stagnation. Well, they were certainly a growing problem, 47 00:04:10.440 --> 00:04:40.440 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 48 00:04:40.440 --> 00:04:46.980 People complain or used to complain more about Monday morning cars, because the workers would 49 00:04:46.980 --> 00:04:55.900 come in hungover from the weekend, and that's a simple issue to solve, you tell them either 50 00:04:55.900 --> 00:05:00.360 you come in fit for work on Monday or don't bother to come in at all, and so they could 51 00:05:00.360 --> 00:05:04.680 have improved the quality, but they couldn't do that because such action would provoke 52 00:05:04.680 --> 00:05:11.880 a major strike. So the American automobile industry lost greatly in competition because 53 00:05:11.880 --> 00:05:18.480 of the poor quality of the cars produced by union workers, their work rules that lower 54 00:05:18.480 --> 00:05:24.040 productivity plus their wage demands, the pensions. I would say they're responsible 55 00:05:24.040 --> 00:05:28.880 in large measure for the destruction of our automobile industry, our steel industry and 56 00:05:28.880 --> 00:05:34.080 other major industries. I know here in Alabama we're benefiting from this in some way. We 57 00:05:34.080 --> 00:05:37.200 We keep getting auto plants moving down, machine small engines. 58 00:05:37.200 --> 00:05:39.080 So long as they remain non-union. 59 00:05:39.080 --> 00:05:46.780 Yeah, and they move here because we don't have these kind of, we have open shop rules. 60 00:05:46.780 --> 00:05:52.760 And so the same thing has happened on an international level, the capital chases, the places that 61 00:05:52.760 --> 00:05:54.800 have relatively less restricted... 62 00:05:54.800 --> 00:05:58.080 Yeah, places our industry is at a great handicap. 63 00:05:58.080 --> 00:05:59.600 Yes, right. 64 00:05:59.600 --> 00:06:03.140 Now what would you say to those, well, let me ask you this. 65 00:06:03.140 --> 00:06:10.140 Are there any conditions under which minimum wage laws or laws favoring union organizations 66 00:06:10.640 --> 00:06:17.000 actually help workers? I can't imagine any. I mean, they should be free to organize any 67 00:06:17.000 --> 00:06:21.500 voluntary association they want, but they should not have any right to prevent other 68 00:06:21.500 --> 00:06:25.540 people able and willing to do their jobs at a lower wage. 69 00:06:25.540 --> 00:06:30.560 This is a great confusion about this whole question of whether or not unions are voluntary 70 00:06:30.560 --> 00:06:38.080 or not. If you had a free market of labor, would we see anything like modern unions anywhere 71 00:06:38.080 --> 00:06:39.080 to your mind? 72 00:06:39.080 --> 00:06:44.880 I don't think we'd see unions organized for strikes and things of that kind. You might 73 00:06:44.880 --> 00:06:51.120 see fraternal associations, you know, maybe people who work in the same plant, maybe they 74 00:06:51.120 --> 00:06:57.040 want to have a softball team or something or a burial fund or God knows what. But I 75 00:06:57.040 --> 00:07:02.840 I don't think you would see anything where they're organizing strikes and stoppages because 76 00:07:02.840 --> 00:07:07.760 so long, it would not be possible for any one group of workers to get significantly higher 77 00:07:07.760 --> 00:07:10.720 wages than other workers able to do their jobs. 78 00:07:10.720 --> 00:07:11.720 Right. 79 00:07:11.720 --> 00:07:17.200 So the guild is just not likely to succeed over the long term, especially not in the 80 00:07:17.200 --> 00:07:18.200 modern age. 81 00:07:18.200 --> 00:07:19.200 Exactly. 82 00:07:19.200 --> 00:07:21.200 Not under economic freedom. 83 00:07:21.200 --> 00:07:22.200 Right. 84 00:07:22.200 --> 00:07:30.080 What about the next chapter? Hayek has the talks about this idea of enough to, the title 85 00:07:30.080 --> 00:07:35.000 is, enough to buy back the product. Right. What does he mean by that? Okay, well, it's 86 00:07:35.000 --> 00:07:41.760 a popular argument of the unions, widely accepted, that the source of demand for the products 87 00:07:41.760 --> 00:07:48.600 is from the payment of wages. Now, it's certainly true that the workers' expenditure of their 88 00:08:18.600 --> 00:08:23.280 to whatever inequality we might have had, it doesn't increase the inequality, it doesn't 89 00:08:23.280 --> 00:08:30.520 add to profits. Now as a matter of fact, suppose we started out, we had a total spending to 90 00:08:30.520 --> 00:08:35.980 buy consumers' goods of 400 units of money. Each unit can be however many hundreds of 91 00:08:35.980 --> 00:08:42.220 billions of dollars or whatever. And 300 units of money spent to pay wages. Well, we could 92 00:08:42.220 --> 00:08:48.900 make reasonably estimate profits at 100. Now, if we raised wages by 100 and the workers 93 00:08:48.900 --> 00:08:56.060 spent all the wages, now we'd have 400 of wages, 500 of sales, profits would still be 94 00:08:56.060 --> 00:09:04.420 100, and as a percentage of sales and cost, they'd be lower. Now, profit margins would 95 00:09:04.420 --> 00:09:11.740 go up if total wages went down, and even if sales revenues went down, because we're subtracting 96 00:09:11.740 --> 00:09:15.740 Inequality equals from unequals, the amount of the inequality is unaffected and becomes 97 00:09:15.740 --> 00:09:17.340 a larger percentage. 98 00:09:17.340 --> 00:09:24.620 Now, also, one of the things I've discovered, suppose we have a situation where we're trying 99 00:09:24.620 --> 00:09:30.220 to recover from a depression and that there's substantial unemployment and wage rates need 100 00:09:30.220 --> 00:09:31.220 to fall. 101 00:09:31.220 --> 00:09:37.140 Now, suppose some of the funds previously used to pay wages are now instead devoted 102 00:09:37.140 --> 00:09:40.100 to the purchase of machinery. 103 00:09:40.100 --> 00:10:10.100 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, 104 00:10:10.100 --> 00:10:16.340 This is what was typically believed, if you have mass on profitability, as in a depression, 105 00:10:16.340 --> 00:10:22.900 you need a reduction in wage rates, in part to restore profitability. And it does so to 106 00:10:22.900 --> 00:10:28.700 the extent that expenditures are diverted to such things as machines and factory construction. 107 00:10:28.700 --> 00:10:34.380 Yes. And do you expect that, right now we're entering in a recessionary environment, do 108 00:10:34.380 --> 00:10:35.940 you agree with that? 109 00:10:35.940 --> 00:10:40.620 It certainly seems so that the potential is there for a major deflation. 110 00:10:40.620 --> 00:10:44.760 And we're starting to see some response in the unemployment rate, right? 111 00:10:44.760 --> 00:10:47.540 It seems to be going up. 112 00:10:47.540 --> 00:10:55.420 So in light of your exposition and in light of what do you expect needs to happen? 113 00:10:55.420 --> 00:11:03.340 Well, as far as unemployment becomes an issue, all legislation, artificially propping up 114 00:11:03.340 --> 00:11:10.300 of Wage Rates should be repealed. But an even bigger issue that would need to be dealt with 115 00:11:10.300 --> 00:11:17.060 is the situation of the money supply and financial contraction. And the potential is there right 116 00:11:17.060 --> 00:11:23.780 now. We could have something worse than 1929. I'm not saying we will, but the potential 117 00:11:23.780 --> 00:11:26.100 is there. And that would have to be addressed. 118 00:11:26.100 --> 00:11:30.780 Does Hazard address the question of unemployment insurance? 119 00:11:30.780 --> 00:11:32.940 He might, but I don't recall it. I don't think so. 120 00:11:32.940 --> 00:11:37.460 Could you elaborate on unemployment insurance in particular? 121 00:11:37.460 --> 00:11:43.180 With unemployment insurance, if you mean people when they become unemployed are getting government 122 00:11:43.180 --> 00:11:44.180 funds. 123 00:11:44.180 --> 00:11:45.180 I should say benefits, really. 124 00:11:45.180 --> 00:11:48.060 All right, naturally. 125 00:11:48.060 --> 00:11:55.220 Well, that enables people to avoid looking for work for a while and it prevents the fall 126 00:11:55.220 --> 00:11:56.220 in wage rates. 127 00:11:56.220 --> 00:11:57.220 Right. 128 00:11:57.220 --> 00:12:00.700 You see, if you didn't have it, the pressure to reduce wage rates would be that much greater. 129 00:12:00.700 --> 00:12:01.700 Yeah. 130 00:12:01.700 --> 00:12:03.300 would occur more quickly. 131 00:12:03.300 --> 00:12:08.540 And in Britain, unemployment insurance, which was very elaborate in the 1930s, actually 132 00:12:08.540 --> 00:12:16.180 prevented restoration of normal economic times to even to a greater extent than the U.S. 133 00:12:16.180 --> 00:12:21.300 And yet, every time we go into a recession, Congress, Republicans and Democrats are ready 134 00:12:21.300 --> 00:12:22.300 to jump in. 135 00:12:22.300 --> 00:12:23.300 Right. 136 00:12:23.300 --> 00:12:29.100 And one other thing I think is very important in this context, even if you have unions just 137 00:12:29.100 --> 00:12:35.740 in a few key industries and they're in a position to prevent a fall in wage rates in those particular 138 00:12:35.740 --> 00:12:43.420 industries. That operates to necessitate a vastly greater fall in wage rates in other industries 139 00:12:44.220 --> 00:12:50.700 because when we try to expand production we need to have expansion occurring more or less throughout 140 00:12:50.700 --> 00:12:57.900 the economy. Like suppose we wanted to produce more automobiles but something was acting acting 141 00:12:57.900 --> 00:13:04.700 as a bottleneck in the production of copper. Well, then that greatly retards our productivity 142 00:13:04.700 --> 00:13:12.120 in every area that depends on copper. So, if you have unions in certain key fields whose 143 00:13:12.120 --> 00:13:18.380 expansion is being held back, in order to make the employment of people worthwhile elsewhere, 144 00:13:18.380 --> 00:13:23.860 you have to overcome this barrier of their productivity being artificially held down 145 00:13:23.860 --> 00:13:27.740 because of lack of supplies of complementary factors of production. 146 00:13:27.740 --> 00:13:30.320 That's a very interesting point. 147 00:13:30.320 --> 00:13:35.440 So that even if unions constitute only, say, five percent of the private sector workforce, 148 00:13:35.440 --> 00:13:38.180 they could still do a lot of damage. 149 00:13:38.180 --> 00:13:42.820 And now I think they presently, I think it's more than five now, I think it's about eight 150 00:13:42.820 --> 00:13:50.200 or nine percent, to the extent that it's possible for workers easily to unionize. 151 00:13:50.200 --> 00:13:55.040 don't want that to happen so many non-union employers routinely match the 152 00:13:55.040 --> 00:14:00.240 union scales to avoid giving the workers a reason to unionize which means that 153 00:14:00.240 --> 00:14:05.360 the union wage demands are much much wider, have a much wider influence than 154 00:14:05.360 --> 00:14:10.320 just in the unionized field. That would be an example of an unseen cost. Yeah, 155 00:14:10.320 --> 00:14:16.080 so they do in fact serve to raise wage rates very very broadly far 156 00:14:16.080 --> 00:14:20.000 are beyond indicated by the percentage of their membership. 157 00:14:20.000 --> 00:14:24.440 Now in the public sector, unions are far more prevalent, why is that? 158 00:14:24.440 --> 00:14:31.560 Well there the employers are not operating in a market, they're not concerned with matters 159 00:14:31.560 --> 00:14:36.760 of profit and loss, they can pay anything and the taxpayers end up footing the bill 160 00:14:36.760 --> 00:14:43.600 and they're buying votes at the public's expense and they can run bigger departments. 161 00:14:43.600 --> 00:14:50.260 So there I think a good case could be made, there should, no unions should be allowed 162 00:14:50.260 --> 00:14:56.880 certainly in working for the government, because they're taking unfair, it's like taking advantage 163 00:14:56.880 --> 00:15:02.840 of a person incapable of taking care of himself, you know, the government has no profit and 164 00:15:02.840 --> 00:15:07.720 loss incentive, it's not its money, so the unions are dealing with someone who can't 165 00:15:07.720 --> 00:15:12.520 offer appropriate resistance and the incentives are to constantly cater to them. 166 00:15:12.520 --> 00:15:16.320 So when we see those public sector unions out protesting and demanding more wages, they 167 00:15:16.320 --> 00:15:18.280 should hold on to your wallet. 168 00:15:18.280 --> 00:15:19.280 Yeah. 169 00:15:19.280 --> 00:15:20.280 Yeah. 170 00:15:20.280 --> 00:15:27.280 And that's their area of growth because they destroy one private industry after another. 171 00:15:27.280 --> 00:15:33.080 In a way, the unions are vampire-like because they need to find fresh blood in order to 172 00:15:33.080 --> 00:15:34.080 prosper. 173 00:15:34.080 --> 00:15:35.080 Yeah. 174 00:15:35.080 --> 00:15:36.080 That's great. 175 00:15:36.080 --> 00:15:39.160 Well, thank you very much, Dr. Reisman, for your exposition today, which is very clear 176 00:15:39.160 --> 00:15:40.160 and wonderful. 177 00:15:40.160 --> 00:15:41.160 Well, thank you. 178 00:15:41.160 --> 00:15:45.160 Thank you very much. It's been my pleasure.