12 September 2022
Those left-wing activists and post-Keynesian who ardently defend the thoroughly discredited myth that unions can raise real wages for everyone do so by deliberately ignoring the lessons of economics and history. When faced by arguments based on economic reasoning and supported with historical facts left-wing activists frequently resort to sneering abuse. Nevertheless, facts are facts.
So why are these people wrong? Let us begin by using the Black Death as a historical case study. There is no disputing the fact that it was largely the ratio of labour to land that determined real wages in pre-industrial times and that by wiping out about 40 per cent of England’s population after 1348 the Black Death caused real wages to leap by raising the land-to-labour ratio. This explained why, without any help from unions and in the face of hostility from the crown, general living standards rose after 1348.
Before the Industrial Revolution it was land and not capital that played a central role in determining the height of real wages. Capital goods were extremely scarce and what existed tended to be exceedingly frail. The problem was the absence of durability. Citing Simon Kuznets’ work Fernand Braudel concluded that there was little if any durable capital in medieval times. And after every five to six years virtually the whole of the capital structure had to be replaced1.
It should be clear that the closer we get to modern time the greater the role of capital accumulation in raising real wages. The more capital2 invested per head of the population the higher real wages will be. This is why real wages in eighteenth century Britain quadrupled even though unions were largely irrelevant during most of the period. (In fact, I believe the impact that capital accumulation in nineteenth century Britain had on living standards has been greatly understated3.
To further underline the argument that the same process that raised British wage rates to unprecedented levels also occurred in the US, even though union membership in the nineteenth century was negligible, never rising above 9 per cent of her workforce, even in the 1920s when real American wages exceeded real European wage rates, including British rates.
Now if unions are responsible for raising living standards, meaning real wages, then how can we explain these historical facts in terms of union activism? How do these critics explain why real wages in countries like Britain and France fell behind American wage rates even thought their workforces were heavily unionised and that unions were a far more powerful force in politics than in America? Of course, no one can and that is why union advocates prefer to ignore historical facts.
The vitally important fact remains that greater per capita investment raises productivity and that productivity in turn raises real wages4. Furthermore, I have ceaselessly stressed the fact that in a free market there exists a tendency for every worker to receive the full value of his labour. A conclusion that is supported by every economics textbook. As that arch-Keynesian economist Paul Krugman said:
Economic history offers no example of a country that experienced long-term productivity growth without a roughly equal rise in real wage5.
Trying to keep real wages below their market price, as the English Crown tried to do in the fourteenth century, only succeeds in causing labour shortages and that raising the cost of labour above its market clearing price will cause unemployment. The last point is the very same one that the arch American Keynesian Paul A. Samuelson made:
Union leaders have learned this important fact: If you can persuade or force [emphasis added] employers always to pay a higher standard wage — a wage rate that is publicly known and adhered to — then the supply of labour will take care of itself. At the standard rate, employers will hire the number of men they want, and any surplus job applicants will be automatically [his emphasis] excluded from the labour market [i.e., rendered unemployed]6.
The late free-market Austrian economist and anti-Keynesian Professor Frederich von Hayek made exactly the same point as Samuelson, even though they radically differed on many other economic matters:
. . .workers can raise real wages above the level that would prevail on a free market only by limiting the supply, that is, by withholding part of labour. The interest of those who will get employment at the higher wage will therefore always be opposed to the interest of those who, in consequence, will find employment only in the less highly paid jobs [suboptimal employment] or who will not be employed at all7.
In English so simple that even leftists can understand it — unions do not raise the standard of living, per capita investment does that. Economics freely admits that unions can raise particular wage rates above market clearing levels. But economists, at least the decent ones, stress this policy simply reduces employment. Readers should now be able to see our critics’ error. The effect of unions raising their members’ wage rates above market clearing values is to force down the real wages of ‘competing’ labour. Arthur Smithies, a Keynesian, outlined this process very well when he wrote:
…concerted action by the whole labour movement to increase money wages will leave real wages unchanged. Real wage gains by a single union are won at the expense of real wages elsewhere8.
Of course, this reasoning will escape anyone labouring under the fallacy of composition. Smithies clearly assumed that the non-union labour markets were still comparatively free. If, however, a rigid wage structure has been imposed then that will prevent a necessary downward adjustment causing these labour costs to rise above the new market clearing rates which in turn will create a labour surplus. In such circumstances a significant rise in part-time work could occur.
Finally, three simple questions for critics:
1. Do you really believe that unions could raise living standards in the absence of capital accumulation?
2. Do any of you actually believe that unions are responsible for capital accumulation?
3. Do any of you honestly believe that unions have never priced people out of work?
Any reader who answered yes to any of these questions should apply to the Easter Bunny for a job.
1Fernand Braudel, The Wheels of Commerce: Civilisation & Capitalism 15th-18th Century, Vol. II, Phoenix Press, 1986, pp. 243-247).
2True capital is the material means of production that directly or indirection raises the marginal productivity of labour.
3The reason for this is that we cannot measure the change in the quality of goods and services. In addition, growth created the resources to bring massive improvements in, for example, sanitation, transportation and water supplies.
4Wages are the total cost of hiring labour. They therefore include pension payments, payroll taxes, insurance, etc.
5Pop Internationalism, The MIT Press, Cambridge, Massachusetts, 1997. pp. 55-56).
6Economics, 10th edition McGraw-Hill, 1976, p. 586).
7The Constitution of Liberty, Gateway Editions, LTD, 1972, p. 270).
8Seymour F. Harris, edited, The New Economics, Dennis Dobson LTD, 1947, p. 561.