All Commentary
Friday, February 1, 1985

The Demand for Labor

Dr. Hans Sennholz heads the Department of Economics at Grove City College in Pennsylvania. He Is a noted writer and lecturer on economic, political and monetary affairs.

To speak of a supply of labor may refer to the productive exertions by all those individuals, whether self-employed or wage-earning, who do, or would like to do, any work for wage or profit. The potential supply in a given market depends on the size of population, the amount of time each individual spends working, and the skill and application which the workers bring to their jobs. The effective supply depends on the preferences and choices by the workers themselves.

The demand for labor springs from its usefulness in the satisfaction of human wants. The potential demand is as infinite as man’s wants and desires. Some are necessary to sustain his life, others to please his fancy. When his desires are boundless, his labors are endless. They set a task he can never accomplish, and create work he can never finish.

The specific demand for labor depends on the preferences and choices by entrepreneurs in the labor market. Their bidding for labor in turn is dependent on their anticipation of the productivity of labor, which is the value consumers ascribe to labor services. It provides an excellent guide and sets a definite limit to employer bidding for labor.

Interdependence of demand and productivity does not imply a constant relationship. It does not follow that a rise or fall in productivity must result in proportional changes in the demand for labor. Modern economics rejects “quantitative analysis” because there are no constant relations that would permit quantitative measurement. Even if a statistician were to demonstrate that, at a given time and place, a ten percent rise in labor productivity brought forth a twenty percent rise in the demand for labor, no such relationship may exist at other times and in other places. Human behavior toward labor and every economic good is variable. Different individuals ascribe different values to labor and the products of labor. In fact, the same individual may change his valuations under changing conditions.

Production for the future must be ever mindful of the future and must anticipate future changes. Prices may change and affect the economic outlook. When wage rates are rising, employers must reflect on the possibility that the rates may soon revert to the old rates, that they may remain where they are at the present, or that they will rise still further in the future. Employers must give thought to the future prices of the product, which may rise, fall, or remain the same. In short, employer bidding for labor always hinges on the anticipation of future labor productivity.

The Productivity of Labor

Consumers, who are the ultimate directors of the production process, attach value to labor services. They judge labor like any other factor of production, by the improvement it adds to their well-being. Economists put it succinctly, labor is valued according to the anticipated improvement expected from the employment of an additional laborer. They call it “marginal productivity.” In simple words, a worker’s productivity is determined by the value consumers at tach to his services and achievements. Employees, employers and capitalists, all are subject to the whims and wishes of consumers who want to be served at the lowest possible price. Employers, therefore, are eager to buy all the specific labor they need for production at the lowest price. But they must compete with other employers who are guided by similar considerations, offering wages high enough to attract the needed labor from their competitors. To remain in business they must outbid competing employers and pay the market rate, which is forever adjusting to the “marginal productivity” for each kind of labor.

If, for any reason, employers should offer wage rates that are lower than the productivity rates, a profit margin would appear. People eager to take advantage of the margin would bid for more labor and thereby push wage rates back to the height set by productivity. Surely, employers are interested in buying labor at the lowest possible price. But no one alone, or together with others, can actually lower his rate without creating a profit opportunity for competitors. Other employers and would-be employers seeing bargain labor would want to seize the opportunity and buy additional labor, which would lift wage rates back to the rates set by productivity.

Many economists have gone astray at this very point of labor market competition. From Adam Smith to Jean-Baptiste Say, John Stuart Mill, Alfred Marshall, and a host of disciples, they all lamented a conjectured failure of the competitive order; they all devised their specious doctrines of labor’s disadvantage and exploitation. Their doctrines and theories in turn gave birth to the la bor movement that commonly aims at replacing the competitive private-property order with a political command system. They induced governments the world over to embark upon radical government intervention in order to favor laborers at the expense of the owners of capital. In time they caused governments to restrict labor market competition and bestow legal privileges on workers’ combinations and unions. Contemporary policies continue to reflect their notions and prejudices.

Guided by such spurious doctrines modern man is eager to use the force of law to raise his wage rates and improve his condition. Ever angry at his “disadvantages,” he does not hesitate to use his political apparatus of coercion. His government may set minimum wage rates and man date expensive benefits; disobedience is visited with fines and prison sentences. His labor association may engage in violent strikes in order to raise wage rates and reduce labor output. In every case he brings forth the specter of falling demand and rising unemployment, that is, people willing and able to work but unable to find employment at the coercive rate. Economists call it “institutional” unemployment. It must not be confused with “temporary” market-generated unemployment.

Directed by Consumers

Directed by consumer choices and preferences, employers buy definite performances at market rates. They do not knowingly buy labor at rates that can be expected to result in financial losses, nor do they for long retain labor that usurps income from investors and entrepreneurs. In fact, they discharge submarginal workers whenever they can, in order to preserve the production process and safeguard their own jobs as well as those of other workers.

Consumers acting on free markets may be responsible for fluctuations in wage rates. They may cause some to rise and others to fall and thereby reassign labor to various fields of production. Some rates may rise in reaction to rising consumer valuation and appreciation. Others may fall in response to declining consumer demand. But all such declines do not create mass unemployment unless wage rates are forcibly prevented from readjusting. Industries may shrink and vanish because of changing consumer aspirations and changing production technology. They may cut wage rates and reduce fringe benefits until laborers prefer to seek other employment. But such changes do not cause institutional unemployment. At the market rate of wages anyone willing to work can find employment and anyone looking for labor can find it.

A worker may be discharged because his employer is readjusting the production process in response to changing consumer demand. Or, having failed to adjust in time, the latter may face liquidation in bankruptcy, which releases all labor. Workers discharged may not immediately take another job; they may search for a better opportunity in other markets. They may want to re locate in another community or move to another climate. For any one of a thousand reasons they may choose to wait for a more propitious opportunity. Their unemployment, being the outcome of both market change and individual choice, is “temporary” and must not be confused with “institutional” unemployment, which is as persistent as the institutional force that is creating it.

Temporary Unemployment

Man is not free to choose permanent unemployment. He must labor in order to sustain his life and provide some comforts of living. In an exchange system he must adjust his labors to the demands of the market where his fellowmen manifest their wants and desires. Failure to adjust promptly to changing conditions may lead to unemployment.

There may be technological unemployment, which always attracts a great deal of popular interest. Technological progress may reduce the number of workers needed to perform certain operations. Computer production and management may result in simplifying and shortening the production processes, thereby reducing the number of workers required to perform them. Labor- replacing machinery and mechanical handling may result in a reduction of the number of workers needed to man a workshop.

The worker displaced by technological changes faces the risk of an extended period of unemployment unless he chooses to adjust quickly to the new situation. He may move to another industry that is expanding and bidding for more labor. Or he may choose to wait until his former employer recalls him. After all, the new process of production that displaced him usually results in lower goods prices and an increased demand for the goods. It may lead to an expansion of business and may necessitate the rehiring of dismissed workers and the addition of new workers.

New tools of production need to be manufactured, installed, serviced, and operated, all of which require human labor. The new machines need designers, draftsmen, manufacturers, truck drivers, programmers, installers, operators, and repairmen. In most cases the laborer who is displaced by a machine may be qualified to work with it in some capacity. If, however, he makes no effort to learn and adjust, preferring to wait and see, the displaced worker may not get the job. Instead, it may go to a white-collar worker or a young school graduate who is eager to learn.

In recent decades manufacturing employment has been declining while certain service industries have expanded rapidly and required additional labor. Supported by massive government spending, the health-care industry, especially for the elderly, has grown significantly. It has absorbed some labor set free by manufacturing industries. In many instances, however, displaced factory workers refuse to make the move to another industry in another location; they had rather wait until they are called back or their unemployment benefits run out.

There may be seasonal unemployment. It is the composite effect of climatic and institutional forces that are felt regularly each year. Farm employment in the United States, for instance, rises from early spring until fall, then declines sharply as winter approaches. Many other activities are subject to similar fluctuations. Construction is affected directly by changing weather conditions. In the snow belt a cold winter may bring most outdoor construction to a halt. Intermingled with the climatic variations are the effects of institutional factors. Industries associated with education, for instance, are affected by the scheduling of the school year from September to June. Retailers are affected by the designation of tax dates by federal and state governments. Holidays have a wide range of economic effects. Christmas and Easter have major impacts on the volume of business; other holidays, such as July 4, Memorial Day, and Labor Day usually are of less effect. They all create an annual cycle that is recurrent and periodic.

Seasonal Fluctuations

The list of industries directly affected by seasonal factors is surprisingly large. Seasonal influence is clearly discernible not only in agriculture and construction, but also in iron and steel, automobiles, tires, cement, glass, shoes, appliances, confections, men’s and women’s clothing, and many others. Many businesses shut down or curtail operations during seasonal slumps.

Industries subject to seasonal fluctuations obviously need to compete for available labor with other industries that offer more regular employment. They can compete effectively only if their wage rates are high enough to induce a sufficient number of workers to prefer seasonal over regular employment. The structure of wage rates reflects the seasonal irregularity in demand.

Some workers prefer seasonal employment over year-round work; they may enjoy seasonal unemployment, which to them may be self-employment during the off-season. Most teachers love their seasonal unemployment; they call it vacation. Some may prefer to be fully employed throughout the year; they may teach during the school year and labor in commerce and industry, or seek self-employment during their vacations. Migrant farm hands may bend their effort in custom grain harvesting, starting in Oklahoma and following the season north until it ends in northern Saskatchewan. Fruit pickers may start in southern California and end up in British Columbia. During the winter they may retreat to their homesteads in Mississippi and Florida. In every case the wage and fringe benefit structure of the seasonal industry adjusts to the irregularity and thereby secures the needed number of workers.

There may be a great deal of unemployment of older workers. Many make little effort to adjust to a new situation, which makes employers reluctant to hire them. This well-known tendency is deeply rooted not only in custom and convention, but also in human nature itself. As he grows older, man may resist changes. When strength and energy wear away, his economic productivity tends to decline. But he may expect to be paid according to seniority, rather than productivity, which may make him more expensive than younger competitors. And even if he were to earn identical wage rates, his unit costs of production may rise as his productive efficiency declines.

Productivity and Income

Self-employed people are much more aware of the direct relationship between productivity and income than employees. They are prepared to face declining incomes when personal productivity declines in advancing age. The physician or dentist who attends to fewer patients readily accepts the fact that his income may decline. The businessman knows that his profit will shrink when his output decreases. But his aging employees tend to forget it; they may expect a stream of raises and improvements until they choose to retire. Their costs continue to rise while their productivity declines, which makes them primary targets for disemployment. In other words, there are no employment contracts calling for wage cuts after age 40, 50, or 60, but there is a great deal of unemployment. It also explains why self-employed people generally continue to labor in their professions long after employees have retired. Government usually compounds the trend by imposing laws and regulations that aim at benefiting elderly employees. But benefits exacted by force merely raise employment costs and thereby disadvantage the intended beneficiaries even more.

Physical strength and prowess may diminish early in life, but man may continue to grow in experience, knowledge and wisdom throughout his life. As long as he is growing, his economic productivity may be rising. There is no specter of unemployment, which appears only to submarginal workers. Unskilled laborers who have nothing to sell but their physical strength may become submarginal at an early age; they may become “old” in their thirties when youthful vigor is fading away. Factory hands who acquire their skills in a day or two become “old” early in life. Skilled workers who are masters of a difficult trade need not fear the competition of younger people; they may enjoy highest personal productivity in their middle years. Professional people who may be studying and learning all their lives may achieve their highest productivity in their fifties and sixties. The philosopher who inquires into the nature of things and synthesizes all learning may be at his best in his seventies and eighties. He has nothing to fear of the competition by his younger colleagues.

And yet, they all may fall prey to cyclical unemployment, which throughout recent history has been one of the great economic and social evils. Workers are laid off en masse when business is caught in the throes of depression. Millions are idled, and in time are impoverished, as economic wheels grind to a halt. Depression time is readjustment time. Economic production is readjusting to consumer demand, capital markets are correcting the mistakes made in the past, and labor markets are reassigning labor in response to changing demand.

Cyclical Unemployment

The public is poorly informed about cyclical unemployment. Under the influence of Mainstream Economics, most people are led to believe that depressions are the evil fruit of the competitive order. In reality, depression and unemployment are the inevitable outcome of government interference with money and credit. They are the consequences of boom-and-bust policies that lead to credit expansion, followed by credit contraction. The harm is wrought during the economic boom; it is corrected with much pain during the depression that follows.

Before the 1930s, when there was little government intervention, the depressions were relatively short and mild. There was little unemployment. After all, there was no institutional restraint on the labor market, no minimum wage legislation, no unemployment compensation. When economic production was forced to readjust, labor would readjust with equal speed and efficiency. It would freely move about the labor market and shop around for the best available position. Workers labored from dawn to dusk, especially during depressions. Chronic unemployment was utterly alien to them.

Institutional Unemployment

The specter of mass unemployment first made its appearance when government became a back-seat driver. In 1930, when there was some cyclical unemployment, the government urged business not to adjust, but to increase business spending. Municipalities and states were called upon to boost their spending for public works. The back-seat driver erected trade barriers, ran huge budgetary deficits, doubled income taxes and raised business taxes, and in many instances, seized control over the car while denouncing the driver. He set minimum wages, ordered fringe benefits, exacted and paid unemployment compensation, and introduced collective bargaining, all of which served to hamper the labor market. They gave rise to institutional unemployment.

Government is a necessary evil, like wheel-chairs and crutches. It protects the lives and property of its citizens from aggressors and wrongdoers. Our need of it reveals that there is evil in the world. The evil is multiplied if government itself becomes the instrument of evil. It may govern too much and thereby kill the self-help and energy of the governed. It may neglect to protect the property of the citizenry, or even prey on it for its own benefit or that of others. It may engage in massive transfer that seizes income and wealth from productive citizens and doles them out to its constituents. And in a moment of omnipotence it may interfere with economic production and enforce wage rates that cause mass unemployment.

Government may set minimum wages. For any number of political reasons, it may issue minimum-rate mandates and call on courts and police to enforce them. To judge the economic effects of this intervention it is important to determine the relationship of the mandated rate to the market rate, that is, the minimum rate imposed by courts and police versus the going rate paid in the labor market. There are three conceivable possibilities with varying effects:

1. The police rate may be lower than the market rate; it may be $1 per hour, for instance, but everyone is earning more than the minimum. No apparent ill effects may come from such intervention that actually does not intervene. It is potentially harmful, however, as the markets may change and cause some wage rates to fall below the minimum, in which case the minimum would now be higher than the market rate and give rise to unemployment. Moreover, it is conceivable that some youngster may not yet produce the minimum, which would cause him to fall into unemployment or, if he chooses to ignore the mandate, become a criminal in the eyes of the law.

2. The police rate may coincide with the market rate. Again, no apparent ill effect may come of the mandate. However, market changes may cause the police rate to be higher than the rate the market would set. In this case the minimum costs of some workers would exceed their productivity; they would become “submarginal” and face unemployment.

3. The police rate may be higher than the rate the unhampered market would set. This is the normal case of minimum wage legislation. After all, government means to lift the wage rates of poor people above the given rates in order to benefit them and earn their political support. It is unfortunate, however, that workers who produce less than the legal minimum tend to be unemployed. Every time government raises the minimum it boosts the unemployment rolls. It may want to raise the minimum from $5 an hour to $6 by mandating a higher hourly rate or adding fringe benefits. It may want to benefit millions of Americans who are earning less than $6 an hour, by lifting their incomes by order of court and police. The order is issued to all employers alike—profitable employers, marginal employers who manage to cover their costs and earn a going rate of return, and submarginal employers who are earning less.

Profitable employers earning returns higher than the going rates, may be able to cover the higher labor costs. The minimum mandate merely prevents them from forming more capital and expanding their businesses, and may discourage them from hiring new labor. The marginal enterprises will become submarginal as a result of the minimum wage boost. They will be earning less than they could earn in fields that require no minimum wage labor. In reaction, employer-entrepreneurs may choose to curtail their most expensive production. They may dismiss some labor, including minimum wage labor. Submarginal enterprises may do the same. The pressure of competition may force them even more than the others to curtail loss-inflicting output and discharge unneeded labor. The curtailment by both, the marginal and submarginal enterprises, reduces the supply of economic goods on the market, which in time may raise their prices.

Consumers are the ultimate bosses of the production process. They set prices and determine the payroll. It is a well-known fact that consumers usually buy fewer goods at higher prices, and therefore require less labor. How much less? No one can foresee the consumers’ reaction, which may vary from product to product and may change over time. It is likely, however, that some are prepared to pay higher prices, which will permit employers to pay higher wages. As no one can know in advance how high prices will rise in reaction to the reduction in output and how many will pay the higher prices, no one can know in advance how many workers will find employment at $6 an hour. If 10 million people were to benefit from the wage mandate, 8 million, perhaps, may enjoy the boost and 2 million may be cast from the employment rolls. At other times and in other places 5 million workers may partake of the boost while 5 million may be condemned to long years of unemployment.

Benefit Mandates

Government intervention may take the form of benefit mandates for some or all workers. To be popular and “progressive” government may mandate new labor benefits. If wage rates are not reduced promptly to compensate for the boost in benefits, total labor cost may exceed the marginal productivity of some workers and, therefore, create unemployment. To reflect on employment and unemployment is to consider total cost, which usually comprises not only the workers’ take-home pay and tax exaction, but also numerous employee benefits. Employers may be ordered to provide certain benefits or contribute to them. They may be directed to pay unemployment compensation, workman’s compensation, paid vacations, healthcare benefits, and contribute to old-age and disability benefits and other labor causes.

To ponder over the demand for labor is to compare the productivity of labor with the cost of labor, that is, total cost. It is irrelevant to employers how the various shares of labor cost are to be distributed, as take-home pay or fringe benefit, as payroll tax or contractual contribution to Red Cross or the Little League. What matters is a comparison of total cost of labor with its productivity. If the former is made to exceed the latter, unemployment sets in.

Unemployment caused by benefit mandates may be temporary if other compensation is permitted to adjust. If a mandate raises labor cost by 10 percent and the unemployment in time depresses wage rates by 10 percent, they cancel each other. In the end, the mandate merely ordered benefits for workers and, by way of unemployment and wage rate adjustment, made them pay for the benefits. It is illusory to believe that government can for long force investors and entrepreneurs to grant benefits without receiving labor in return.

Some of the benefits accomplish the very opposite of what their political sponsors mean to accomplish. Unemployment compensation is designed to alleviate the pains of unemployment and facilitate the search for a job. But it is an unfortunate fact that every boost in unemployment taxation levied on employers raises the cost of labor and thus reduces the demand for labor. In deep recessions with heavy unemployment, state governments are quick to raise tax rates and bases, which invariably raises the unemployment. States with high rates of unemployment taxation suffer from high rates of unemployment.

Production Barriers Reduce Labor Efficiency

Government may erect production barriers that reduce the productivity of labor. It may raise business taxes, boost environmental costs, erect trade barriers, impose regulations and controls. It may engage in deficit spending and consume business capital, reducing labor productivity. If labor costs are not reduced simultaneously they may exceed the marginal productivity of some workers and thereby create unemployment.

To judge the import of production barriers it is important to distinguish between new and old barriers, between new and old government intervention. New barriers are those to which the price and production structures have not yet fully adjusted. The new business tax has not yet raised goods prices, business may still be in the throes of adjustment through reduction in output and disemployment of labor. The new trade barrier may not yet have had its full effect on output, prices and wages. The new budget deficit that is consuming business capital and reducing labor productivity, may not yet have run its course. Readjustment to new barriers takes time; it may take several years of painful readjustment until the apparatus of production has adjusted anew to consumer demand.

Old barriers are those to which the price and production structures have fully adjusted. The painful readjustment is over, wage rates are lower, goods prices are higher, and the un employment that forced the labor adjustment lies in the past. Present unemployment cannot be placed on the doorsteps of old barriers erected during the 1960s and 70s. The apparatus of production has adjusted to them. Today’s unemployment must be explained in terms of new barriers to which the labor market has not yet fully adjusted, and in terms of insurmountable barriers to which no legal adjustment is feasible. Price and cost adjustment cannot easily overcome the minimum wage barrier that prevents the employment of much unskilled labor, nor can it readily compensate for the generous subsidies granted to the unemployed. For many workers their choice of job or joblessness may depend on the difference between labor income and unemployment compensation. For them, the utility of labor tends to shrink and that of leisure may rise whenever leisure is subsidized.

Unemployment compensation constitutes a production barrier in the sense that it may induce some workers temporarily to withdraw from production. It reduces the supply of labor, which in turn raises the marginal productivity and wage rates of the remaining labor. The boost tends to be temporary unless the compensation succeeds in creating a standing army of unemployed. In that case, it must not be overlooked that the increase is accomplished at the price of mass unemployment and grievous suffering of the unemployed. It is financed by unemployment taxes exacted from the income of the employed, and is borne by all members of society who are made poorer by the idleness of some of its members. Unemployment compensation is a rather ineffective method of raising wage rates and improving the economic lot of working people.

Interference with Prices

Government may interfere with the pricing process and thereby lower the productivity of labor. If labor costs are not adjusted simultaneously some labor may become submarginal. As government is most keenly interested in “essential” products and services, e.g., fuel, utilities, steel, and the like, it may forcibly hold their prices below market rates, thereby depressing labor productivity.

Throughout the 1970s the Federal Government kept oil and gas prices far below world market prices. The price controls, together with a fuel allocation program, struck hard at economic production and employment. It brought Sunday closings of filling stations, created long lines on other days, lowered home and office thermostats, and reduced commercial air service. It brought energy brown-outs, and energy-related industrial layoffs. Once self-sufficient in energy, the U.S. was forced by price controls to supplement gas and oil supplies with overseas purchases. By 1980 no fewer than 69 government agencies and a dozen Congressional Committees were exercising authority on energy questions. Unemployment rose from some 4.1 million Americans at the beginning of the decade to nearly 6 million at the end.

This is not to imply that the energy chaos was solely responsible for soaring unemployment. There were many other policies that contributed to the evil. There cannot be any doubt that the comprehensive price and wage controls imposed in 1971 were largely responsible for the severe recession that was to descend on all markets in 1974 and 1975. Average unemployment in 1975 was estimated at 7.8 million Americans. If it had not been for the rampant inflation that was to follow, the unemployment undoubtedly would have grown worse.

Inflation and Unemployment

Under the sway of Keynesian doctrines and recipes, governments the world over are practicing deficit spending and credit expansion in order to alleviate unemployment. They are convinced that such policies constitute an efficient method for gradually lowering labor costs. Lower real wages raise the demand for labor and actually reduce unemployment. But the success of Keynesian policies depends entirely on the ability to deceive the workers and their unions or, if this should fail, to persuade them to suffer losses in real income.

Inflation and credit expansion as an employment policy cease to be effective when the workers resist the obvious reduction in real income. They are foiling the Keynesian plan when they demand wage boosts that compensate for the rise in goods prices. In fact, they may create new unemployment pressures when their contract demands anticipate future purchasing power losses. This is why moderate dosages of inflation no longer cause real wages to decline and the demand for labor to rise.

Application of ever larger doses of inflation must, in the end, lead to a complete breakdown of the monetary system and to mass unemployment. Double-digit inflation causes businessmen to hedge for survival. They invest their working capital in inventory and capital equipment, or other durable goods that are likely to escape the monetary depreciation. Investors buy real estate, precious metals, and collectors’ items. Economic output, especially for consumers, tends to decline, which causes goods prices to rise and unemployment to soar.

The ultimate folly of the Keynesian recipe is a combination of inflation and price control. Both together instantly paralyze all markets, hamper economic production, encourage consumption, and create goods shortages. They cause the exchange system with its magnificent division of labor to disintegrate and give way to a primitive command system. Disintegration causes mass unemployment.

Labor Unions

Long before there was a Keynesian recipe governments began to rely on labor combinations for improving labor conditions. Guided by popular notions of labor’s disadvantage they bestowed legal immunities and privileges on labor unions so that they would raise wage rates above those the unhampered market would set. Unfortunately, simple economics reveals that disemployment sets in wherever labor costs are forcibly lifted above market rates.

It does not matter whether government or union is imposing the coercive rates. The effects are the same: institutional unemployment. The rates may differ according to the measure of coercion. Government edicts usually are more comprehensive and, therefore, more restrictive than union rules. Minimum wage legislation may affect millions of workers. Union coercion may be limited to a few companies in a few industries, which obviously limits their restrictive powers. As long as unionism is a limited phenomenon, the disemployment it imposes may bring forth an adjustment in non-unionized employment. The labor market may absorb the labor set free by unions and thus prevent mass unemployment.

Disemployed union labor reduces the marginal productivity of unorganized labor and depresses its wage rates. It creates a visible difference between union rates and market rates, which is both boon and bane to unionism. The difference obviously helps to promote the union ideology according to which unions do raise wage rates and improve the economic conditions of all working people. It is a bane because it gives rise to much suffering. It creates unemployment among union members and depresses the wage rates of all others. When union rates amount to double or triple the market rates, the industry usually falls on hard times. With the demand for its products and services declining, it tends to contract, releasing labor, until it ceases to function as a viable industry. Foreign producers may ultimately fill the gap torn by union restriction and industry contraction.

The decline of a unionized industry is bound to accelerate when the quantity and quality of labor may decline as a result of diminishing effort and application by the workers themselves. They may choose to loaf and goof off, dally and tarry, or do shoddy and shabby work. They may steal from their employer, damage their tools and equipment, and otherwise sabotage the production process. Union labor usually is angry labor pressing its grievances. When labor productivity declines for any reason, wage rates must be reduced simultaneously. Failure to adjust labor cost to declining labor productivity leads to unemployment.

An Invitation to Labor

Human life is a constant want and a standing invitation to labor. In dictatorships, the invitation becomes a command that is enforced by court and police. In free societies, it takes the form of business demand for workers. Employers are bidding for labor in order to serve consumers who are the directors of the production process.

Consumers judge the efforts of every worker and determine his income. They decide upon employment and unemployment. Being weighed on their sensitive scales of productivity and cost, some labor is found wanting. In free labor markets it is free to readjust. In markets con strained by onerous rules and regulations it is condemned to chronic unemployment.

  • Hans F. Sennholz (1922-2007) was Ludwig von Mises' first PhD student in the United States. He taught economics at Grove City College, 1956–1992, having been hired as department chair upon arrival. After he retired, he became president of the Foundation for Economic Education, 1992–1997.