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Lower Labor Costs Now!

Tags Big GovernmentFree MarketsProduction Theory

08/04/2008Llewellyn H. Rockwell Jr.

Official data are starting to reveal what close observers have suspected for some time. Layoffs are increasing. Unemployment is on the rise. It now stands at a four-year high of 5.7 percent, which is not high by historical standards, but it stings when you consider that the rate dipped below 4 percent in the late 1990s.

What worries people is the trend line. This is the seventh straight month of reported job declines.

Job instability is the number one factor that leads to public panic. It is more pressing than stock-price declines, general price increases, and a host of other bad trends, because it hits people in the most direct way by threatening to end the flow of money that puts bread on the table.

Don't blame the employers. They are faced with making cutbacks wherever possible. They have to worry about surviving in the downturn. It is not only labor costs that must be cut. Cutbacks must occur in every area.

In the past, we've seen policy intervention designed to do exactly the opposite of what needs to be done. The most typical is an expansion of unemployment benefits, and both parties have already agreed to this regrettable step. Such benefits amount to telling a lie to people, that they can continue to hold out for higher wages when the most important step workers can make is to lower their offering prices for labor on the market.

But, you say, it is unrealistic to expect people to devalue their work by lowering their wage expectations. If so, there is another way to go about the same thing: lower the costs of hiring on the market. The costs of employment to the employer go way beyond the wages and salaries they pay.

Among them are payroll taxes, of which the employer must absorb half, at least in an accounting sense. Once you add Social Security with Medicare with unemployment with workmen's comp, the employer ends up paying about 10% of labor costs in taxes. The laborer also pays 6.2 percent. But these accounting divisions are purely formal. In an economic sense, the laborer ultimately pays the full tax. But the point is that there is no choice about this. If someone is hired, there must be a tax premium built into the cost of hiring this person, and this is before the worker has added any value at all to the work of the enterprise in question.

The payroll tax is a tax on employment because it is a forced price increase in the wage that everyone hopes to gain. If we eliminated this, we would see the costs of hiring plummet, and the benefit would be experienced directly and immediately by the worker. The worker would not have to lower wage and salary expectations. Instead of paying the government, the worker would be able to add that money to his or her own remunerative calculus.

Another tax on employment comes in the form of mandatory provisions of health insurance for firms of a certain size and employment of a certain time. With the costs of health care having risen beyond belief, this is a serious impediment to hiring. Employees tend to think of health insurance as a free benefit or even a right, but this is an illusion. The money paid comes out of the paycheck. Almost all employees would be better off arranging for their own private medical insurance or taking the risk upon themselves. The new demand for individual provision would make the market for health insurance more competitive and bring down prices. It would also increase the incentive of people to take better care of themselves, since the perception of "free" health care creates a moral hazard.

Another great step would be to eliminate the minimum wage. What this would do is decontrol the prices of labor in general. It would permit workers the freedom to offer their services at any rate privately negotiated between the employee and the employer. The minimum wage merely puts a floor on wages that reduces their flexibility on the market. It acts like any price control: in this case, it creates a surplus of labor services that go unpurchased. It outlaws some jobs.

There are other costs of hiring that are very high but ultimately incalculable. Discrimination law has gone from being a relatively clear (though ultimately wrongheaded) rule against racial and sexual discrimination to become a legal minefield that just boggles the mind. Once you consider the entire panoply of restricted "grounds" of discriminating, every single employee becomes a walking lawsuit.

The risks to hiring anyone are huge. It is no longer possible to imagine hiring full-time employees without feeling as if you are likely to be stuck with these people no matter how they perform and no matter what turn economic conditions take. On the margin, this makes employers far more risk averse to hiring anyone, especially in risky times. If regulators, bureaucrats, judges, and juries would back off here, we would see a great increase in employee mobility and new willingness on the part of every firm to take on new employees.

Now, the problem immediately presents itself. What will the poor government do if it is denied all this revenue? What will become of workers' rights if government ceases to protect victimized workers from nasty employers? Well, here is the problem. The choice right now is not between a high-paying job with lots of benefits and a low-paying job with no benefits. The choice for many is coming down to having a job or not having one. As for government revenue to sustain transfer programs, I say tough: let the public sector suffer for a change.

A dramatic initiative to lower the costs of hiring could end up having great effects. It could wean us from the World War II–era mistake of pushing the costs of health care onto employers. It could force a desperately needed reform of Medicare and Social Security. It would shift the locus of control over employment contracts from government to those affected most directly by those contracts: namely, the individual workers and the firms for which they work.

Of course what you read here is roughly the opposite of current policy trends, which are to increase rather than reduce the costs of hiring. This is how government ends up taking a bad situation and making it worse, which is what it has done consistently throughout history. This won't change until the public makes its demands known to the elites.

The best anti-recession slogan right now would be: Lower Labor Costs Now!


Contact Llewellyn H. Rockwell Jr.

Llewellyn H. Rockwell, Jr., is founder and chairman of the Mises Institute in Auburn, Alabama, and editor of LewRockwell.com.

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