9. Labor, Wages and Employment

9. LABOR, WAGES AND EMPLOYMENT

SUGGESTED ACTIVITIES

1. Repetition is essential in teaching—as any teacher well knows. These catchy phrases, used so far in this syllabus, bear constant repeating to review the significant economic concepts they describe:

ARMCHAIR METHOD—the method of developing theories through the use of deduction. Economists adopt the “armchair method” when they think, reason and use logic to explain the actions of individuals on the basis of a priori assumptions (Unit 2).

MICRO-ECONOMIC APPROACH—studying individual economic activities—instead of mass phenomena, totals, aggregates or collectives—in terms of the individual units responsible. Economic phenomena are explained as the results of countless individual actions taken by specific individuals who have preferences, felt-uneasinesses, values and goals, individuals who think, reason, believe and act (Unit 2).

SUBJECTIVE (PERSONAL) VALUES—values which depend on the ideas of the individual making the evaluations (Unit 3).

VALUE SCALE—the order or arrangement (conscious or unconscious) in which every individual, at a particular place and time, ranks or grades his or her own subjective (personal) values or goals according to their importance to him or her (Unit 3).

FELT UNEASINESS—the subjective (personal) feeling of discomfort, distress or dissatisfaction with things as they are which spurs each of us on to try to improve the situation in some way (Unit 3).

ECONOMIC PROBLEM—the conflict which arises because “our eyes are bigger than our stomachs,” because each of us wishes for lots more than we can possibly ever have, acquire or expect to accomplish within the limited time, energy, knowledge, resources and wealth available to us in a single lifetime (Unit 4).

AUCTION—everything offered on the market is up for bids as if at an auction. Every potential trader (buyer and seller) is always weighing the pros and cons of bidding or refusing to bid, buying or refusing to buy, specific units of certain goods and/or services at various prices (Unit 6).

MARGINAL UNIT—the last unit of a good or service which a person considers worthwhile acquiring under the circumstances. The service or satisfaction provided by the marginal unit is its “marginal utility” (Unit 6).

ANT TIME PREFERENCE—the desire to refrain from consuming everything in the present so as to set something aside for tomorrow. Persons with the time preference of Aesop’s ant save some things in the attempt to prepare for the future (Unit 7).

GRASSHOPPER TIME PREFERENCE—the desire to consume or spend everything in the present, to eat, drink and be merry today, giving little or no thought to tomorrow (Unit 7).

RAINY DAY SAVINGS—stocks of consumer goods set aside for a “rainy day” or an emergency (Unit 7).

CAPITALIST SAVINGS—stocks of raw materials, tools and/or other factors of production accumulated so as to be able to produce more and/or more easily in the future (Unit 7).

CONSUMER SOVEREIGNTY—the “economic power” of consumers to direct production. Like puppeteers, the consumers “pull strings” by making purchases and refusing to make purchases, thus telling entrepreneurs, the producer-marion-ettes, what, where, when and how to produce (Unit 8).

GATE OR BOX OFFICE RECEIPTS—the means by which customers may reward producers who supply them with things they want. The greater a producer’s gate or box office receipts, the better his chance for a profit (Units 6 & 8).

2. To demonstrate that the wages paid for a service, labor or work, are prices, exchange ratios, determined just as are prices of goods or commodities, the teacher might hold another fictitious classroom auction similar to those described in Unit 6. In this instance the teacher will play the role of a potential employer, planning to invest in a particular enterprise and seeking to hire a number of high school students for temporary summer jobs or for regular work after graduation. In selecting the enterprise, consider the interests, aptitudes and probable expectations of the students in this particular class. The entrepreneurial proposal should be fairly realistic so that students can visualize themselves as potential candidates for the jobs to be auctioned off. See the several suggestions below. The teacher should outline in considerable detail the fictitious entrepreneurial project he or she contemplates for this purpose, explain the reason for the enterprise and describe the good or service it will be producing as well as the tasks expected of each employee—hours of work, working conditions, etc. Write on the blackboard for all to see while the auction is in process the most important features of each enterprise and the jobs that are up for bid.

The teacher, acting in the role of the fictitious entrepreneur, must try to anticipate the future market for the good or service the enterprise will be supplying and budget a certain amount each week to pay these particular workers. In real life, this amount would of course depend on the box office receipts expected from customers in exchange for the services the workers would be rendering. For the sake of this classroom activity, however, this figure must be arbitrarily selected. To simplify the calculation, the teacher might multiply mentally the approximate average weekly wage students are likely to ask for the jobs up for auction by half the number of students in the class. Use the product of these two figures as one week’s budgeted allowance. For instance, if it is expected that a high school student would be willing to start at $80 per week as a salesclerk in the enterprise described and there are 30 students in the class, multiply $80 by 15, and announce $1,200 as the ceiling you, the teacher acting as entrepreneur, believe you are justified in spending for hiring salesclerks. This figure, representing your weekly budget for this purpose, should also be noted on the blackboard before the bidding starts.

NOTE: In real life, entrepreneurs start their calculations by trying to anticipate future consumer wants, potential costs and expected box office receipts. They estimate the number of workers of various types they will need and the cost of hiring them on the basis of the wages they expect they will have to pay. They may very likely try to discover the wages established in the market in the very recent past for similar jobs by previous employer-employee auctions. However, such current or “going” wage rates are useful only insofar as they furnish clues or hints as to what entrepreneurs may have to pay employees to work for them in the near future. The purpose of employer-employee auctions is to establish new market wage rates, in the light of anticipated market conditions, suitable for particular jobs in a particular enterprise at a particular time and place in the future. In real life, entrepreneurs budget their available savings as best they can to cover all anticipated expenses—for plant, equipment, materials, promotion, etc., as well as wages—trying always to remain flexible enough to adjust to changes that may occur However, in this fictitious classroom auction, the budget for hiring workers must be set arbitrarily. Hence the suggestion that it be established as outlined—on the basis of class size and anticipated wage demands of the students.

Here are several suggested fictitious enterprises, each with a number of potential job openings for which students may bid:

a. The teacher is presumed to be a businessman who has just leased a small or medium-sized store in a new shopping center and needs salesclerks. They need not have had any special previous experience, but they should be neat, careful, reliable and willing to learn. Salesclerks must be able to stand on their feet a good part of the day. The store is to remain open Mondays, Tuesdays, Wednesdays and Saturdays 9:00 AM to 6:00 PM, Thursdays and Fridays, 9:00 AM to 9:00 PM. Each salesclerk is expected to work 40 hours a week. Evening and Saturday hours will vary from week to week. There will be time off for lunches, suppers and coffee breaks, when relief salesclerks take over for regular salesclerks. There will be opportunities for advancement for any salesclerk who proves capable and is interested in a future with the company.

b. The teacher plays the role of the spokesman for a young couple operating two adjoining summer camps in the nearby mountains, one camp for boys 6-12 years old and the other for girls of the same age. The camp owners are looking for counsellors for the ten weeks from the middle of June to the end of August. Each counsellor will sleep in a tent with a group of boys, or girls. Simple but nourishing meals will be furnished, of course. The two camps and their counsellors will eat in a common dining room, cooperate on several activities everyday and have a joint outing or social affair every Saturday afternoon. Counsellors at either camp will have, in effect, a fully-paid, healthy, outdoor summer vacation, and frequent opportunities to ride horseback, swim or play tennis.

c. The teacher pretends to be a state highway employee, hiring men and women to collect tolls on a nearby super-highway. Each will have to work 40 hours/week on a rotating schedule, taking turns at the various overlapping shifts—7:00 AM to 3:00 PM, 11:00 AM to 7:00 PM, 4:00 PM to 12:00 midnight, and 12:00 midnight to 8:00 AM. The work will not be hard or strenuous but many persons might consider it monotonous. The toll collectors will be able to sit or stand, as they wish in their booths, protected from the elements to some extent but not completely sealed off from the effects of strong wind or rain and extreme heat or cold. To qualify for such a job a person should be in fairly good health.

d. The teacher plays the role of an employee in the personnel office for Disneyland (California) or Disney World (Florida) who is anxious to hire a number of young people as guides, chauffeurs or guards. Those hired for these jobs would have to pay their own transportation to and from their home and place of work. No room and board is included in the weekly pay. Employee cafeterias are close at hand where they can eat lunches and suppers inexpensively. These jobs require persons who like people as individuals and enjoy being among crowds.

e. The teacher pretends to be the manager of a summer beach or mountain resort ho tel/motel who is looking for young people to work as waiters and waitresses. The hotel and its location should be described in some detail. Transportation to and from the resort area will be paid by the company. Waiters and waitresses will be housed in dormitory-like facilities. Board will be provided. The actual weekly cash salaries will be fairly low because transportation, board and room are furnished. Also waiters and waitresses can expect tips ranging from about $50 to $100 per week. Waiters and waitresses will have to be on duty at mealtimes, but they should have considerable opportunity to use the various sport and recreational facilities available.

f. The teacher announces that he/she is hiring employees for a new, or expanding grocery store or supermarket in the vicinity of the high school. There is need for inventory or stock clerks, checkout boys and girls, packers and so on. The hours will be somewhat flexible. The work will be steady and the jobs could prove permanent. However, applications are also welcome from students seeking part-time or temporary summer work only.

g. The teacher presumes to be the agent for a market research firm, looking for young people to conduct telephone or door-to-door surveys during the summer months. The teacher should describe in some detail the type of information to be collected, the product or products with which the surveys are concerned, the neighborhoods to be visited, if the canvas is to be door-to-door, the hours, whether part-time or full-time, and so on.

h. Teachers in rural areas may describe themselves as employers or agents for employers looking for young people to fill various jobs at local farms, canning plants, road work, construction jobs, garages, summer resorts, and so on, depending on local conditions. In any case, the teacher should try to describe the jobs in sufficient detail for the students to decide whether or not they are interested in applying.

Once the teacher has described the fictional enterprise, its weekly budget for wages and the specific jobs to be filled—noting the major points on the blackboard—each student should write on a piece of paper, for his eyes only, the lowest weekly wage or salary he would be willing to accept for the particular kind of work involved. Some students may already have plans to travel or study in the summer and would not be willing to take one of the jobs described except for a tremendous sum of money. Others might be interested only if they were to receive a higher wage than most other students would ask, to make up for its lack of appeal to them. Some students might be very anxious to find a job, any job, and so would be willing to accept a relatively low salary. Still others might consider the jobs described desirable, even interesting, glamorous or “fun,” in which case they would be willing to work for very little cash per week. In any case, each student should weigh in his or her mind the present situation, their various interests, wishes and alternatives for work, study, travel or vacation during the coming months, writing down the least they would ask per week for that particular job.

After each student has written down the minimal weekly wage he or she would be willing to accept, the bidding can begin. The teacher, as potential entrepreneur, will want to hire as many employees as possible within the allotted budget. Start the bidding low, asking how many students would be willing to take one of the jobs described at $30, $40, $50 per week. Point out that no one will be hired below the market wage, determined by the outcome of the auction. Thus, willingness to work at a low wage doesn’t mean one will have to work for less than others hired for the same or similar jobs. Make sure the students clearly understand that:

(1) the purpose of the auction is to find the market wage, the wage which will be paid all persons hired for the particular jobs described

(2) those who would have been willing to work for less than the market wage, i.e., the wage employer and would-be employees finally agree upon, will actually be receiving a sort of “profit” or bonus over and above what they would have been willing to work for in that job.

Jobs offering room and board will probably go for less cash money per week than jobs without such “fringes.” In any event, as the bidding proceeds, ask all students who would be willing to accept the job described at the weekly salary then being offered, to stand or raise their hands. At each stage in the auction, the teacher, or a student volunteer, should count the number of “job applicants,” figure all costs of hiring them at that particular salary, and write that sum on the board. The “auction” should continue, the weekly salary offered being upped bit by bit, until the product of the number of students applying, times the salary then being offered, is equal to or just below the budgeted allowance. The cost of transportation and/or board and room, if included in the offer to employees, must also be figured and added to the cash wages being offered. See pp. 84-85 for possible formats to record the bidding.

At the conclusion of this job auction, remind the students that everyone will gain to some extent as a result of the entrepreneur’s hiring workers:

(a) the entrepreneur, who now has employees to help him/her carry out the proposed project, thus furnishing a chance for profit

(b) the new employees, each of whom believes accepting the job described at the salary offered is more desirable from his or her own subjective (personal) point of view—considering all the circumstances—than any other alternative available

(c) potential consumers who, if the entrepreneur’s plans work out well, will have additional opportunities they wouldn’t have had otherwise to acquire the goods and services the entrepreneur will be offering.

Insofar as the decisions of would-be entrepreneur and would-be employees are voluntary and do not turn out to be wrong, everyone gains as a result. For a detailed list of the specific ways such a job auction helps everyone concerned, see the explanatory text of this Unit, pp. 90-91.

NOTE: To compare the determination of market wages and prices, see Unit 6. What is said there about prices applies to wages also. The entrepreneur-employer buys hours of work with the pay he offers so that he is in effect selling money for services. Employees sell their own time and effort for so much money and thus they are, in effect, buying money with their labor.

3. After determining the wages to be paid and the maximum number of employees that could be hired within the fictional enterprise’s weekly budget and after explaining the advantages to be gained from employer-employee bargaining, the teacher should exclaim: “Oh my goodness! We forgot to figure the various payroll deductions—for income taxes, social security, and the like. All these must come out of your pay. They will reduce your ‘take-home pay’ and thus your income, so you may not still be willing to work for the wage we agreed to, less these deductions. But these taxes are costs of my hiring you. I must add them, in my calculations, to the cash I pay you and deduct the total from my allotted weekly budget for paying workers.

Then ask each student to figure what the weekly take-home pay would be for each worker who had ostensibly been hired through the job auction. Here are the deductions which must be made:

a. social security (OASDI + hospital insurance) Employers share, which must be paid out of the sum budgeted for salaries. (Although not officially a deduction from salary, it is a cost to the employer of hiring a worker.)

5.85% (due to rise in 1978 to 6.05%)

Employee’s share, to be deducted from weekly paycheck

5.85% (due to rise in 1978 to 6.05%)

b. income taxes [Federal, State & City]

(approx.) 20%

If the students have access to Weekly Withholding Tax Tables [Federal, State and, when applicable, City] listing taxes to be withheld according to salary and number of tax exemptions claimed, they may figure these deductions precisely. Otherwise let them use 20% as a rough estimate of the total average income taxes a single self-supporting person of high school age would have to pay on the salary he or she would probably earn.

c. compulsory unemployment insurance, union dues checked off if any

After the students have made the necessary calculations to figure these deductions, ask how many, who had been willing to take the jobs offered at the wages previously determined, will still want the job at this reduced take-home pay. Fewer students will want these jobs at the lower incomes they actually yield after deducting taxes. Yet the limit imposed by the weekly budget for paying workers makes it impossible for the teacher-entrepreneur to offer higher gross salaries to retain the same number of workers who had previously agreed to work. When the students have reconsidered their decisions as to whether or not to accept the jobs described at the reduced net take-home pay, point out:

(1) Taxes are a cost of doing business

(2) Irrespective of who mails the check in payment of a tax, the taxpayer must obtain the money from someone—from his employees by paying them less than he otherwise could, or from his customers by charging them more. [If an entrepreneur believes that he will not be able to hire the workers he needs for less money or sell enough of his production to consumers at higher prices, he will reconsider whether or not to start or continue in operation. In any case, if he can avoid it, he will not long pay the tax out of his own pocket]

(3) Therefore, the higher taxes are, other things being equal, the more enterprises will be hampered and cut back

(4) With enterprises hampered, the jobs available to would-be workers will be fewer and/ or less productive

(5) With enterprises hampered and workers employed in less productive tasks, there will be less production than there would have been of the goods and services consumers want most

(6) With less production of goods and services available, living standards will tend to be lower than they would otherwise have been.

4. In the course of this discussion, point out to the students that taxes to support a government, which really protects lives, property and individual rights, are necessary costs of doing business. Taxes become a burden on enterprise and production when they are taken to pay for government controls, regulations, subsidies to some at the expense of others, projects that private persons would or could undertake themselves if government did not pre-empt the field, projects that consumers wouldn’t voluntarily pay for if they had the choice, and bureaucratic waste and inefficiency.

5. If the students have access to old newspaper files—either at a local newspaper office or in a library, perhaps on microfilm—ask one or several of them to study classified ads of some years back. A comparison of old Help Wanted columns with those which currendy appear in the papers might interest the rest of the class. Ask the students reporting to note what changes have taken place over the years in the businesses in operation in the community, the types of jobs advertised, the specialized skills required, the specific worker qualifications mentioned, hiring methods (whether direct or through employment agencies), commuting distances involved, wage offers, and so on.

6. If time permits, one of the readings for this Unit could be assigned to every student to summarize in a brief resume or synopsis. Or the students might read and review one of the books on this Unit’s list of recommended readings.

7. If it seems appropriate, have the students research some aspect of the labor question. There should be adequate reference material on these subjects in your school or local library, especially if die books on this Unit’s list of recommended readings are included. The books dealing with economic history, especially the development of the factory system during the “Industrial Revolution” should be pertinent. See Unit 15’s recommended readings (pp. 212-213). Biographies, autobiographies, as well as books and encyclopedia articles about specific industries or products should also be helpful. Here are several suitable topics to suggest:

a. The lot of the working man and his family before the “Industrial Revolution”—living standards, working conditions, production methods—in agriculture, industry, construction, trade, commerce, etc. (For information about the lives of ordinary seamen in the 17th-19th centuries, for instance, see accounts of long sea voyages and explorations. What kind of work did farmers and other laborers have to do before production became mechanized? What kinds of homes did their families live in? Describe the apprenticeship system. And so on.)

b. The development of factories, the use of tools and the division of labor made possible by increased savings and investment. Perhaps each student could report on a specific industry, comparing the work of a single employee over the years—as Adam Smith did with respect to pin-making (Chapter I in his The Wealth of Nations).

c. The history of labor laws and labor (trade) unions. (Most encyclopedias have articles on legislation in the field of labor and unions. The U. S.

Department of Labor also up-dates and publishes from time to time a chronology of “Important Events in American Labor History.” Your Congressman may be able to tell you how to order a copy.)

d. A description of some local factory, mentioning specialized jobs of individual workers, tools used, output and working conditions.

SUGGESTED FORMAT FOR NOTING RESULTS OF CLASSROOM JOB AUCTION

Fictitious proposal for hiring waiters and waitresses for a summer resort hotel/motel

Activity 2(e)

Maximum weekly budget (calculated by multiplying approximate cost anticipated per employee hired at $100, i.e., $60 weekly pay in cash + $40 weekly allowance for transportation, board and room, by 15, half the number of students presumed to be in the class—$1,500

No. of students bidding at each weekly salary”	TOTAL
5	$50	$40	$ 450
6	55	40	570
10	60	40	1,000
15	65	40	1,575

NOTE: At this point in the bidding, the teacher in the role of entrepreneur should point out that the sum budgeted for waiters and waitresses has been topped by $75. Several options are open to the entrepreneur in such a case. He may try to eliminate one of the 15 applicants for any of several reasons—relative immaturity or inexperience, lack of physical stamina or enthusiasm, and so on. Or he might try to economize elsewhere, perhaps by hiring a bus to transport all employees together rather than paying each in cash for his/her anticipated out-of-pocket transportation expenses to and from the resort area. In any event, the teacher should remind the class once more at this point that every entrepreneur is always trying to juggle his expenses and budget so as to be able to offer his potential customers the best combination of goods and/or services at the best possible price. He is always weighing the relative importance to his enterprise of every unit of expenditure, weeding out any unit which is less valuable in his view than what it costs him to retain it. The more successful he is at improving his product while reducing his expenses, the better his chances are for increasing his box office receipts and profits.

SUGGESTED FORMAT FOR NOTING RESULTS OF CLASSROOM JOB AUCTION

Fictitious proposal for hiring grocery clerks

Activity 2(f)

Maximum sum budgeted weekly (calculated by multiplying the average anticipated wage per week, $80 by 15, half the number of students)—$1,200

Weekly salaries offered	TOTAL
0	$50	$ 0
1	55	55
3	60	180
3	70	210
8	75	600
9	80	720
10	85	850
12	90	1,080
15	95	1,425

N.B. After reaching this point in the bidding, the teacher should call attention to the fact that the budget allowance would be exceeded if 15 grocery clerks were hired at $95/week. Unless the manager had some new reasons for being more optimistic about his future prospects, his potential box office receipts, than he had been when planning his budget, he would probably hire only 12 employees in this case—at $90/week. It is possible, of course, that offering each potential grocery clerk an extra dollar or so might induce a 13th student to apply for a job, but otherwise under the conditions described he would have to get along with only 12 grocery clerks.

EXPLANATORY TEXT

This Unit deals with labor from three points of view—(1) economic, (2) historical and (3) legislative. The economic approach explains what labor is, why people labor and how their labor is rewarded by the payment of wages determined through the market. The historical approach describes and explains some changes over the years in the type of work done by individual workers, their productivity, earning power and working conditions. The third approach, legislative, discusses the situation of individual workers today, affected as it has been by laws concerning employer-em-ployee dealings and legally-privileged labor (trade) unions.

1. What is labor? Labor, in the usual meaning of the word, is what people do—not because it is the one thing in the world they like to do most of all—but because, in spite of its relatively less appeal, they find it the most suitable way to accomplish what they really want, to acquire the various goods and services they need to survive and would like to have to make their respective lives more enjoyable. Labor is rarely considered desirable for its own sake. People seldom work just for the fun of it.

As has been pointed out many times over in this syllabus, each of us has many goals, values, needs and wants. At any instant we are always aiming at what we consider most urgent. But few of the things we want in life are free; in economic terms they are considered economic goods, not free goods. We can no more get them by wishing than can beggars get horses to ride. The students should appreciate the description of this dilemma as it was supposedly stated by the Chinese philosopher, Confucius (550/551 B.C.-478 B.C.):

Man with mouth open

Must wait long time

For roast duck to fly in.

To accomplish most of our goals, values, needs and wants, to acquire economic goods we must put forth some effort, effort which may not be much fun, which may even be downright unpleasant and which may interfere with or, at best, postpone our doing the other things we like—pursuing other interests, relaxing, having fun, and so on. In economics, this necessary effort, which is not an end in and of itself but which is adopted as a means to other ends, is known as “labor” or “work.” Labor or work seems worthwhile to a person only if it appears to be the best possible way to accomplish what he or she really wants most. Therefore, labor or work is not a goal in itself, but a means to an end and, thus, a factor of production.

2. Why do people work? Briefly, because working helps them accomplish what they want most. This doesn’t mean necessarily that people like to work, that they enjoy every minute on the job, but only that under certain circumstances they prefer working to any other alternative. Labor usually seems desirable only because the worker expects it to help him or her accomplish other goals. Any enjoyment they get from labor is always relative. The real choice a person faces at any moment, therefore, is between (a) working to get the things he or she can gain by work or labor only or (b) not working and going without them.

Most labor, whether a person is working for himself or for someone else, causes a certain amount of tedium, discomfort, inconvenience, annoyance, boredom or dissatisfaction. When a person is actually working he or she is, at the very least, precluded from doing things he or she would prefer to be doing at that particular time. Economists call the tedium or dissatisfaction caused by work the “disutility of labor.” People labor or work, therefore, in spite of the various disadvantages or disutility it brings about, because working seems to be the best, the easiest and the quickest way to accomplish their various goals.

No one devotes 100% of his or her time to labor or work. Most people alternate between working and not working, spending some portion of each day, week, month or year working and other portions sleeping, eating, relaxing, playing and pursuing their individual interests. They will keep on working only so long as it seems worthwhile, only so long as the gains anticipated from labor are more than enough to make up for the disutility incurred. If for some reason the benefits expected do not seem to justify the effort required, workers may slow down on the job, do no more than absolutely necessary, sabotage the project they were hired to do, work fewer hours or give up working entirely. People cannot be forced to work with enthusiasm and energy. They work with a will only when they are persuaded it is in their own best interests. When they work it is evidence that they look on labor, in spite of its disutility, as the most suitable action they can take at the time—all things considered—to satisfy their various wants and to improve their respective situations as they view them.

3. In a division of labor market economy, everyone “takes in everybody else’s laundry,” so to speak. Why will people work, in spite of the disutility of labor, for the benefit of others whom they don’t even know? It is not difficult to understand that a person would be ready to ignore the disutility of labor to produce the food, clothing and shelter he or she wants for him/herself and his/her immediate family. A Robinson Crusoe, all alone on an isolated island, knows that his very survival depends on his personal efforts. If he wants to live, he will consider the labor involved in foraging, hunting or growing food well worth the effort. If he wants to keep warm, dry and safe, he will want to work to construct a shelter against the elements and other dangers and to make garments for himself. If, as and when he succeeds, his reward is direct and obvious—his own survival and whatever comforts he provides for himself.

In a complex market economy, however, most people produce things other people want. The reward for their labor is indirect, reaching them by a seemingly circuitous route through the market. Yet the success of our complex market economy depends on motivating people to produce by just such “indirect” rewards. Almost every one of us today produces primarily for others. In return for our production of the things other people want, we receive from countless other producers—through a complex arrangement of market exchanges—the many things we want to use and consume ourselves. Practically no person, family or community is self-sufficient nowadays—as Robinson Crusoe was by necessity. We all satisfy—with varying degrees of success—our own needs and wants through the market by helping others to satisfy theirs.

Remember, the things people do voluntarily always reflect what they want to do most, given the circumstances, the limitations imposed by nature, their own abilities and knowledge and the other persons around them. This means we all “take in each other’s washing” precisely because we all expect to find ourselves better off as a result. We work to produce things for other people because that seems best at the moment from our respective viewpoints.

In a market economy, we work for money wages —not because we want the money for itself alone— but because we want things money will buy. It is easier, simpler, quicker and more efficient to exchange the money we earn, by working in a particular job, for the things we want than it is to produce them ourselves. Thus, working at various specialized tasks in return for pay is the most direct way—under the circumstances—to get the things we and our families consume. Some producers in the modern economy—farmers, bakers, garage mechanics, etc.—may use and consume directly a small proportion of their own output. But many workers consume only the products of the labor of others and nothing at all that they produce themselves. A criminal lawyer, for instance, an unmarried male truckdriver for a women’s clothing firm, a non-smoker on a cigarette factory assembly line, etc., consume none of their own output directly. The miner in Sri Lanka (formerly Ceylon), who digs graphite used in making pencils, may never see a finished pencil at all. Yet such persons, even though they consume no part of the finished goods to which they contribute directly, are still able to obtain various things they need and want for their daily living—by exchanging their own output through the market.

To illustrate the widespread interdependence of workers throughout our division of labor market economy, discuss several specific industries with the class, the many kinds of specialized labor each requires and the consumers who eventually buy and consume the final products. Point out that consumers frequently buy and use products to the production of which they contribute nothing at all directly. Yet they are able to pay for these consumers’ goods and, in the process, reward the workers who produced them—each in proportion to his or her particular contribution to the finished good or service—with the earnings received for their own particular contributions in helping to produce other goods and services. List on the blackboard three columns—(1) industry, (2) specialized employees, (3) purchaser of the final product:

Industry	Specialized employees needed	Purchaser who ultimately pays the workers when he buys the final product
1. apartment house construction	architects; builders; foremen; steam shovel and dump truck drivers; plumbers; bricklayers; riveters; painters; etc.	tenants—store clerks, sports reporters, textile manufacturers, cab drivers, etc.—whose work is not connected at all with construction.
2. automobile manufacture	machine tool operators; assembly line workers; secretaries; typists; foremen; mechanics. Also all jobs involved in producing automobile parts, the factory, as well as related items such as gasoline, drive-ins, highways, etc.	purchasers of automobiles and trucks for pleasure & business. everyone who buys merchandise which is shipped by truck, etc.

Another way to demonstrate the dependence of every specialized worker on consumers who actually pay their wages, as they buy the finished goods and services, is to list on the blackboard the specialties of various students’ parents, the final product to which each contributes, and the consumers who ultimately buy it. For instance:

Type of employment	Specialized task performed	Final product	Ultimate consumer
1. shoe store clerk	selling	sale of shoes	purchasers of shoes
2. assembly line worker in bakery	mixing dough	loaves of bread	purchasers of bread
3. bulldozer operator in lumber camp	clearing roads & moving logs	paper pulp, board lumber	newspaper readers home owners
4. truck driver for chemical firm	drives a truck	chemical fertilizers for farmers	consumers of food grown on farms

The important point to stress at this stage is that in a complex market economy the reward to a worker for his labor comes to him indirectly—from the final consumer of the products his labor helps to make. Employers are merely middle-men. They are entrepreneurs—idea men, decision makers and risk takers—who hire workers at a certain wage or salary in the hope that together they will be able to produce something consumers will want to purchase and whose costs consumers will pay. Employers must advance the funds to pay their workers, in anticipation that the gate or box office receipts from sales of the finished products will cover, or exceed, all costs. When their entrepreneurial calculations prove correct, the process benefits everyone concerned. Consumers gain the advantages to be derived from the final product. Employers who succeed in recouping their costs, justify their investment and find it worthwhile, perhaps even profitable, to stay in operation. The workers then have relatively secure jobs and may continue as employees, transforming their labor into purchasing power to obtain the goods and services they and their families need and want to consume.

4. Why can most workers today enjoy higher living standards—more material goods, more hours for leisure, cultural pursuits and fun as well as longer vacations—than their ancestors could without having to work harder or longer and, perhaps, not even as hard or as long? The reason is simply that there are more things being produced, so that there are more goods and services available to be shared among the individual workers who contribute to their production. There are two reasons why this is the case. Most workers today can produce more than their ancestors could in the same or less time because: (a) their work is more highly specialized— big undertakings are broken down into many relatively simple tasks, permitting exchange on a wider scale in a more highly developed market economy (Units 4 and 5); (b) they are helped by having more efficient tools to use, thanks to increased savings and investment which enable inventors and entrepreneurs to develop and produce more and better tools, machines and production methods (Unit 7).

Adam Smith’s description of the advantages of specialization and of the division of labor in increasing the “dexterity” and thus the output of individual workers in making pins is a classic. The first three chapters of The Wealth of Nations, where he deals with the division of labor are well worth having the students read and discuss in the classroom. It is certainly true, as he points out, that specialization helps to improve a worker’s proficiency and thus his or her output. However, no amount of increased dexterity in performing a single task such as digging and shoveling earth, for instance, will enable a man using a simple spade or shovel, to approach the greater productivity of a person using modern sophisticated earth-moving equipment. Nor can any hand seamstress or stocking knitter ever expect to improve her efficiency at sewing or knitting enough to compete with the speed of sewing or knitting machines. The vast increase in productivity and production that has taken place throughout the world in the last two centuries has been due, therefore, to the use of more and better tools.

It certainly seems obvious, as Dean Russell states in “How to End Poverty” (Reading No. 76),

Other things being equal, a man with a wheelbarrow and shovel can move more dirt from ‘hither to yon’ than can a man using only his hands. That is, a man with a machine can produce more than a man without a machine; or, capital formation increases production.

It is possible to improve one’s living standards somewhat with primitive handicraft methods—by working harder, longer, more efficiently and/or by upgrading the quality of the final product. However, when most people throughout the country or trading area are able to enjoy higher living standards, this must mean that there has been a widespread increase in the quantity and quality of consumers’ goods available. The operator of modern sophisticated earth-moving equipment can dig deeper, lift greater loads of earth farther and in a shorter time than if he were digging with a simple shovel or spade. His labor as a bulldozer operator is more efficient, more productive and relatively more valuable to consumers than the sweating, back-breaking, physical toil of a manual laborer who digs with a hand shovel or spade, no matter how skillful a mover of earth he may be. A factory worker who operates a modern sewing or knitting machine can stitch up hundreds of dresses, pairs of blue jeans, socks or pantyhose in the same time it would have taken to sew or knit a single garment by hand. Thus, generally speaking, people today have more material goods and services, as well as more time for fun, leisure and cultural pursuits, than their ancestors did because most workers now produce more of more value to consumers in relatively shorter periods of time—thanks to the use in production of the more efficient tools and machines made possible by capitalist savings.

Capitalist savings in the form of tools and machines arise, as explained in Unit 7, only after some rainy-day savings have been accumulated and made available to persons with ideas—inventors and entrepreneurs—who sooner or later develop new schemes, new labor-saving devices and new techniques for improving or increasing production. However, in this Unit, we are concerned primarily with how this increased production finds its way through the market, not only to the savers, inventors and entrepreneurs who helped make the tools and machines possible but also to all the various workers who use the new tools and machines to produce increased quantities of the new products.

5. How is each individual worker rewarded through the market in proportion to the relative importance of his/her personal contributions? In other words, how is a specific wage determined? Wages are exchange ratios between units of money and units of labor. Thus, wages are prices paid for labor and like the prices of anything on the market, they are determined through countless pricing auctions. Wages arise out of the bidding and competition of buyers (would-be employers looking for labor to buy) and sellers (would-be employees with hours of labor to sell), each of whom is pursuing personal goals in response to personal (subjective) values. Just as there are upper and lower limits to the prices at which any particular item will be traded at a particular time and place (see the explanation of the “law of price” in Unit 6, pp. 52-53), so are there upper and lower limits to the wages which will, and can, be paid for units of any particular kind of labor at a particular time and place.

A worker’s wage depends, as should be evident by now, on what consumers will pay for his or her output—as determined through many “auctions” among consumers bidding for goods and services and among employers competing for workers. Would-be employers, like potential consumers, break their decisions into “bite-sized pieces.” They consider separately every unit of labor or every individual worker and speculate on the specific advantages, under given circumstances, of hiring, or refusing to hire, one more or one less worker. Will the contribution of a particular person to the final product, under the circumstances, make it worthwhile to hire him? Will consumers pay enough for what he contributes to the product to cover the full costs of his employment? Boehm-Bawerk’s concise statement about the market value of commodities applies to units of labor as well:

For actually the whole theory of subjective value is nothing but an extended selection as to how much depends upon a good in terms of promotion of our well-being. [Italics added]

Value and Price (1960 ed., p. 136; 1973 ed., p. 20)

Thus, the wage paid any worker, in open competition on the market, for a particular amount of a particular kind of labor depends upon what that particular worker actually contributes to the wellbeing of consumers—as valued by the consumers themselves. Workers who contribute as much or more in the eyes of consumers than the cost of their employment are above the “margin,” that invisible dividing line, and will be hired; those whose production is not expected to equal or exceed what they will cost an employer are “sub-marginal” and will not be hired. It’s as simple as that.

Entrepreneurs may not, therefore, and in fact cannot, pay a worker more than consumers will reimburse them for that worker’s share in the final product. At the same time, however, that worker’s wage must always be more than enough to compensate him or her for the disutility of labor, i.e., all the inconvenience and discomfort of having to work rather than being free to do what he or she would prefer. The money wages must be high enough and working conditions pleasant enough to induce the required number of workers, with the special characteristics and skills needed in the enterprise, to prefer the jobs being offered to other alternatives. The wage for any job, therefore, must fall within certain limits. It must be high enough to attract the needed employees and yet it must be no more than the value consumers place on the worker’s output. Like any other price, therefore, the wage an entrepreneur can afford to pay workers—and will have to pay them if he expects to attract and hold employees—depends in the final analysis on the actual gate or box office receipts the enterprise earns on the market. In the last analysis wages depend on consumer sovereignty.

Differences in pay for different jobs are explained not only as reflections of the value consumers place on the contributions of different workers to the final product, but also on the scarcity of qualified workers relative to the demand for their contributions. Employers must offer greater inducements to attract workers whose knowledge, abilities, skills, experiences and contributions are more important to an enterprise and, at the same time, scarce relative to demand than they will to obtain less crucial workers. Applicants who are qualified, or who may qualify, to perform more routine, simpler tasks, are much more numerous relative to the number of openings than are those with special skills. The greater the scarcity of anything relative to the demand for it, the more valuable it will be and the higher the price it will command on the market. For instance, competition is always keen among the many applicants for the relatively few “glamor jobs” in the world. Job-seekers envision little or no disutility of labor in work that offers chances for fame, fortune and/or exceptional “fringe benefits.” As a result, the more exciting occupations usually attract so many more applicants than there are openings that candidates vie with one another to display extraordinary qualifications and often agree to work very long hours at very low pay.

The classroom labor auctions should help to demonstrate how the wage for any specific job is determined by the relative abundance or scarcity of qualified applicants for that job. Upon completion of the auction, the teacher may find it helpful to discuss the theory of wages by stressing the following points in sequence:

a. Everyone—would-be employer and job-seeker alike—was bidding in the attempt to improve his or her situation as he or she saw it under the given circumstances

b. Everyone bid according to his or her own personal (subjective) scale of values

c. Would-be employers looking for workers on the free market do not consider workers en masse, but individually, weighing at each instance the relative advantages of hiring one more, or one less, person

d. Would-be workers looking for jobs do not consider work in the abstract but weigh the pros and cons of the specific opportunity offered at a particular time and place relative to those of other specific alternatives

e. If neither would-be employer nor job-seeker makes a mistake in judgment or in anticipating their future wants, they both expect to be better off than they would have been otherwise as a result of their voluntary agreement

f. Barring force, fraud, violence and error, there is a tendency on the market for jobs to be offered to, and held by, those who want them most

g. No one who voluntarily takes one of the jobs expects to receive less, and he may very likely receive more, than enough to compensate him for the disutility he believes the labor, under the given circumstances, will entail

h. No one who hires a worker voluntarily is forced to pay more, and he may very likely pay less, than the value he expects to derive from the labor he will be receiving

i. Those who do not accept jobs, those who continue in their present occupations or pursue previously-made plans, do so because they consider these more advantageous to them under the circumstances, than taking one of the new jobs offered

j. Insistence by any would-be worker on wage rates higher than those established on the market—whether due to error, ignorance, stubbornness or outside interference (by minimum wage laws, for instance)—means that person will not be hired for that job at that time

k. Persistence by any would-be employer in offering wage rates lower than those established on the market—whether due to error, ignorance, stubborness or outside interference—means that would-be employer will not find workers willing to become his employees under those conditions

l. However, barring force, fraud or human error, there is a tendency on the free market for everyone who is willing to work at market wages to find employment he considers suitable, in view of all available alternatives m. Thus, everyone tends to gain as a result of voluntary labor agreements on a free market. Both would-be employer and job seeker judge the specific situation to the best of their abilities— comparing all other opportunities with that offered by hiring (or refusing to hire) a particular worker, or by accepting (or rejecting) a particular job. The employer hires and the employee accepts a specific job because the terms agreed upon seem better to both than any alternative open to either. At the same time, those who reject a specific job do not consider the net income enough to compensate for its disutility of labor or the other opportunities lost n. The market wage for a certain quantity and quality of labor, while necessarily acceptable to both employer and employee involved, ultimately depends on the personal (subjective) values of consumers and the prices they will pay for it in the final product. A would-be employer will offer higher wages to workers whose production he expects to contribute more to the well-being of consumers and his gate or box office receipts than he will to those he expects to contribute less

o. The wage paid on the free market for any particular kind of labor, therefore, conforms to “economic law.” It is forced by consumer sovereignty, competition and the pricing process to fall within certain limits determined by supply and demand. These two factors (supply and demand) rest in turn on the personal (subjective) values of consumers at the margin—i.e., the invisible dividing line between those who buy and those who refuse to buy the goods and services produced and offered on the market by the specific employers and employees concerned.

6. If a worker’s wage depends on the value to consumers of what he produces, it would seem that a person who operated a modern mass production machine would earn much more than one who worked with simple hand tools—a pencil or a hammer or a pair of scissors. Does he? If not, why not? The productivity of some workers is increased tremendously by tools and machines. Other workers perform specialized tasks that cannot be substantially improved or speeded up by using mechanical, mass production equipment. Yet somehow their wages must be related through the market. The earnings of a bulldozer operator on a highway construction job who moves thousands of cubic feet of earth in a day are not necessarily much more than those of another man on that same construction job who smooths the earth with a hand rake in preparation for pouring blacktop. The operator of a sewing machine who stitches hundreds of garments daily does not receive several hundred times the pay of the seamstress who adds finishing touches by hand to a relatively few garments each day. The wages of a barber, file clerk or typist are usually not much, if any, less than those of persons who operate complex computers or huge mass production machines that’ perform difficult tasks accurately and quickly. Although workers throughout the entire economy today have higher living standards than their ancestors did because of the increased productivity of modern efficient tools and machines, the wage of a particular worker does not relate specifically to his total output with the aid of the tools he uses. His specific wage is related, through competition, to the wages of all other persons throughout the economy who are capable of, and might become available for, the work he is doing. The opportunity for workers to move from job to job, from industry to industry, from employment to unemployment and vice versa provides employers with a “pool” of potentially willing and qualified workers. The opportunity for employers to seek workers wherever they may be found helps keep the wages for comparable labor comparable throughout the economy.

The market economy may be likened to a complex grid or network of interconnecting and interrelated phenomena (Unit 5). If there is free and open competition, the give-and-take, push-and-pull of acting individuals connected with the market—with the purchasers of final products “pulling the strings”—permits employers and would-be employers to bid so as to attract qualified workers and would-be workers from their present occupations into those enterprises where they are wanted and needed most. Wages and working conditions offered will adjust. Consider barbers and hairstylists, for instance. When men and women wear long hair and don’t care to have it shaped or styled by professionals, fewer barbers and hairdressers are called for and their numbers per thousand of the population will decline. But if fashions change, men and/or women who prefer to have their hair specially cut, shaped or curled will have to pay relatively higher prices for this service to induce more persons who know how, or will learn, to style hair to enter that profession. Persons currently unemployed or “between jobs,” or young people embarking on new careers may decide to become barbers and hairdressers. Factory employees and construction workers may shift to barbering if they find it congenial or lucrative enough to justify changing occupations. In this way, consumer purchases and refusals to purchase forge interconnecting links throughout the ever-shifting labor market, among employers, employees and the unemployed. Persons shift from employment to unemployment and back to employment again, transfer from job to job, back and forth across professional and industrial lines, according to their personal situations, inclinations, prevailing market conditions and relative wages offered in jobs for which they may qualify. The labor market’s continual state of flux, tends to make the wages offered workers with similar skills and aptitudes more or less comparable throughout the entire economy.

7. What is the role of labor unions in the labor market today? How do they influence employment and wages? Time and energy are scarce. Thus it is a human characteristic to want to conserve them. It is not surprising, therefore, that people often cooperate or join together in groups or societies in the hope of attaining more easily some common goals. Women organize; men set up business associations; religious persons establish churches; workers combine to form labor unions; and so on. Cooperation of this kind is natural, desirable and effective for attaining certain ends, so long as these organizations remain voluntary, respect the rights of individuals and reject the use of force or threat of force as a means for acquiring members, funds and conducting their activities. As has been pointed out time and again in the course of this syllabus, open competition on the market helps to assure that the supply of and demand for anything —commodities, services, workers, jobs, etc.—will always tend to be equal—if no interferences in the form of force, fraud, violence or threat thereof occur. Free and open competition tends to check the accumulation of excessive power in the hands of any single person, firm, group, association, society, union or faction. However, the “balance wheel” of competition may be sabotaged if not completely destroyed by the intervention of force or threat of force.

Many organizations start on a completely voluntary basis only to reject voluntarism later, especially if they find they may enjoy benefits from the use of force or coercion in the form of government-granted legal privileges. At times certain employers have obtained special favors—tariffs or import quotas, monopoly franchises, government contracts, subsidies, price supports, low interest rates, the right of eminent domain, etc.—which gave them special advantages over competitors. At other times, officially recognized organizations of workers have obtained various government-granted favors. Labor unions were originally voluntary organizations. Workers combined and cooperated for common goals, with the general sanction of the courts and judges. Law Professor Sylvester Petro speaks of the early unions in this way:

The vast mass of authoritative judicial opinion from the second half of the nineteenth century establishes beyond any doubt the common law’s acceptance of the right of workers to organize and to take peaceable, nonfraudulent, and noncoercive concerted action in pursuit of higher wages. The legal rules were largely those which a logical application of free-market principles would require. Employers had a right to free access to the labor market. All workers had a right to join or refuse to join unions, to apply for work at wages satisfactory to themselves; to refuse to apply for work, or to cease work, individually or in concert, when wages were unsatisfactory. No one had the right to use fraud or force against others in the exercise of these various rights.

So, where workers were dissatisfied with their wages, they had a common-law right to cease work in concert. But they violated the law if they used force or fraud to prevent other workers from seeking the jobs they vacated. For such forcible prevention negated the right of employers to seek other workers, and the right of other workers to seek employment.

The Labor Policy of the Free Society (Ronald Day Co., 1957, p. 193)

In recent decades, our federal government has passed many laws granting special privileges to certain labor unions and their members. Some of these laws have attempted to create jobs by using tax funds to finance public works, stimulate industries in “depressed” and “disaster” areas, etc. Minimum wage laws have been enacted in the belief that they help raise the wages of the less capable workers. Other laws have tried to raise the wages of some workers by reducing the number of persons competing for the jobs. For instance, unemployment payments and welfare benefits, military service obligations, immigration quotas, Social Security payments to oldsters, and so on, have taken many persons off the labor market. As a result, these programs have helped to raise the wages of remaining job-holders—and at the same time also, don’t forget, they have raised the taxes those job-holders must pay. State and local laws as well as judicial decisions have had similar effects by restricting “child labor” and compelling many young people, who would have liked to work, to attend school. Among the most valuable legal privileges granted favored workers have been (a) the right of “recognized” unions to represent all workers in certain categories during labor negotiations and (b) the opportunity of persons who had been working for a firm to strike and to picket and thus effectively to keep others from being hired for the jobs whose terms and conditions the strikers are rejecting.

Labor unions have been singled out time and again for special legislative treatment. Such laws help only a relatively small number of workers, the privileged union members. However, to understand the economic situation of individual workers today, it is essential to know something about the laws dealing with unions, wages, conditions of employment and business. It might be well for the students to read the articles on labor unions in the basic reader and perhaps also one of the shorter books on this Unit’s list of recommended readings. Here are a few of the major landmarks in federal legislation which have had considerable effect on the situation of workers in this country:

1890—Sherman Anti-Trust Act, prohibiting any restraint on interstate commerce in the form of an agreement, contract, or trust.

1908—The Supreme Court held (Loewe v. Law-lor) that the Sherman Anti-Trust Act applied to workers’ strikes and boycotts. The U. S. Supreme Court in various decisions (1898-1917) approved the right of the several States to regulate the number of hours per day a worker could work in certain industries, the age below which children could not work in some jobs, and conditions under which women could and could not be employed.

1913—Department of Labor established “to foster, promote and develop the welfare of the wage earners of the United States, to improve their working conditions, and to advance the opportunities for profitable employment.”

1914—Clayton Act, Section 6, provided that “nothing contained in the Anti-Trust laws shall be construed to forbid the existence and operations of labor organizations.” Yet the Supreme Court continued to rule as it had before, against labor unions if it considered their actions “in restraint of trade.”

1932—Norris-LaGuardia Anti-Injunction Act, prohibiting federal courts from issuing injunctions in labor disputes, effectively freeing labor unions from Anti-Trust restrictions. This Act also formally expressed government policy as in favor of organized labor and outlawed “yellow-dog” contracts, that is contracts which specified as a condition of employment that workers not join unions.

1933—National Industrial Recovery Act, providing general regulation of all industries. Section 7a concerned labor unions and expressly granted workers the right “to organize.” However, the NIRA was declared unconstitutional by the Supreme Court on May 27, 1935.

1935—National Labor Relations (Wagner) Act, based on Section 7a of the NIRA, guaranteed workers the right to organize and to elect representatives for collective bargaining. It set up the National Labor Relations Board (NLRB). It also restricted the freedom of employers by prohibiting certain rather vaguely defined “unfair labor practices,” leaving their determination to the NLRB.

1938—First federal minimum wage established. Under the Fair Labor Standards Act, the minimum wage in certain types of jobs was set at 25¢ per hour. This minimum has since been raised several times until it is now (1975) $1.80 to $2.10 per hour in the various types of covered employment, with further increases scheduled for 1976 and 1977.

1947—Labor-Management Relations (Taft-Hart-ley) Act, passed June 23, 1947, over President Truman’s veto, replaced the Wagner (1935) Act. This act was intended to eliminate some “unfair practices” on the part of labor organizations, picket-line or strike violence and threats to workers so as to win their support for union activities. The Taft-Hartley Act outlawed closed shops requiring union membership of workers before hiring, although it permitted union shops requiring that nonunion workers hired become union members within 30 days or relinquish their jobs. Officials of NLRB-recognized unions had the right under this law to serve as exclusive bargaining agents in labor negotiations.

Section 14b of the Taft-Hartley Act permitted the states to enact “right-to-work” laws—and many have. The intent of such laws is to make open shops virtually compulsory. Employees should not be made to join or promise not to join a union as a condition of employment. Thus, hiring contracts which discriminate on the basis of union status are usually forbidden or declared unenforceable.

1948+—Various federal, state and local laws and regulations imposed to assure “fair employment practices,” protect “civil rights” and prohibit employers from discriminating among workers on certain grounds— race, religion, sex, age, etc. Yet their ef-feet has been to require the employers affected to discriminate on precisely these grounds—to record this information on employee files and to institute quotas for hiring representatives of the various minorities. As a result employment and wage decisions are often made now, not on market criteria, but on the basis of race, religion and the like.

1959—Labor Management Reporting Disclosure (Landrum-Griffin) Act passed by Congress, intended to alleviate certain union abuses by bringing them to public notice.

1971+—A wage-price freeze (announced August 1971, expired 1973) later modified to allow certain wage and price increases. Price and wage controls, even the possibility of new or altered price and/or wage controls, add substantially to the uncertainties entrepreneurs must consider in their calculations.

In addition to these various government programs granting legal privileges to organized labor union officials and delegating substantial power over labor negotiations to the National Labor Relations Board (NLRB), many laws have been enacted to regulate employer-employee relations on conveyances engaged in “interstate commerce”—railroads, trucks, busses, planes, etc. The first such law was enacted in 1888, “to facilitate the peaceful settlement of labor disputes” in the railroad industry. Most wages and hours in “interstate commerce”—the definition of which has been substantially expanded over the years to include practically all industry within the country—are now, in effect, under federal control.

8. Why are many would-be workers sometimes unemployed? Something should be said about the cause of unemployment—both voluntary and involuntary. The reasons for unemployment cannot be analyzed without considering wage rates. As shown by the classroom auctions, there is a tendency on a free market for everyone to find work who is willing to accept the market wage for his labor. Applicants for jobs who ask more than the market wage for certain jobs will not be hired for those jobs at that time and place. However, by turning down specific jobs at the market wages for those jobs, individuals show their preferences; under the circumstances they prefer to do something else. They are not involuntarily unemployed. They may not want to work so long, so hard, at that location or at that kind of job. They may be waiting— perhaps in vain—for something better to turn up, something they expect to be more fun or more profitable. They may want to loaf, study or travel for a while. Of course, they may decide later they were wrong; they may wish they had not rejected work they could have done or jobs they could have had. But whatever their reasons for turning down particular jobs, if the choice was theirs, their “unemployment” is voluntary, not involuntary.

In the real world of change and fallible human beings, there will always be some involuntary unemployment, caused by unanticipated changes, lack of knowledge and human error. Some people will always be between jobs or out of work involuntarily as a result of conditions they could not anticipate or prevent or because of changes due to their own or someone else’s actions. Many things may disrupt a person’s plans—(a) accidents, (b) acts of nature, (c) the actions of others, (d) the passage of time, (e) personal mistakes in judgment, etc. The effects of changes may be compounded still further by human error or ignorance. If a business firm’s gate or box office receipts decline for any reason— mistakes in managerial judgment, the introduction of competing products, changes in production methods, or sources of supplies or raw materials—it may have to curtail operations or go out of business entirely. All such changes can cause unemployment. However, entrepreneurs are always trying to cope with such changes affecting the ideas, actions and plans of many persons. Some companies will expand as a result, others will contract and still others will be compelled to go out of business. In the wake of such changes, some workers must shift jobs, perhaps moving to other fields of production, maybe to other geographical locations. Thus, even on a free market, some persons will always be out of work and looking for employment. When workers and employers remain flexible, however, and anxious to minimize or avoid losses by adjusting as soon as possible, no individual worker need endure involuntary unemployment for long. If competition on the market is free and open, some entrepreneurs sooner or later will try out new ideas in the attempt to supply consumers with something better, cheaper or better-and-cheaper. This will call for hiring workers. Thus, changes may reduce the need for workers in some fields of production, but in a free market economy new employment opportunities will open up jobs in other areas. Workers forced out of firms that go under should soon find other employment. Barring force, fraud, human error and ignorance, therefore, people change their plans relatively quickly on the free market and adapt to new conditions. Those who are willing to work for the wages established on the market under the new conditions will find employment again before long. Once more they will be in a position to earn money for themselves by contributing to the production of goods and services for others.

9. Why then are some people who would like to work sometimes faced with the prospect of longterm involuntary unemployment? Real wage rates, i.e., the total cost of hiring workers, are crucial. The wages paid individuals on the market are influenced not only by the ideas, choices and actions of other persons. Many non-market phenomena also affect the cost of hiring workers. The many laws and regulations, which hamper individuals in making choices add uncertainties to business speculations and increase the costs of production. Such government interventions inevitably require many producers to curtail their operations. This reduces total production and the number of workers needed. Then many would-be workers can no longer find suitable employment and must remain involuntarily unemployed for indefinite periods of time. With less produced, the market prices per unit of the fewer goods available on the market tend to rise and consumers must restrict their purchases and get along with less. As prices and wages are then no longer determined in free and open competition, market forces no longer operate to make the number of workers and the number of jobs at market wages come out even. Entrepreneurial plans must be shifted because of the legal restrictions and production must be diverted from trying to satisfy the most urgent demands of consumers into channels which do not violate government regulations.

Government exaggerates and prolongs involuntary unemployment in many ways. Some tax laws hamper businesses, add to costs and prevent them from profiting to the full extent of their success in satisfying consumers. As a result, their gate or box office receipts decline and they are unable to save, invest and expand as they otherwise could have in response to consumer demand. Various “protective” laws—tariffs which raise the prices of certain potentially competitive foreign goods on the U.S. domestic market, quotas which reduce or stop imports, subsidies or licenses to favored businesses, etc.—keep some high cost firms in operation in defiance of consumer wishes. Other laws prevent employers from paying more than, or less than, certain wage rates, restrict competition, compel them to bargain with certain employees or representatives of certain recognized unions only, precluding other would-be workers from applying for jobs or would-be employers from hiring them if they did. Still other laws dampen the incentive of many to work by providing “relief” to those who are unemployed.

The classroom labor auctions should demonstrate how non-market interventions tend to raise costs and reduce employment. Almost any current news story about labor problems offers an opportunity for the students to discuss or report on the effects of specific government interventions on wages, employment and production. For instance:

a. The addition, or repeal, of a tax on salaries— By increasing (or reducing) the cost of employing each worker, an employer would be able to employ fewer (or more) workers

b. An increase in the minimum wage—

Anyone whose contribution to the final product was considered less valuable to the employer than the newly decreed minimum wage would have to be fired, or asked to work surreptitiously at a lower rate. The employer might have to curtail his operations—or seek more savings, diverting them from other uses, to invest in new machinery to do the work mechanically with fewer, but more skilled and higher paid operators

c. A strike of all workers in a firm, forcing it to close for a time and then to yield to union demands for higher wages for all workers—

The effects of such coercive strikes on production, number of workers, wages, profits, savings, as well as future savings, investments and employment, are explained in some detail in Percy L. Greaves, Jr.’s “How Wages are Determined” (Reading No. 37)

d. A change in the income tax laws that increases (or reduces) the sums persons are able to save and invest per year—

Increased savings and investments help to increase production, employment and the earnings of workers. The effect of reduced savings will be felt in future years, when fewer workers can be hired because investments in the form of production facilities had to be restricted. The future prospects for the production of energy— natural gas, oil and electricity, especially—have been seriously harmed by government actions that have limited profit opportunities in those industries

e. A ceiling placed on wage boosts for workers in some industries, at a time when government policies are leading to increases in the quantity of money so that prices generally are rising— Because they cannot raise salaries, employers in those industries are hampered in retaining their most valuable workers or in bidding for new ones. Thus they are hindered in expanding or improving production to suit consumers. Employers and employees, discouraged at their poor prospects, will gradually shift to other industries that are not under controls, perhaps precisely because their output was not considered so essential. Thus controls tend to distort prices, defy consumer wishes and discourage urgently wanted production.

SUMMARY

As pointed out earlier, the purpose of this Unit has been to deal with “labor, wages and employment” from three points of view:

1. economic—to show how wages, i.e., the prices in money terms paid for specific units of labor, are actually determined in the course of many “auctions” on the market by the bidding and competition of countless acting individuals, each seeking to attain his various ends

2. historical—to show the effects over the years of more specialization, division of labor and the use of more efficient tools and machines provided by increased capitalist savings and investments

3. legislative—to show how the natural inclination of individuals to combine and cooperate for common goals—in the case of workers—has been especially aided and abetted by government, with the result that organizations of workers, labor unions, now enjoy a privileged position with powers denied to voluntary organizations.

This syllabus is devoted primarily to presenting economic theories which explain the actions of individuals in seeking to attain their various ends by peaceful means. The important conclusion to be learned from studying economic principles is that persons can accomplish more of their goals, more easily, more quickly and more successfully when government protects lives and property, settles disputes that the individuals concerned cannot resolve peacefully and assures freedom for every citizen to pursue his or her own personal interests as best he or she can by voluntary means without using force or threat of force to interfere with the equal rights of others to do the same. However, governments today are no longer limited to furnishing equal protection under law to every citizen. They intervene actively in the economy to alter conditions in directions of their choosing. Thus, it is important to understand something about today’s hampered market economy. As a consequence, most Units in the syllabus present not only basic economics, but also introduce some of the problems that arise when individuals are hampered—whether by other individuals or by government officials—in peacefully trying to attain their various goals.

GLOSSARY WORDS

(For definitions, see glossary, pp. 223ff.)

Capitalist savings

Closed shop

Collective bargaining

Consumer sovereignty

Disutility of labor

Employee

Employer

“Industrial revolution”

“Interstate Commerce”

Labor

Labor (trade) union

Marginal worker

Market economy

Open shop

Pickets, picketing, picket lines

“Right-to-work” laws

Strike

Union shop

Wage, wage rates

“Yellow-dog” contract

Footnotes

1 The figures given in these columns are purely hypothetical, chosen somewhat arbitrarily to illustrate the way such a fictitious auction might proceed in the classroom and be written up on the blackboard.

2 The supposed number of students shown here as willing to work at each of the various weekly salaries mentioned are hypothetical only, to illustrate the use of this format for keeping track of the results of such an auction. The bidding will vary from time to time, place to place and even class to class.

1On coming to Paris for a visit, I said to myself: Here are a million human beings who would all die in a few days if supplies of all sorts did not flow into this great metropolis. It staggers the imagination to try to comprehend the vast multiplicity of objects that must pass through its gates tomorrow, if its inhabitants are to be preserved from the horrors of famine, insurrection, and pillage. And yet all are sleeping peacefully at this moment, without being disturbed for a single instant by the idea of so frightful a prospect. On the other hand, eighty departments have worked today, without co-operative planning or mutual arrangements, to keep Paris supplied. How does each succeeding day manage to bring to this gigantic market just what is necessary—neither too much nor too little? What, then, is the resourceful and secret power that governs the amazing regularity of such complicated movements, a regularity in which everyone has such implicit faith, although his prosperity and his very life depend upon it? That power is an absolute principle, the principle of free exchange. (1845)
2On coming to Paris for a visit, I said to myself: Here are a million human beings who would all die in a few days if supplies of all sorts did not flow into this great metropolis. It staggers the imagination to try to comprehend the vast multiplicity of objects that must pass through its gates tomorrow, if its inhabitants are to be preserved from the horrors of famine, insurrection, and pillage. And yet all are sleeping peacefully at this moment, without being disturbed for a single instant by the idea of so frightful a prospect. On the other hand, eighty departments have worked today, without co-operative planning or mutual arrangements, to keep Paris supplied. How does each succeeding day manage to bring to this gigantic market just what is necessary—neither too much nor too little? What, then, is the resourceful and secret power that governs the amazing regularity of such complicated movements, a regularity in which everyone has such implicit faith, although his prosperity and his very life depend upon it? That power is an absolute principle, the principle of free exchange. (1845)

Free Market Economics: A Syllabus