The demand curve for labor, like that for virtually every other good or service, slopes down and to the right. That is a harsh fact that many of my fellow liberals have great difficulty accepting.
In lay terms, it means that when society does something to increase the price of labor, employers will hire fewer employees or hire them for fewer hours. Judging whether that tradeoff of higher pay at the cost of fewer workers is an improvement is seldom simple.
There are times when the benefits of actions to raise wage rates clearly outweigh the costs. I’d argue that is true for the federal minimum wage. It raises wages for many low- income workers above what they would get without the law. But it clearly also exacerbates unemployment and those unemployed are far more likely to have black skins than white, to be under age 25 rather than over it and to live in inner cities rather than small towns.
I think the social benefits exceed the social costs, but it is clear that the law hurts some people. Liberals hate to be told that there is any tradeoff at all in measures such as the minimum wage, just as libertarians hate to be told that the minimal state they desire would be a considerably poorer one since wealth depends on public goods that only government can supply, as well as on private initiative.
The labor demand tradeoff popped up again in two current issues. The first is whether lower-income state workers should face higher co-pays and deductibles in their health care benefits. This seems to be the sticking point that may lead to strikes at the University of Minnesota and other state agencies.
Critics of the state’s and U’s compensation offers are correct in noting that low-wage workers will have less buying power after paying for health care than they did under the old contract. Some will certainly face hardship. Some of those who protest this change argue that, as a matter of principle, higher health care costs should always be picked up entirely by employers and never passed on to employees.
Society may conclude that such an argument is just. People need to recognize, however, that over the long run, something will give. Affected workers will either get lower increases in their pay or fewer of them will be hired. Public sector employers are no different from those in the private sector. If the cost of an input goes up, each sector will seek substitutes, such as machines or technology, or simply make do with less.
If complete employer responsibility for health care costs were made a blanket requirement across the economy, unemployment would rise among low-skilled workers.
This harsh tradeoff of fewer jobs when job costs are increased does not mean that going on strike, or threatening to, is a bad choice for current workers. They may well retain existing benefits with no loss in pay. Inevitable adjustments in staffing levels will affect people the state might employ in the future more than it will hurt current workers.
The labor tradeoff also figures into the ongoing debate over world trade. In developing countries, the workers who make clothing or footwear for U.S. markets often earn very low wages compared to U.S. standards, work in conditions that may be appalling and frequently are abused by employers.
U.S. customers, oriented by human rights groups, can pressure retailers to procure goods only from companies or countries that institute minimum standards for pay and working conditions. If all retailers do so, the total decline in U.S. companies’ procurement abroad will be small. With higher labor costs, a bit of production will shift back to the United States and customers will buy slightly fewer of the affected categories of goods.
Similarly, if all U.S. importers follow the same policy, overall employment in producing these goods in developing countries will fall only slightly. Workers’ total earnings from such employment may increase, though this is uncertain.
The outcome is murkier when not all retailers apply the same standards. Suppliers who refuse to abide by the pay or work rules gain a cost advantage over those who do. If the benefit conferred on workers by fair treatment and pay rules is significant, then the retailer’s cost advantage of shunning such agreements is similarly large. If the benefit to workers is small, the penalty of avoidance is less.
Nongovernmental organizations trying to improve working conditions in developing countries find it easiest to pressure well-known entities such as Wal-Mart, Target, Nike or Adidas. Such retailers may adhere to pay and working conditions standards. They become vulnerable, however, to losing market share to smaller, less-visible or less easily pressured competitors.
As such unconstrained competitors gain market share, employment by suppliers to the “fair standards” retailers will fall, yet it will increase for “exploitive” competitors. As long as there are workers in supplier countries willing to work for low wages in bad conditions, it is hard to isolate a subset of the labor force and pay them above market wages. Nor is it clear that it is morally preferable to pay a smaller number of workers higher wages than to pay a larger number of lower wages.
Idealists would say that the tradeoff should not exist. Every worker in a developing country should have a job and every employee should earn decent wages. Unfortunately, only a handful of economies have succeeded in this. In the real world and for most poor people, the tradeoffs implied by a downward-sloping demand curve for labor are real ones, and consumers in wealthy nations can do little to change this.
© 2003 Edward Lotterman
Chanarambie Consulting, Inc.