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24 March 2006 Labour Markets Are Not Special Ideas have consequences. One body
of ideas with wholly baleful consequences was the economics of Karl
Marx. Although now largely defunct, it led to untold human misery
in the twentieth century. What were the central ideas of
Marxist economics? A key plank was the abolition of
private property in the name of the socialist goal of equalisation
of incomes. But the absence of rights to property blunts incentives
to work, save and raise incomes generally. Private property is also
the ultimate guarantee of personal freedoms against state oppression. Another element of Marxism was
'public ownership of the means of production, distribution and exchange',
which led to widespread nationalisation of industry. This trend
has been reversed in the last quarter century as the evidence became
conclusive that, on average and over time, privately owned businesses
outperform state-owned enterprises. Progressive taxation - the notion
that people should not just pay proportionately more tax as incomes
rise but disproportionately more - is another Marxist idea. It can
be shown to rest only on envy, not on any concept of fairness, and
on the notion that incentives to be productive don't matter in the
cooperative socialist utopia where income is distributed 'from each
according to his means, to each according to his needs'. Interestingly,
it is the countries of Eastern Europe and the former Soviet Union
that have moved most strongly to proportional or flat taxes in recent
years. One of the hoariest of Marxist
chestnuts is the idea that labour markets are different (in an economic
sense) from other markets and are characterised by unequal bargaining
power. Marx argued that employers ('capitalists') would use their
stronger bargaining power to drive wages down to subsistence levels
and create a 'reserve army of the unemployed'. This fallacy is debunked in a recently
published Business Roundtable study, Power In Employment Relationships:
Is There an Imbalance?, by Geoff Hogbin, an economic consultant
and former academic at Monash University, Melbourne. Hogbin explains that elementary
economic analysis suggests that, as for other goods and services
traded through markets, wages and other terms of employment are
determined largely by supply and demand. There is no reason to suppose
that the employer side of the market has inherent power over the
employee side. The 'bargaining inequality' fallacy
is readily exposed by reference to several empirical findings:
At times there may be a sellers'
or buyers' market for labour, due to supply and demand conditions,
but this is so for other markets and does not reflect a systematic
imbalance of bargaining power. As for other markets, wage adjustments
facilitate market 'clearance' and the attainment of full employment.
The study concludes that a freely
functioning labour market conducive to full employment provides
the best protection for employees and employers alike against opportunistic
exploitation by the other party and that labour market regulation
should be neutral between individual and collective contracting.
Hogbin says, "The argument
that laws to encourage the formation of trade unions and strengthen
their bargaining power are required to counteract the superior bargaining
power of employers is not tenable." The alleged power imbalance is
central to the view that labour markets are special and require
special regulation. New Zealand's Employment Relations Act 2000
is based on the premise of an "inherent inequality of bargaining
power in employment relationships". The implications of the finding that the Marxist view of labour markets is wrongheaded are clear. New Zealand does not need the complex labour market regulation embodied in the Employment Relations Act. A basic framework of contract law which provides firms and employees with the freedom to choose arrangements that suit them best would be more conducive to productivity gains, higher wages and better employment relationships in New Zealand. Roger Kerr is the executive director of the New Zealand Business Roundtable |