L is for Labour markets

May 16th, 2014 at 4:00 pm by David Farrar

The explains:

‘The labour market’ refers to all the places where firms look for people to hire, and where workers look for job opportunities. It exists because firms need workers and workers need jobs.

Employers need workers who will do the work at an affordable wage, while workers need jobs that pay an acceptable wage to meet their needs.

So both sides need to search for what they want, and employers have to compete with other employers while workers have to compete with other workers.

The employment contract is a deal between a willing employer and a willing worker about what the worker will do for the employer, and what the employer will do for the employee. The agreed wage is part of the deal, but as with any market, the outcomes of labour markets offend some notions of virtue and fairness.

The scarcer a worker’s skills relative to society’s willingness to pay, the bigger the pay check. Luck also plays a big role, particularly in one’s country of birth. The lower the quality of a country’s economic institutions, the poorer the job opportunities.

To illustrate, according to ESPN, Kobe Bryant’s salary for the 2013-14 season with LA Lakers is US$30 million. Yet, the United Nations reports that 1.2 billion people, about 20 per cent of the world’s population, live on less than the equivalent of US$1 per day.

Views about the labour market are often intensely ideological. Marxists believe that government involvement is necessary to stop fat cat capitalists from exploiting workers. Firms are rich and powerful, while the worker is weak, and regulation is necessary to offset this imbalance.

This view ignores the power that competition between employers confers on workers. Would anyone pay Kobe Bryant $30 million otherwise? Johnny Paycheck’s 1977 country classic: “Take this job and shove it, I ain’t working here no more” epitomises the liberating power of choice.

The problem with much of the labour market regulation is that it effectively says that ‘we’, meaning those with jobs, would rather see others unemployed and on welfare rather than in a job that we think is not up to standard.

In New Zealand we have tolerated high youth unemployment because governments preferred to see young people without work than in a job paying less than the adult minimum wage. Just how does that make sense?

A deeper concern with labour market regulation at the expense of the most vulnerable, such as those with few skills trying to get their first job, is that it violates their very being. It is an awful thing to be unable to find a job, to feel that society puts no value on what you have to offer.

Adam Smith expressed this non-Marxist view over 200 years ago:

The property which every man has in his own labour; as it is the original foundation of all other property, so it is the most sacred and inviolable … To hinder him from employing this strength and dexterity in what manner he thinks proper without injury to his neighbour is a plain violation of this most sacred property.

Very true about high youth unemployment.

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27 Responses to “L is for Labour markets”

  1. gump (1,647 comments) says:

    “The scarcer a worker’s skills relative to society’s willingness to pay, the bigger the pay check. ”

    That may be true for the labour market, but it’s certainly not true for executive compensation.

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  2. Nick R (507 comments) says:

    “Views about the labour market are often intensely ideological.”

    I didn’t realise this series was intended as comedy until now.

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  3. mikenmild (11,247 comments) says:

    I think the NZ Initiative operates in an irony-free zone…

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  4. SW (240 comments) says:

    Is the intended audience teenage economic students?

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  5. Yoza (1,872 comments) says:

    More like the Twilight Zone. It wouldn’t be so bad if they were just a bunch of cranks raving in the ether. What is truly terrifying is this lunacy is the blueprint for our future.

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  6. mikenmild (11,247 comments) says:

    Who writes this stuff? A twelve year old?

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  7. CharlieBrown (1,012 comments) says:

    gump – one thing the article doesn’t factor in is what an employer values an employees potential. Most CEO’s aren’t worth a fraction of what they earn, but some of them are worth multitudes more to that company than what they earn. Employers take gambles when employing people, some of the gambles are huge.

    I suggest all national party supporters read that article and apply that to what National have done. John Key believes that it is better to have people unemployed and others underemployed rather than letting companies and employers negotiate. The existance of the employment relations act and the youth wage are sure proof of that.

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  8. mikenmild (11,247 comments) says:

    Not a fan of the minimum wage, eh Charlie? Already your level of analysis soars above the contribution from the gandiosly named NZ Initiative.

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  9. gump (1,647 comments) says:

    @CharlieBrown

    “Most CEO’s aren’t worth a fraction of what they earn, but some of them are worth multitudes more to that company than what they earn. Employers take gambles when employing people, some of the gambles are huge.”

    ————————

    That’s absolutely true – large organisations do take a risk in hiring their CEOs.

    Which is exactly the problem with the analysis by the NZ Initiative. A company can’t establish the value of a CEO until after they have spent some time in their position, but their remuneration is negotiated before they begin. Labour market theory cannot explain why we see ridiculous situations like CEOs getting massive windfall payouts after they fail to deliver results to their organisations.

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  10. mikenmild (11,247 comments) says:

    This is a dead thread. Pity, usually talk of minimum wage laws gets some of the regular Kiwibloggers frothing at the mouth.

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  11. CharlieBrown (1,012 comments) says:

    gump – you would find that the severance package is all part of their employment agreement which goes back to the point of the employment being a gamble. It sucks but thats the way it is.

    I would argue that alot of this comes back to needlessly high and complex tax systems. A large reason we have such complex financial institutions that are so far divorced from the end stakeholder that enables such ridiculous pay packages is due to people and companies trying to minimize or simplify their tax.

    A classic example in NZ is the PIE tax regime which gives some people tax advantages compared to investing in a term deposit or directly in an equity stock, this in term puts the saver\invester another step away from the end point in where their money is invested in something that they have no voting rights over. Look at a lot of the financial products that are sold out there and you will see that a major selling point is often the ease and efficiency of arranging your tax affairs.

    So my point is complex and large tax systems probably are a disincentive for average people to directly invest in companies where they can vote against such absurd practices.

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  12. CharlieBrown (1,012 comments) says:

    Milkenmaid – I definitely don’t like the minimum wage. That, along with rediculously unbalanced employment and labour laws and maternity leave laws makes employing someone a huge risk. In a country like NZ where most employers are small companies whose owners have their livelihood invested in that company, there is a huge risk of employing anybody. The department of labour has a “Company is always at fault” attitude to any accident that occurs, regardless of the steps taken to prevent them or the fault or stupidity of the injured person.

    An employee can break a contract and quit without notice and the employer can do SFA about it, an employer can’t if the reverse occurrs. If an employee breaks the term of their agreement the employer has to go through the whole verbal and written warnings process that gets reset every year or so.

    We now live in a consumer driven age where ethical issues can really impact a companies bottom line. Without a minimum wage, consumers will put pressure on companies when they feel workers are being exploited. The government forcing an arbitrary figure of what they think is acceptable is absurd.

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  13. Nostalgia-NZ (5,203 comments) says:

    We’d possibly be employing 1 or 2 more people at the moment if there wasn’t so much regulation around employment. For an example of where this stuff goes wrong check out the ethnic family businesses that thrive because they run them the way they like, unconcerned about what the fretting ideologists or the policing authorities will say. There are young unemployed men that walk past one of the workshops every day, walk past a chance of being asked if they’d like to try some basic work and see how they get on in turning it into a job for themselves. Meanwhile in the background there are those that chatter about how much they are worth compared to other employees, about allowances and the ‘rules’ it’s generally a restrictive and self defeating f… up for employers, employees, and the economy. Who surrendered the chance for 2 people to sit down and do a deal that suits them without some other prick telling them what the rules are?

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  14. tom hunter (4,838 comments) says:

    I suppose this thread is dead but once again I find myself disappointed that the NZ Initiative is merely outlining basic theory rather than making it live by talking about the practical problems the theory/ies are coming up against.

    One of those is alluded to in the story about Kobe Bryant. There have been some interesting articles in recent years where economists have begun to analyse labour markets like professional sports to explore the phenomena of such income “capture”, which seems to be something other than the old concept of rentiers. High earners seem to be capturing larger chunks of the income than their skills alone could account for.

    The second aspect is that the labour market may be sending signals that our education system is not teaching people the skills that the modern world wants, even though it thinks it is. And “skills” may mean something other than technical ones.

    The third aspect is that the IT revolution appears to be running ahead of the labour market in supplanting workers in industry after industry and job after job. We’ve all seen the impact of the Web on bookshops and other stores, but the IT revolution is now starting to chew into areas such as law, where firms are increasingly using software to review thousands of documents rather than hiring teams of legal interns. That sort of leapfrogging is not unusual in the history of the industrial revolution, but because this involves almost resourceless information (or at least vastly cheap processing of information), what’s happening now may be qualitatively different than anything that’s come before, and the real answer may circle back to education but could also include another destination – the long discussed concept of Universal Income.

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  15. mikenmild (11,247 comments) says:

    CharlieBrown
    I feel that a minimum wage is an essential part of regulating the labour market. I look at it in the same light as a host of other things, such as health and safety rules and anti-discrimination laws, that go to form the underpinnings of a decent society and counterbalance, to some extent, the inherently unequal power balance between the employer and employee.

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  16. Paulus (2,627 comments) says:

    Try employing an Electrician, Plumber, Brickie or Tiler to do a relatively simple job.
    No – sorry too busy. Can fit you in in about a month.
    When you do look at the bill and sit quietly and meditate.
    They have skills.
    They have learned their trade – cannot see why some of the unemployed cannot do an apprentiship.
    Sorry they cannot read or write and it is hard work.

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  17. Nostalgia-NZ (5,203 comments) says:

    mikenmild as I pointed out above a large part of the work force is largely unregulated and thrives. Starting from a position that insists there are 2 ‘sides’ rather than an opportunity for work to progress both parties puts people in trenches straight away. In the nuts and bolts world out here somebody can hire a lemon and find it easier to pay them out to let them go, meanwhile that deepens caution and concern about what real relationship can be developed between 2 parties that work on their own deal on their own terms. No doubt this is more relevant to small business, however small business is highly productive for the economy. Why can’t people mind their own fucken business?

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  18. hj (7,015 comments) says:

    Peter highlights that we have a relatively high rate of natural increase in population.
    But we also have a large and persistent outflow of NZers (large by any comparative
    international standards). That outflow should best be seen as a rational response to
    perceived opportunities – those abroad are better than those here. Outflows of New
    Zealanders should generally act as a stabilizing force, helping to rebalance the
    economy. Economies with slow growing populations need to devote a whole lot
    smaller proportion of their real resources to simply maintaining the capital stock per
    worker.
    Based solely on the fertility and migration choices of New Zealanders (each
    presumably behaving fairly rationally), our population growth would have been
    growing only quite slowly since the mid 1970s. As it is, our population growth since
    1990 has been second or third fastest in the OECD. What changed? Migration
    policy did in the early 1990s.
    And 80% of our population growth in the last couple of decades has been the net
    inflow of non NZ citizens – thus almost purely a matter of discretionary policy
    choice. Government policy interventions can act to stymie successful adjustment –
    and I believe this to have been the case in NZ over the last two decades. Our negative
    NIIP position is larger, our real exchange rate is higher, our real interest rates are
    higher, and our capital stock per worker (and associated perceived business
    opportunities) are lower than they would have been if we had simply let the self-
    stabilising behavior take its course. As John McDermott’s slides showed earlier, that
    adjustment was working prior to the mid 1980s.

    http://www.treasury.govt.nz/downloads/pdfs/mi-jarrett-comm.pdf
    $20 million for aprenticeship training is measly; NZ runs a just in time skills program based on immigration.

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  19. mikenmild (11,247 comments) says:

    ‘Why can’t people mind their own fucken business?’
    I’ll take that as a plea for less, or no, regulation of the employment relationship. Regulation exists where it is considered that pure market outcomes will not produce equitable results. As I mentioned above, the employment relationship tends to be an inherently unequal one. Succesive governments, no doubt supported by a large majority of voters, have taken the view that a certain amount of regulation is beneficial to producing fair overall outcomes. I should not expect that consensus approach to be easily overturned.

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  20. mikenmild (11,247 comments) says:

    hj
    It’s an old problem – train our own people or import more people with skills.

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  21. CharlieBrown (1,012 comments) says:

    If you are a national party supporter that believes in the minimum wage then think about this for a moment. Do you believe in free trade? Do you support the free trade deal with China? Do you buy chinese products (or any product from developing asian countries)? If you answered yes to those questions then think about how much most people that work on those factory lines making those products made will have earnt last year.

    In todays global economy, the minimum wage results in outsourcing of labour to those countries that don’t have minimum wages. Its simple supply and demand.

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  22. mikenmild (11,247 comments) says:

    That’s only true to the extent that labour can be outsourced. Many, perhaps most, jobs cannot be moved overseas. Surely you are not advocating that NZ labour laws should reflect those of Bangladesh. Good jobs could be created here if we abolished the minimum wage and all irksome health and safety rules and started a shipbreaking industry.

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  23. CharlieBrown (1,012 comments) says:

    It still doesn’t get away from the fact that you selectively support minimum wage laws depending on what country you happen to live in. I’m saying that we can have labour laws like those of Bangladesh as the local consumer will avoid doing business with companies in this country if they see people working for peanuts as that is not what we want to see in this country. If you allow retail companies to decide who they can sell to this power of the consumer will become much more powerful as consumers can force a company to personally blacklist individual employers who engage in employing people for less than what society believes is acceptable. Imagine if all the petrol companies issued tresspass notices against someone that employed people for $2 an hour and made them work 80 hours a week, they would quickly change their practice.

    “That’s only true to the extent that labour can be outsourced. Many, perhaps most, jobs cannot be moved overseas. Surely you are not advocating that NZ labour laws should reflect those of Bangladesh.” – Tell me where most of the household products you have in your house or work was manufactured – You probably spend thousands of your disposable income each year on products that come from countries without or with low minimum wages.

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  24. mikenmild (11,247 comments) says:

    Yes, much of what I use is manufactured overseas. In turn, we earn our way as a country by exporting vast amounts of products that are valued by other countries. It’s called trade.

    You may think that magical market operations would prevent abusive employment situations. I disagree. Without laws, we would have more exploitation. It’s as simple as that.

    I agree that there is a trade off between regulating labour markets and employment levels. Nothing I have seen persuades me that we have that balance fundamentally wrong.

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  25. CharlieBrown (1,012 comments) says:

    “You may think that magical market operations would prevent abusive employment situations. I disagree. Without laws, we would have more exploitation. It’s as simple as that.” – I disagree – its simple as that.

    I base my belief on the fact we sometimes see such behaviour with advertisers already, even in this highly regulated country. Singapore is proof of such a country where minimum wages aren’t needed. There rates of acute poverty are as low, if not lower than NZ. And this is a country that was third world 2 generations ago.

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  26. DisgruntledOne (20 comments) says:

    “I’m saying that we can have labour laws like those of Bangladesh as the local consumer will avoid doing business with companies in this country if they see people working for peanuts as that is not what we want to see in this country.”
    So what you’re saying is that you agree that the result of the minimum wage is ethical employment, but think it would happen without the minimum wage being enshrined in law, because consumers are such amazingly ethical purchasers.
    Even assuming they are, why bother changing the law?

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  27. DisgruntledOne (20 comments) says:

    By the way, I actually do dislike the Minimum wage, but for a different reason. The reasoning that gives rise to it is, as far as I understand, that when many people are competing for the same job, the wage can be driven below what we deem to be an ethical wage. Therefore we set a minimum. Surely it makes more sense for the ‘minimum wage’ to be a guideline for welfare rather than a something that only applies to the person who got the job?

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