Basic Economics

  While it is always politically tempting for governments to mandate benefits for workers, to be paid for by employers—since that wins more votes from workers than it loses among employers, and costs the government nothing—the economic repercussions seldom receive much attention from either the politicians who create such mandates or from the voting public. But one of the reasons why the unemployed may not begin to be hired as output increases, such as when an economy is rising out of a recession, is that working the existing workers overtime may be cheaper for the employer than hiring new workers.

  That is because an increase in working hours from existing employees does not require paying for additional mandated benefits, as hiring new workers would. Despite higher pay required for overtime hours, it may in many cases still be cheaper to work the existing employees longer, instead of hiring new workers.

  In November 2009, under the headline “Overtime Creeps Back Before Jobs,” the Wall Street Journal reported: “In October, the manufacturing sector shed 61,000 people, while those still employed were working more hours: Overtime increased.” The reason: “Overtime enables companies to increase productivity to meet rising customer orders without adding fixed costs such as health-care benefits for new hires.”{390} It also enables companies to meet temporary increases in demand for their products without taking on the expenses of training people who will have to be let go when the temporary increase in consumer demand passes. The cost of training a new worker includes reducing the output of an already trained worker who is assigned to train the new worker, both of them being paid while neither of them is producing as much output as other workers who are already trained.

  Although it is easier to visualize the consequences of more costly working conditions in a capitalist economy, where these can be conceived in dollars and cents terms, similar conditions applied in the days of the socialist economy in the Soviet Union. For example, a study of the Soviet economy noted that “juveniles (under 18) are entitled to longer holidays, shorter hours, study leave; consequently managers prefer to avoid employing juveniles.”{391} There is no free lunch in a socialist economy any more than in a capitalist economy.

  Because working conditions were often much worse in the past—fewer safety precautions, longer hours, more unpleasant and unhealthy surroundings—some advocates of externally regulated working conditions, whether regulated by government or unions, argue as if working conditions would never have improved otherwise. But wage rates were also much lower in the past, and yet they have risen in both unionized and non-unionized occupations, and in occupations covered and those not covered by minimum wage laws. Growth in per capita output permits both higher pay and better working conditions, while competition for workers forces individual employers to make improvements in both, just as they are forced to improve the products they sell to the consuming public for the same reason.

  Safety Laws

  While safety is one aspect of working conditions, it is a special aspect because, in some cases, leaving its costs and benefits to be weighed by employers and employees leaves out the safety of the general public that may be affected by the actions of employers and employees. Obvious examples include pilots, truck drivers, and train crews, because their fatigue can endanger many others besides themselves when a plane crashes, a big rig goes out of control on a crowded highway, or a train derails, killing not only passengers on board but also spreading fire or toxic fumes to people living near where the derailment occurs. Laws have accordingly been passed, limiting how many consecutive hours individuals may work in these occupations, even if longer hours might be acceptable to both employers and employees in these occupations.

  Child Labor Laws

  In most countries, laws to protect children in the workplace began before there were laws governing working conditions for adults. Such laws reflected public concerns because of the special vulnerability of children, due to their inexperience, weaker bodies, and general helplessness against the power of adults. At one time, children were used for hard and dangerous work in coal mines, as well as working around factory machinery that could maim or kill a child who was not alert to the dangers. However, laws passed under one set of conditions often remain on the books long after the circumstances that gave rise to those laws have changed. As a twenty-first century observer noted:

  Child labor laws passed to protect children from dangerous factories now keep strapping teenagers out of air-conditioned offices.{392}

  Such results are not mere examples of irrationality. Like other laws, child labor laws were not only passed in response to a given constituency—humanitarian individuals and groups, in this case—but also developed new constituencies among those who found such laws useful to their own interests. Labor unions, for example, have long sought to keep children and adolescents out of the work force, where they would compete for jobs with the unions’ own members. Educators in general and teachers’ unions in particular likewise have a vested interest in keeping young people in school longer, where their attendance increases the demand for teachers and can be used politically to argue for larger expenditures on the school system.

  While keeping strapping teenagers from working in air-conditioned offices might seem irrational in terms of the original reasons for child labor laws advanced by the original humanitarian constituency, it is quite rational from the standpoint of the interests of these new constituencies. Whether it is rational from the standpoint of society as a whole to have so many young people denied legal ways to earn money, while illegal ways abound, is another question.

  Hours of Work

  One of the working conditions that can be quantified is the length of the work week. Most modern industrial countries specify the maximum number of hours per week that can be worked, either absolutely or before the employer is forced by law to pay higher rates for overtime work beyond those specified hours. This imposed work week varies from country to country. France, for example, specified 35 hours as the standard work week, with employers being mandated to continue to pay the same amount for this shorter work week as they had paid in weekly wages before. In addition, French law requires employees to be given 25 days of paid vacation per year, plus paid holidays{393}—neither of which is required under American laws.

  Given these facts, it is hardly surprising that the average number of hours worked annually in France is less than 1,500, compared to more than 1,800 in the United States and Japan. Obviously the extra 300 or more hours a year worked by American workers has an effect on annual output and therefore on the standard of living. Nor are all these differences financial. According to BusinessWeek magazine:

  Doctors work 20% less, on average. Staff shortages in hospitals and nursing homes due to the 35-hour week was a key reason August’s heat wave killed 14,000 in France.{394}

  The French tradition of long summer vacations would have made the under-staffing problem worse during an August heat wave.

  Sometimes, in various countries, especially during periods of high unemployment, a government-mandated shorter work week is advocated on grounds that this would share the work among more workers, reducing the unemployment rate. In other words, instead of hiring 35 workers to work 40 hours each, an employer might hire 40 workers to work 35 hours each. Plausible as this might seem, the problem is that shorter work weeks, whether imposed by government or by labor unions, often involve maintaining the same weekly pay as before, as it did in France. What this amounts to is a higher wage rate per hour, which tends to reduce the number of workers hired, instead of increasing employment as planned.

  Western European nations in general tend to have more generous time-off policies mandated by law. According to the Wall Street Journal, the average European worker “took off 11.3 days in 2005, compared with 4.5 days for the average American.”{395}

  Spain is especially generous in this regard. The Wall Street Journal in 2012 reported that in Spain the law requires that workers receive 14 paid holidays off annually, plus 22 days of paid vacatio
n, 15 days off to get married and 2 to 4 days off when anyone in an employee’s family has a wedding, birth, hospitalization or death. Employees who themselves are off from work due to illness can continue to get most or all of their wages paid, if they have a note from a doctor, for the duration of their illness, up to 18 months. Should the employer choose to fire an ill worker, the severance pay required to compensate that worker can be up to what that worker would have earned in two years.{396}

  Such mandated generosity is not without its costs, not simply to the employer but to the economy in general and workers in particular. Spain has had chronically high levels of unemployment—25 percent in 2012, but ranging up to 52 percent for younger workers.{397} Moreover, 49 percent of the unemployed in Spain in the second quarter of 2013 had been unemployed for a year or more, compared to 27 percent in the United States.{398}

  The labor market is affected not only by mandated employer benefits to workers, but also by government-provided benefits that make it unnecessary for many people to work. In Denmark, for example, a 36-year-old single mother of two “was getting about $2,700 a month, and she had been on welfare since she was 16,” according to the New York Times, which also noted that “in many regions of the country people without jobs now outnumber those with them.”{399}

  Third World Countries

  Some of the worst working conditions exist in some of the poorest countries—that is, countries where the workers could least afford to accept lower pay as the price of better surroundings or circumstances on the job. Multinational companies with factories in the Third World often come under severe criticism in Europe or America for having working conditions in those factories that would not be tolerated in their own countries. What this means is that more prosperous workers in Europe or America in effect buy better working conditions, just as they are likely to buy better housing and better clothing than people in the Third World can afford. If employers in the Third World are forced by law or public pressures to provide better working conditions, the additional expense reduces the number of workers hired, just as wage rates higher than would be required by supply and demand left many Africans frustrated in their attempts to get jobs with multinational companies.

  However much the jobs provided by multinational companies to Third World workers might be disdained for their low pay or poor working conditions by critics in Europe or the United States, the real question for workers in poor countries is how these jobs compare with their local alternatives. A New York Times writer in Cambodia, for example, noted: “Here in Cambodia factory jobs are in such demand that workers usually have to bribe a factory insider with a month’s salary just to get hired.”{400} Clearly these are jobs highly sought after. Nor is Cambodia unique. Multinational companies typically pay about double the local wage rate in Third World countries.

  It is much the same story with working conditions. Third World workers compare conditions in multinational companies with their own local alternatives. The same New York Times writer reporting from Cambodia described one of these alternatives—working as a scavenger picking through garbage dumps where the “stench clogs the nostrils” and where burning produces “acrid smoke that blinds the eyes,” while “scavengers are chased by swarms of flies and biting insects.” Speaking of one of these scavengers, the Times writer said:

  Nhep Chanda averages 75 cents a day for her efforts. For her, the idea of being exploited in a garment factory—working only six days a week, inside instead of in the broiling sun, for up to $2 a day—is a dream.{401}

  Would it not be even better if this young woman could be paid what workers in Europe or America are paid, and work under the same kinds of conditions found on their jobs? Of course it would. The real question is: How can her productivity be raised to the same level as that of workers in Europe or the United States—and what is likely to happen if productivity issues are waved aside and better working conditions are simply imposed by law or public pressures? There is little reason to doubt that the results would be similar to what happens when minimum wage rates are prescribed in disregard of productivity.

  This does not mean that workers in poorer countries are doomed forever to low wages and bad working conditions. On the contrary, to the extent that more and more multinational companies locate in poor countries, working conditions as well as productivity and pay are affected when increasing numbers of multinationals compete for labor that is increasingly experienced in modern production methods—that is, workers with increasing amounts of valuable human capital, for which employers must compete in the labor market. In 2013, The Economist magazine reported, “Wages in China and India have been going up by 10–20% a year for the past decade.” A decade earlier, “wages in emerging markets were a tenth of their level in the rich world.” But between 2001 and 2011, the difference between what computer programmers in India were paid and what computer programmers in the United States were paid constantly narrowed.{402}

  The competition of multinational corporations for workers has affected wages not only among their employees, but also among employees of indigenous businesses that have had to compete for the same workers. In 2006, BusinessWeek magazine reported that a Chinese manufacturer of air-conditioner compressors “has seen turnover for some jobs hit 20% annually,” with the general manager observing that “it’s all he can do to keep his 800 employees from jumping ship to Samsung, Siemens, Nokia, and other multinationals” operating in his area.{403} In Guangdong province, factories “have been struggling to find staff for five years, driving up wages at double-digit rates,” the Far Eastern Economic Review reported in 2008.{404}

  These upward competitive pressures on wages have continued. According to the New York Times in 2012, “Labor shortages are already so acute in many Chinese industrial zones that factories struggle to find enough people to operate their assembly lines” and “often pay fees to agents who try to recruit workers arriving on long-haul buses and trains from distant provinces.”{405} That same year the Wall Street Journal reported that average urban wages in China rose by 13 percent in one year.{406}

  Competitive pressures have affected working conditions as well as wages:

  That means managers can no longer simply provide eight-to-a-room dorms and expect laborers to toil 12 hours a day, seven days a week. . . In addition to boosting salaries, Yongjin has upgraded its dormitories and improved the food in the company cafeteria. Despite those efforts, its five factories remain about 10% shy of the 6,000 employees they need.{407}

  In 2012 the New York Times reported that workers assembling iPads in a factory in China, who had previously been sitting on “a short, green plastic stool” that left their backs unsupported and sore, were suddenly supplied with decorated wooden chairs with “a high, sturdy back.” Nor were such changes isolated, given the competitive labor markets, where even companies in different industries were competing for many of the same workers. According to the New York Times:

  “When the largest company raises wages and cuts hours, it forces every other factory to do the same thing whether they want to or not,” said Tony Prophet, a senior vice president at Hewlett-Packard. “A firestorm has started, and these companies are in the glare now. They have to improve to compete. It’s a huge change from just 18 months ago.”{408}

  The difference between having such improvements in working conditions emerge as a result of market competition and having them imposed by government is that markets bring about such improvements as a result of more options for the workers—due to more employer competition for workers, who are increasingly more experienced and therefore more valuable employees—while government impositions tend to reduce existing options, by raising the cost of hiring labor in disregard of whether those costs exceed the labor’s productivity.

  A free market is not a zero-sum system, where the gains of one party have to come at the expense of losses to another party. Because this is a process that creates a larger total output as workers acquire more human capital, these workers, their e
mployers and the consumers can all benefit at the same time. However, politicians in various Asian countries have sought to simply impose higher pay rates through minimum wage laws, {409}which can impede this process and create other problems that are all too familiar from the track record of minimum wage laws in other countries.

  Informal pressures for better working conditions by international non-governmental organizations likewise tend to disregard costs and their repercussions when setting their standards. Tragic events, such as the 2013 collapse of a factory in Bangladesh that killed more than a thousand workers, create international public opinion pressures on multinational corporations to either pay for safer working conditions or to leave countries whose governments do not enforce safety standards.{410} But such pressures are also used to push for higher minimum wage laws and more labor unions, usually without regard to the costs and employment repercussions of such things.

  Third-party observers face none of the inherent constraints and trade-offs that are inescapable for both employers and employees, and therefore these third parties have nothing to force them to even think in such terms.

  COLLECTIVE BARGAINING

  In previous chapters we have been considering labor markets in which both workers and employers are numerous and compete individually and independently, whether with or without government regulation of pay and working conditions. However, these are not the only kinds of markets for labor. Some workers are members of labor unions which negotiate pay and working conditions with employers, whether employers are acting individually or in concert as members of an employers’ association.