Tuesday, October 02, 2007

Australians@Work disappoints

The Australians at Work report claims that AWAs reduce wages of unskilled workers and increase their working hours – in short that AWAs decrease their hourly wage rate. Common law contracts deliver a better deal the report claims. The system of AWAs is claimed to lead to what amounts to almost child abuse.

This is Laborite tripe and mythology. It is not the duty of the wage system to deliver social justice. The wage system should pay workers their worth in terms of production. With enough competition firms are forced to do this because workers will otherwise quit and accept bargains that benefit both employers and themselves elsewhere. This competition increases the more workers are employed – with higher unemployment, because wages are too high, it becomes harder for unemployed workers to get a job and harder for employed workers to shift out of a job they don’t like. If firms have to pay more than the opportunity cost of labour, perhaps because of trade union activity, then fewer workers will be employed. Minimally prescribed pay and conditions do simply create unemployment.

We need to once-and-for-all bury the myth that wages should be some kind of gift that employers pay workers. We should also teach young Australians about the value of competition as a means of ensuring workers are matched with well-paid jobs and as a means of reducing unemployment.

And there is effectively full employment in Australia at present – opportunities for getting jobs are everywhere. They may not be gold-plated jobs but everyone who wants to work can get a job.

Socially just wages should be paid but this is not a function of labour markets whose task is to efficiently allocate labour resources and to ensure no wasteful unemployment. The tax system can be configured to help low income workers and transfers can be provided to supplement the incomes of those on low incomes. This is the best way to achieve a just distribution of Australian incomes.

Coalition MPs such http://www.theage.com.au/news/national/awas-more-work-and-less-pay/2007/10/01/1191091031239.html by pointing out that the researchers are hacks for the union movement and that other studies suggest different outcomes. This is playing into the hands of Laborite dodos. The correct way of responding to their economically illiterate claims is to point out that you don’t try to force firms to employ low skilled workers on high wages that exceed their low productivity because you will only generate unemployment.

The correct response is to determine how much middle Australia will pay to ensure that everyone in the community gets a reasonable enough income and to make sure by the tax-transfer mechanism that this is achieved.


derrida derider said...

The wage system should pay workers their worth in terms of production. With enough competition firms are forced to do this because workers will otherwise quit and accept bargains that benefit both employers and themselves elsewhere.

That's a typical response from an economist who doesn't know much modern labour economics. There's abundant evidence that most workers are not paid their marginal product, because (a) it's virtually impossible for the employer to measure (hence you need efficiency wages), and (b) creating a new job (for employers) or quitting an existing one (for employees) carries heavy uncertainty costs.

The upshot of the latter is that in an employer-employee match there are usually substantial rents to be allocated (ie there is a wedge between wage paid and marginal product - the monopsony model). So wage regulation, collective bargaining, etc tends to more often reapportion that rent rather than make the match unviable.

Hence the costs in employment of min wages, etc are much less than a simple full competition model would suggest, and in principle could generate sufficent redistribution from employer to employee to get a net welfare gain.

hc said...

The Ripley 'believe it or not' economics that you refer to (labour demand curves don't slope downwards etc) has never convinced me. And yes by assuming a symmetrical enough bargaining model you can find exploitable rents that a clever enough union can extract via a collective bargain.

But I don't believe this has much relevance in man economy where labour shortages are appearing at all levels - partly as a consequence of labour market reforms.

You write that offering a new job carries heavy uncertainty. How will creating new jobs then be assisted by unfair dismissal laws?

You don't address the main point of my post - that providing the social wage (the object of the newspaper article I linked to) is the job of employers. It isn't.

Kymbos said...

It's not the role of employers to ensure a reasonable social wage, it's the role of Governments... by setting realistic minimum wages as a safety net. It's direct, simple and effective.

Very good point, well made Harry.

P.A. Coplay said...

Hi derrida derider,

Would be keen to hear more about the abundant evidence that workers are paid above their marginal product. My impression is that most modern empirical labour economics doesn't directly estimate marginal productivity. I am aware of Card and Krueger etc but they didn't do this either. Their results are interesting, but the theory you describe seems used more to explain the results.

Without further evidence (and this is an empirical question), would be reluctant to believe that markets for low skilled jobs don't work the way competitive theories suggest in the absence of interventions such as the minimum wage or unfair dismissal laws.


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