Can Government Control the Labor Market and if so, is it a Good Idea?

June 5th, 2014
in Op Ed, syndication

Random Thoughts from the High Desert

Written by

The article on loss of middle skill jobs really intrigued me.

DOL Sec Perez

It of course raises the question what if anything can or should be done to deal with it.

Follow up:

The full report from the Dallas Federal Reserve is only four pages so why not read it? (Use link above to access report.)

This is probably the most important set of data in the report.

Middle Skills

It is very simple to interpret. Over the last twenty-five years, the percentage of low-skill and high-skill jobs has increased while the percentage of middle-skill jobs has decreased. Could this be a factor in the observed increase in income inequality? Could the labor market be telling us something?

Other important findings in that report include:

  • The decline in middle-skill i.e. routine jobs occurs during recessions but starting about twenty-five years ago, these jobs have not come back after the recession but remain gone. The replacement jobs as the economy recovers are in either high-skill or low-skill categories.
  • Female workers seem to have done a better job of adaptation than male workers generally moving from middle skill routine jobs to the high-skill category. Male workers appear to have moved equally to low-skill and high-skill categories.
  • Unlike the studies that I read when I was formally studying economics in the early eighties (when the returns to education were highly questionable), now the rewards for higher eduction are substantial.

All of this raises the question of how, if at all, government should react to this clear trend. The standard response which to me displays a misunderstanding of the above and other relevant factors is to increase the minimum wage.

This would seem to imply that compensation is not determined by the supply of and demand for labor with certain characteristics. On the other hand, it may be based on an assumption that employers have no alternative in that it is not cost effective to attempt to automate low-skill, and in the absence of minimum wage laws, low-pay jobs or that these jobs can not be off-shored.

This table may provide solace to those who advocate raising the minimum wage as a way of dealing with the changing structure of the work force and demand for labor.

Dallas Fed Mix of Jobs by Skill Level

Employers may indeed not be able to reduce their employment of non-routine manual labor. They may indeed be able to be held hostage by government and be forced to pay compensation that exceeds what a free market would determine to be the appropriate compensation. That is how things are handled by centrally controlled economies. But will this approach work in today's World economy?

Employers may have no option, but consumers do. It is more difficult to enforce higher prices on consumers. So the higher pricing resulting from increases in the minimum wage and other cost increases to business resulting in higher prices for goods and services may result in consumers reducing their consumption of such goods and services possibly by self-supplying these goods and services. After all, they are goods and service that require the lowest skill level to provide.

So again one wonders if policies that appear to me to be more politically motivated than well thought out may in the end harm those who presumably are the intended beneficiaries of such policies. The recent Congressional Budget Office (CBO) assessment of two minimum wage proposals concluded that there would be only moderate harm to low-wage employees and those seeking low-paying jobs. That analysis to me seemed fairly static, not considering the longer-term impacts but rather simply the initial impacts.

A better strategy might be to facilitate a better match between employer needs and worker capabilities. But that requires that government do something rather than simply dictating what others do. It is a lot easier to order others to do things than actually provide education, defense, public safety, highways, and other services usually considered to be primarily the role of government. That is why the U.S. is more and more becoming a command and control economy as many nations which formerly had a command and control economy are attempting to have an economy where the market has more impact than government on decisions that are made regarding production, consumption and, of course, investment.

I have had a lot of experience in the private sector and so far I have never seen a situation where government attempts to regulate prices were successful. Of course most of my experience has been with government attempting to prevent the increase in prices. Now we see government attempting to mandate increases in the price of labor and unfavored forms of energy and even mandating purchases which was, of course, the central aspect of the Affordable Care Act.

It is not new for government to require private sector expenditures but usually the reason is clearer. It is one thing to require bonding or insurance in the event of causing damage to someone else. The nexus is quite clear in that case. But now we increasingly are working off of far less direct causations such as requiring school children to purchase a meal with fruit to reduce society's cost to provide healthcare fifty years later. It seems like a slippery slope towards a very invasive government both economically and with regards to personal freedom.

But I will reserve the topic of forced expenditures for another day as this article is about how to deal with the changing structure of the labor market and the impact of government intervening between the buyer and seller of labor. The general assumption in economics is that if you force a change from an equilibrium, generally the new solution will be suboptimal.

This is an important field of research in economics as indicated by this quote from Wikipedia which can be found here. I have removed the references from the quote since I have not provided the links to the individual reference documents but they can be found at the full Wikipedia article at the above link.

"In economics, market failure is when the allocation of goods and services by a free market is not efficient. That is, there exists another conceivable outcome where a market participant may be made better-off without making someone else worse-off. (The outcome is not Pareto optimal.) Market failures can be viewed as scenarios where individuals' pursuit of pure self-interest leads to results that are not efficient – that can be improved upon from the societal point of view."

So basically government is saying that this changing mix of skills demanded by employers is some sort of conspiracy to damage society that needs to be dealt with.

"Market failures are often associated with time-inconsistent preferences, information asymmetries,non-competitive markets, principal–agent problems, externalities, or public goods. The existence of a market failure is often the reason for government intervention in a particular market. Economists, especially microeconomists, are often concerned with the causes of market failure and possible means of correction. Such analysis plays an important role in many types of public policy decisions and studies. However, some types of government policy interventions, such as taxes, subsidies, bailouts, wage and price controls, and regulations, including attempts to correct market failure, may also lead to an inefficient allocation of resources, sometimes called government failure. Thus, there is sometimes a choice between imperfect outcomes, i.e. imperfect market outcomes with or without government interventions. But either way, if a market failure exists the outcome is not Pareto efficient. Mainstream neoclassical and Keynesian economists believe that it may be possible for a government to improve the inefficient market outcome, while several heterodox schools of thought disagree with this."

And again government, without having identified the flaw in the marketplace which needs modification, is endeavoring to change the outcome. I suspect that the love affair with the concept of driving prices up in order to redistribute purchasing power to increase aggregate demand and tax revenues will not be more successful than the record with respect to government trying to drive prices down or at least prevent price increases.

None of this worked in the Soviet Union., I have studied how central planning does not work. It has not worked particularly well in Europe. Although it might seem ridiculous to those proposing minimum wage increases, it is exactly the way a monopoly works. The goal of a monopoly is to raise the price above the price which otherwise would be set in the marketplace. It is one of the reasons why we have anti-trust legislation. If we thought that monopolies resulted in prosperity they would not be illegal but be encouraged. The general feeling is that monopolies reduce prosperity while benefiting the monopolists. And yet governments are immune from prosecution as conspirators in creating labor monopolies.

However, it is hard to even to come up with examples of monopolies that have benefited the monopolist over an extended period of time. Most assessments of monopolies are that they initially raise prices by as much as twenty-five percent but ultimately lead to the failure of the monopolist. If not for OPEC, oil companies would not be utilizing horizontal drilling and fracking to extract oil and gas from source rocks in the United States thus putting the future of OPEC in doubt. Has the tin cartel been successful? How about the match cartel or the various salt cartels (both sodium and potassium salts)? One notes the recent beginning of the demise of the marijuana cartel. How about the sugar cartel? How about the various state dairy cartels? How about the De Beers diamond cartel? According to Wikipedia:

"De Beers’ market share fell from as high as 90% in the 1980s to less than 40% in 2012"

De Beers no longer even exists as a separate company. AT&T is long gone in terms of its former self. So is IBM which once had a lock on the computer market based on a cartel strategy of renting not selling. It resulted in the personal computer and mid-sized computers called servers.

The market has a way of finding ways to defeat attempts to regulate prices whether those attempts are made by the private sector or government. Low-skilled labor with essentially an infinite supply of illegal immigrants and producing non-differentiable products and services that can in many cases be self-supplied (people do not have to go to fast food restaurants so the price elasticity becomes important) would appear to be one of the more difficult commodities to "cartelize". That is why I believe the minimum wage is truly an ignorant policy advanced by people with little understanding of the way the world works and with perhaps a low-opinion of the intelligence of voters. Well, they may have correctly assessed the astuteness of the electorate - but perhaps not.

A well worded advertisement can entice people to try a product or a political philosophy. But subsequent purchases are based on the experience with the product, service or political philosophy. There is nothing like not being able to find a job or hold the job to focus the mind. As middle-skill jobs are migrated to either high-skill or low-skill jobs, people will figure out which government policies are facilitating moving up or at least having a job if you are unable to move up but instead must move down.

This of course raises the question: "Is government a high-skill high-complexity job and if so is it staffed with those having the skill set to perform this job?"

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