'L' is for labour market

The ABC of Economic Literacy
Insights Newsletter
16 May, 2014

‘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.

Loosely coinciding with this year’s election campaign, Insights is campaigning for economic literacy from A to Z. Coming up next week: ‘M’ for Monetary Policy.

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