The Market for Labor; D. Bechara

The concept of marginal produc tivity describes the economic forces at work in the labor market. When an entrepreneur needs employees, Mr. Bechara recently earned a master's degree in Labor Law at the University of Pennsylvania. He is an attorney and a member of the bars of the Com monwealth of Puerto Rico and the District of Colum bia. he must offer them enough incentive to entice them away from other pos sible employers. However, the sal ary that an employer may offer pro spective employees is limited by the realities of the market. Con sequently, the employer must weigh how much income he will receive from the production that each new employee will generate. If the employer pays a wage that is above the laborer's marginal pro ductivity, then he will incur losses, which will force him to lower the wages. If, on the other hand, he pays too Iowa wage, lower than the mar ginal productivity, then the prospect of gain will entice other entrepre neurs to take advantage of the dif ference between the marginal pro ductivity and the wages prevailing in the market.

Interventionists, those people who 137 138 THE FREEMAN March argue in favor of numerous laws which create minimum conditions for employment, are inconsistent concerning wage determination. They argue that employers are mis erly and refuse to give employees a fair wage. The interventionists are thus assuming that employers would not compete against one another for workers, because that would tend" to bid wages up toward the point of marginal productivity. But if employers are so guided by avarice, why would they not seize the opportunity for profit when they observe a wide disparity between high marginal productivity and low prevailing wages? Effect of Unemployment It is often argued that in the real world we confront an ocean of un employment and that an entrepre~ neur does not have to entice employ ees already employed, so that he is able to offer a salary lower than the marginal productivity. However, to the extent that there is involuntary unemployment, it is a result of the interventionist policies of the gov ernment. The consequence of impos ing a minimum wage is that those people who cannot produce economic goods worth more than that minimum will not be·hired. Further more, the imposition of inflexible laws that restrict the labor market create unnecessary and tragic human consequences. The argument that we must combat the result of one government intervention with more government intervention is simply a non sequitur.

_Even assuming that the interven tionists are correct about the effect of unemployment on wages, the theory of marginal productivity re mains unassailable. Inasmuch as those who are unemployed are in such a position as a result of the interventionist policies, they cannot effecti vely compete on the labor market with the rest of the employ ees· in the market. Hence, marginal productivity still applies to the employed. If we assume, however, that the unemployed population does com pete with the rest of the labor force, the net effect would be to bring about a readjustment in wages, tak ing the unemployed into considera tion. Those who argue that the un~ employed .can compete with those employed are, in effect, admitting that prevailing wage rates are too high, above· the equilibrium level. Otherwise, no involuntary long term unemployment could result. Therefore, regardless of which point of view we adopt concerning un employment, the marginal produc tivity theory cannot be denied.

Syndicalism Contemporary interventionist philosophy frequently advances the idea of worker ownership-in1978 THE MARKET FOR LABOR 139 common of the means of production. The origin of this notion can be found in syndicalism, an historical reaction to the market system. Syn dicalism argued for the expropria tion of the means of production from rightful owners, and the substitu tion of the workers themselves as the owners. This method of economic organization would allegedly bring about income equality. The syndicalist society, however, denied the existence of change. As some workers sell their shares in production, or simply squander them, income inequalities again re sult, which was the evil that syn dicalism was supposed to remedy. When workers die and leave an in heritance, we have the same prob lem: heirs own shares of enterprises in which they do not necessarily work. Therefore, we find that this system not only created income in equalities, but also allowed people to own shares of entities in which they did not work, both evils in the eyes of the syndicalists. In order to en force the syndicalist method of pro duction, a great bureaucracy with ever-widening powers needed to be created to redistribute wealth con tinually so as to eliminate these consequences.

Syndicalism faced difficulties with respect to growing and dying industries. Aside from the obvious problem of the raising of capital, the syndicalist state had no way to deal with the fact that some industries became prosperous, while others were headed toward bankruptcy. The employees of the bankrupt in dustries would have lost all the as sets they earned, while those employed by the growing industries would oppose any new employee from entering their industry since it would imply having to further di vide the shares of the enterprise among more people. Consequently, syndicalism induced tremendous rigidi ties on the labor market. The syndicalist society failed to perceive the nature of our system, which involves not only production, but exchange. As John Chamberlain put it: In the early 1920's the Italian syn dicalist trade unions seized the factories. But there followed a sitdown strike of the salesmen, the commercial agents, the factors, the middlemen. Syndicalism had no way of entering the world of com merce, the world of connection, which must go either by the law of contract or by administrative fiat. When no provi sion is made for the world of commerce, a vacuum exists outside of the factories. A state is needed to enforce the freely ac cepted terms of contracts or to staff an administrative apparatus. If there is no state, gangsters step in to do the job ... 1 Inequalities Persist Syndicalism, therefore, brought about the same income inequalities which it attempted to eliminate. At the same time it denied the economy 140 THE FREEMAN March the benefits of market pricing under capitalist production and exchange.

Although it may be easy to neu tralize the appeal of syndicalism, the underlying ideas which engendered it remain with us to this very day. These ideas nourish the belief that employees are not receiving their fair share and that laws should therefore be enacted to alter such inequality. Hence we find a rising popularity for such methods as prof it sharing and worker participation in managerial decisions (codetermi nation) as the ways to create a mid dle ground between pure syn dicalism and pure capitalism. It is possible that profit sharing and codetermination may have posi tive consequences in some indus tries, that productivity may rise and that labor-management relations may be improved. However, it does not necessarily follow that what may be good for one firm may be good for the economy as a whole. With regard to profit sharing and codetermination, it must be remem bered that these topics are consid ered here strictly from the point of view of what would take place in the event laws were enacted to compel every firm to establish its own method of profit sharing and codetermination.

Profit sharing is not a new idea, and has been tried before: Albert Gallatin, Secretary of the Trea sury under Presidents Jefferson and Madison, installed profit sharing in his glass works at New Geneva, Pennsylva nia in 1794. Horace Greeley had a profit sharing plan for certain employees at the New York Tribune, and was a strong advocate. In 1886, Colonel Procter intro duced a profit sharing and general em ployee relations program at Procter and Gamble. Eastman Kodak joined the ranks of the profit sharers in 1912, and Sears, Roebuck and Company in 1916. In 1920 the National Industrial Conference Board surveyed the field and found fifty four companies with profit sharing plans; in 1940, its survey uncovered 158 plans. 2 Profit Must Be Earned A profit sharing plan may be de scribed as one which is organized so as to make intermittent payments to the employees out of any possible profits. Consequently, the success of the plan is contingent on the success of the enterprise. If there is no profit in a given year, no contributions can be made.

However, the term ((profit shar ing" is misleading because it implies that profits exist only as the bottom line of an accountant's ledger. Yet, true profits, from a strictly economic point of view, consist of ((the reward willing customers accord· an entre preneur who efficiently uses scarce resources to satisfy their wants."3 Profits that are shared with em ployees or taxed away by the state cannot effectively be a part of an 1978 THE MARKET FOR LABOR 141 economic process by which consum ers reward the most productive and ingenious entrepreneurs. And what of that portion of profit which repre sents an interest payment to the investor? If investors are at liberty to place their savings elsewhere to obtain an appropriate yield, it is not feasible to consider sharing the interest portion of profits. One could argue that if a law were passed imposing profit sharing plans on all enterprises, then there would be no threat of investors withdrawing their funds to other firms. However, this argument fails to realize that under such a law there would be no investment unless the investment yields an interest above the yield which would be con fiscated by the profit sharers.

Therefore, if a universal profit shar ing plan existed, its first conse quence would be to reduce and limit investment to those areas profitable enough to cover the profit sharing burden as well as the interest which investors would find acceptable. All other investments which would pro duce less than that sum would be discontinued, because no investor would find it worthwhile to invest his savings at a negative interest. No Panacea Profit sharing does not promise an extensive future. For the years 1969 through 1974, corporate profits after taxes averaged about $55 billion a year. If that entire amount had been divided equally among an' average employed labor force of 81 million, each worker's share would have been about $13 a week.4 But in that case, .no profits would have been available as interest or a return to investors. Of course, when we speak in terms of figures and aggregates, we deal with imperfect concepts which tend to be misleading. Histor ically, an average of 45 per cent of the annual reports of companies show a loss for the year. 5 Hence, it becomes obvious that the ideal of profit sharing, even if universally applied, cannot become a panacea for our industrial prob lems. The average employee will see his particular work as too far re moved from the actual profits earned, so that the motivation to be more productive is very weak.

Problems dealing with equity will also arise every time the profit is divided, each sector of the labor force demanding a larger share than the one actually allocated to it. Similar difficulties will emerge re garding the ((fair" division of the profit between shareholders and employees. Profit sharing is also a deceiving term because its proponents use it to allude to a mechanism for raising wages. After dividing among the employees what the proponents call profi t, there will still be some amount left over for investors, 142 THE FREEMAN March which will be considered as the net profit. The amount divided among the workers, rather than profit, is another wage, a bonus which is part and parcel of the costs of production. Whatever the problems inherent in the profit sharing idea, some firms still may see it as the better way to pay their workers according to their marginal productivity. This is tolerable in a free market, and there should be no law against it.

But neither should the law deny others their liberty by making profit sharing universal and compulsory. Codetermination Codetermination has become a reali ty in many West European countries. Although each country may have its own devices, the gen eral tendency is to allow a certain number of employees on the board of directors, so that both labor and management may have an influence on decisions which may affect the employees. As in the case of profit sharing, in the free market some firms may look upon the process of codetermination as their better way to compete for employees-and that should be their privilege. However, we are dealing in this essay not with the voluntary actions of employers and employees, but with the possibility that laws be enacted to force this concept on all corporations. In a sense, codetermination is a thrust against the concept of private property, a limitation of property rights but short of outright expro priation. Others than the property owner would enter into the decisions about how to risk his investment.

Instead of economic efficiency, the guide would become political ex pedience. And if business activity is thus politicized, where is the process to end?6 In the long run, an employer can not impose his will on his employees because he is limited by the action of the market. If the employer insists on conducting his personnel affairs in an arbitrary manner, he will lose the most efficient of his employees, who will be hired by his competitors. If an employer insists on acting in an authoritarian way, he will find that in the long run the quality of his employees will deteriorate, the products he manufactures will re flect this and his business will gen erally be affected. Thus does open competition in the market effec tively curb the abuses cited by pro ponents of codetermination. In addition to those who advocate forced profit sharing and codetermi nation are others who believe that the only way to raise wages is through union pressure on employ ers. However, the price mechanism has its effect here as in any other area where commodities are bought and sold. It is possible that unions will be able to obtain wages higher 1978 THE MARKET FOR LABOR 143 than the market level, but adverse effects will follow. In the first place, the industry involved may have to raise its prices to pay for the higher production costs. This may reduce demand for that company's· prod ucts, so that some employees will be discharged. Conversely, if the de mand for these products is not as responsi ve to their price, then the consumers will have that much money less to spend or invest on other products, so that other indus tries will suffer a decrease in their business. At the same time, the long.;.run effect of wages higher than the equilibrium level in any indus try, as imposed by union pressure, is to trap capital. As a result of this, investors will no longer be willing to reinvest in such industries, and the apparent benefits of union pressure become short-Ii ved.

Capital the· Key The only true way for raISIng wages is to allow for capital for mation. Marginal productivity de termines wages in the market, but that productivity is affected by the amount of capital invested per em ployee. American workers are more productive not because they are any more intelligent than other workers, but because they have at their dis posal more efficient and more productive tools. These efficient tools alone cannot guarantee that profits will be made, since profits depend on the behavior of willing customers whose needs have been correctly an ticipated. However, once consumer preferences are correctly foreseen, then the more. producti ve the tools the more the marginal productivity of employees rises. What we may wisely ask of government is that it not interfere with capital formation and that it respect and protect private property and the right of every individual to contract and trade freely with others who are willing. @ ......FOOTNOTESIJohn Chamberlain, The Roots ofCapitalism (Indianapolis: Liberty Press, 1976), p. 245. See also Ludwig von Mises, Human Action (Chicago: Henry Regnery Co., 3rd ed. 1966), pp. 812-820.

2Claude Robinson, Understanding Profits (Princeton: D. Van Nostrand Co., 1961), p. 303. 3"Profit. Sharing," The Freeman, December 1973. 4Statistical Abstract of the United States 1976, U.S. Department of Commerce, Bureau of the Census. 5Robinson, op. cit., p. 79. 6 llImplications of representation trend for U.S. corporations," Harvard Business Review, January/February 1977. HThe Realities of CoDetermination," The AFL-CIO American Federationist, October 1977. llParticipation by Agreement," Lloyds Bank Review, July 1977.