The Demand for Labor; H. Sennholz

The demand for labor springs from its usefulness in the satisfaction of human wants. The potential de mand is as infinite as man's wants and desires. Some are necessary to sustain his life, others to please his fancy. When his desires are boundDr. Hans Sennholz heads the Department of Econom ics at Grove City College in Pennsylvania. He is a noted writer and lecturer on economic, political and monetary affairs. less, his labors are endless. They set a task he can never accomplish, and create work he can never finish. The specific demand for labor de pends on the preferences and choices by entrepreneurs in the labor mar ket. Their bidding for labor in turn is dependent on their anticipation of the productivity of labor, which is the val ue consumers ascribe to labor ser vices. It provides an excellent guide and sets a definite limit to employer bidding for labor. Interdependence of demand and productivity does not imply a con stant relationship. It does not follow that a rise or fall in productivity must result in proportional changes in the demand for labor. Modern eco nomics rejects "quantitative anal ysis" because there are no constant relations that would permit quanti tative measurement. Even if a stat istician were to demonstrate that, at a given time and place, a ten percent 83 84 THE FREEMAN February rise in labor productivity brought forth a twenty percent rise in the de mand for labor, no such relationship may exist at other times and in other places. Human behavior toward la bor and every economic good is var iable. Different individuals ascribe different values to labor and the products of labor. In fact, the same individual may change his valua tions under changing conditions.

Production for the future must be ever mindful of the future and must anticipate future changes. Prices may change and affect the economic outlook. When wage rates are rising, employers must reflect on the pos sibility that the rates may soon re vert to the old rates, that they may remain where they are at the pres ent, or that they will rise still fur ther in the future. Employers must give thought to the future prices of the product, which may rise, fall, or remain the same. In short, employer bidding for labor always hinges on the anticipation of future labor productivity. The Productivity of Labor Consumers, who are the ultimate directors of the production process, attach value to labor services. They judge labor like any other factor of production, by the improvement it adds to their well-being. Economists put it succinctly, labor is valued ac cording to the anticipated improve ment expected from the employment of an additional laborer. They call it "marginal productivity." In simple words, a worker's productivity is de termined by the value consumers at tach to his services and achieve ments. Employees, employers and capitalists, all are subject to the whims and wishes of consumers who want to be served at the lowest pos sible price. Employers', therefore, are eager to buy all the specific labor they need for production at the low est price. But they must compete with other employers who are guided by similar considerations, offering wages high enough to attract the needed labor from their competitors.

To remain in business they must out bid competing employers and pay the market rate, which is forever ad justing to the "marginal productiv ity" for each kind of labor. If, for any reason, employers should offer wage rates that are lower than the productivity rates, a profit margin \\rould appear. People eager to take advantage of the mar gin would bid for more labor and thereby push wage rates back to the height set by productivity. Surely, employers are interested in buying labor at the lowest possible price. But no one alone, or together with others, can actually lower his rate without creating a profit opportu nity for competitors. Other employ ers and would-be employers seeing bargain labor would want to seize the opportunity and buy additional 1985 THE DEMAND FOR LABOR 85 labor, which would lift wage rates back to the rates set by productivity. Many economists have gone astray at this very paint of labor market competition. From Adam Smith to Jean-Baptiste Say, John Stuart Mill, Alfred Marshall, and a host of dis ciples, they all lamented a conjec tured failure of the competitive or der; they all devised their specious doctrines of labor's disadvantage and exploitation. Their doctrines and theories in turn gave birth to the la bor movement that commonly aims at replacing the competitive private property order with a political com mand system. They induced govern ments the world over to embark upon radical government intervention in order to favor laborers at the ex pense of the owners of capital. In time they caused governments to re strict labor market competition and bestow legal privileges on workers' combinations and unions. Contem porary policies continue to reflect their notions and prejudices.

Guided by such spurious doctrines modern man is eager to use the force of law to raise his wage rates and im prove his condition. Ever angry at his "disadvantages," he does not hesitate to use his political appara tus of coercion. His government may set minimum wage rates and man date expensive benefits; disobedi ence is visited with fines and prison sentences. His labor association may engage in violent strikes in order to raise wage rates and reduce labor output. In every case he brings forth the specter of falling demand and rising unemployment, that is, people willing and able to work but unable to. find employment at the coercive rate. Economists call it "institu tional" unemployment. It must not be confused with "temporary" mar ket-generated unemployment. Directed by Consumers Directed by consumer choices and preferences, employers buy definite performances at market rates. They do not knowingly buy labor at rates that can be expected to result in fi nancial losses, nor do they for long retain labor that usurps income from investors and entrepreneurs. In fact, they discharge submarginal work ers whenever they can, in order to preserve the production process and safeguard their own jobs as well as those of other workers.

Consumers acting on free markets may be responsible for fluctuations in wage rates. They may cause some to rise and others to fall and thereby reassign labor to various fields of production. Some rates may rise in reaction to rising consumer valua tion and appreciation. Others may fall in response to declining con sumer demand. But all such declines do not create mass unemployment unless wage rates are forcibly pre vented from readjusting. Industries may shrink and vanish because of 86 THE FREEMAN February changing consumer aspirations and changing production technology. They may cut wage rates and reduce fringe benefits until laborers prefer to seek other employment. But such changes do not cause institutional unemployment. At the market rate of wages anyone willing to work can find employment and anyone look ing for labor can find it. A worker may be discharged be cause his employer is readjusting the production process in response to changing consumer demand. Or, having failed to adjust in time, the latter may face liquidation in bank ruptcy, which releases all labor.

Workers discharged may not imme diately take another job; they may search for a better opportunity in other markets. They may want to re loca te in another community or move to another climate. For anyone of a thousand reasons they may choose to wait for a more propitious opportunity. Their unemployment, being the outcome of both market change and individual choice, is "temporary" and must not be con fused with "institutional" unem ployment, which is as persistent as the institutional force that is creat ing it. Temporary Unemployment Man is not free to choose perma nent unemployment. He must labor in order to sustain his life and pro vide some comforts of living. In an exchange system he must adjust his labors to the demands of the market where his fellowmen manifest their wants and desires. Failure to adjust promptly to changing conditions may lead to unemployment. There may be technological un employment, which always attracts a great deal of popular interest.

Technological progress may reduce the number of workers needed to perform certain operations. Com puter production and management may result in simplifying and short ening the production processes, thereby reducing the number of workers required to perform them. Labor-replacing machinery and me chanical handling may result in a reduction of the number of workers needed to man a workshop. The worker displaced by techno logical changes faces the risk of an extended period of unemployment unless he chooses to adjust quickly to the new situation. He may move to another industry that is expand ing and bidding for more labor. Or he may choose to wait until his for mer employer recalls him. After all, the new process of production that displaced him usually results in lower goods prices and an increased demand for the goods. It may lead to an expansion of business and may necessitate the rehiring of dismissed wor kers and the addition of new workers.

New tools of production need to be 1985 THE DEMAND FOR LABOR 87 manufactured, installed, serviced, and operated, all of which require human labor. The new machines need designers, draftsmen, manu facturers, truck drivers, program mers, installers, operators, and re pairmen. In most cases the laborer who is displaced by a machine may be qualified to work with it in some capacity. If, however, he makes no ef fort to learn and adjust, preferring to wait and see, the displaced worker may not get the job. Instead, it may go to a white-collar worker or a young school graduate who is eager to learn. In recent decades manufacturing employment has been declining while certain service industries have expanded rapidly and required ad ditionallabor. Supported by massive government spending, the health care industry, especially for the el der ly, has grown significantly. It has absorbed some labor set free by man ufacturing industries. In many in stances, however, displaced factory workers refuse to make the move to another industry in another loca tion; they had rather wait until they are called back or their unemploy ment benefits run out.

There may be seasonal unemploy ment. It is the composite effect of cli matic and institutional forces that are felt regularly each year. Farm employment in the United States, for instance, rises from early spring un til fall, then declines sharply as winter approaches. Many other activ itiesare subject to similar fluc tuations. Construction is affected di rectly by changing weather condi tions. In the snow belt a cold winter may bring most outdoor construc tion to a halt. Intermingled with the climatic variations are the effects of institutional factors. Industries as sociated with education, for in stance, are affected by the schedul ing of the school year from September to June. Retailers are af fected by the designation oftax dates by federal and state governments. Holidays have a wide range of eco nomic effects. Christmas and Easter have major impacts on the volume of business; other holidays, such as July 4, Memorial Day, and Labor Day usually are of less effect. They all create an annual cycle that is re current and periodic.

Seasonal Fluctuations The list of industries directly af fected by seasonal factors is surpris ingly large. Seasonal influence is clearly discernible not only in agri culture and construction, but also in iron and steel, automobiles, tires, ce ment, glass, shoes, appliances, con fections, men's and women's cloth ing, and many others. Many businesses shut down or curtail op erations during seasonal slumps. Industries subject to seasonal fluc tuations obviously need to compete for available labor with other indus88 THE FREEMAN February tries that offer more regular em ployment. They can compete effec tively only if their wage rates are high enough to induce a sufficient number of workers to prefer sea sonal over regular employment. The structure of wage rates reflects the seasonal irregularity in demand. Some workers prefer seasonal em ployment over year-round work; they may enjoy seasonal unemployment, which to them may be self-employ ment during the off-season. Most teachers love their seasonal unem ployment; they call it vacation. Some may prefer to be fully employed throughout the year; they may teach during the school year and labor in commerce and industry, or seek self employment during their vacations.

Migrant farm hands may bend their effort in custom grain harvesting, starting in Oklahoma and following the season north until it ends in northern Saskatchewan. Fruit pick ers may start in southern California and end up in British Columbia. During the winter they may retreat to their homesteads in Mississippi and Florida. In every case the wage and fringe benefit structure of the seasonal industry adjusts to the ir regularity and thereby secures the needed number of workers. There may be a great deal of un employment of older workers. Many make little effort to adjust to a new situation, which makes employers reluctant to hire them. This wellknown tendency is deeply rooted not only in custom and convention, but also in human nature itself. As he grows older, man may resist changes. When strength and energy wear away, his economic productivity tends to decline. But he may expect to be paid according to seniority, rather than productivity, which may make him more expensive than younger competitors. And even if he were to earn identical wage rates, his unit costs of production may rise as his productive efficiency declines.

Productivity and Income Self-employed people are much more aware of the direct relation ship between productivity and in come than employees. They are pre pared to face declining incomes when personal productivity declines in ad vancing age. The physician or den tist who attends to fewer patients readily accepts the fact that his in come may decline. The businessman knows that his profit will shrink when his output decreases. But his aging employees tend to forget it; they may expect a stream of raises and improvements until they choose to retire. Their costs continue to rise while their productivity declines, which makes them primary targets for disemployment. In other words, there are no employment contracts calling for wage cuts after age 40, 50, or 60, but there is a great deal of un employment. It also explains why 1985 THE DEMAND FOR LABOR 89 self-employed people generally con tinue to labor in their professions long after employees have retired.

Government usually compounds the trend by imposing laws and regula tions that aim at benefiting elderly employees. But benefits exacted by force merely raise employment costs and thereby disadvantage the in tended beneficiaries even more. Physical strength and prowess may diminish early in life, but man may continue to grow in experience, knowledge and wisdom throughout his life. As long as he is growing, his economic productivity may be ris ing. There is no specter of unem ployment, which appears only to submarginal workers. Unskilled la borers who have nothing to sell but their physical strength may become submarginal at an early age; they may become "old" in their thirties when youthful vigor is fading away. Factory hands who acquire their skills in a day or two become "old" early in life. Skilled workers who are masters of a difficult trade need not fear the competition of younger peo ple; they may enjoy highest personal productivity in their middle years.

Professional people who may be studying and learning all their lives may achieve their highest produc tivity in their fifties and sixties. The philosopher who inquires into the nature of things and synthesizes all learning may be at his best in his seventies and eighties. He has nothing to fear of the competition by his younger colleagues. And yet, they all may fall prey to cyclical unemployment, which throughout recent history has been one of the great economic and social evils. Workers are laid off en masse when business is caught in the throes of depression. Millions are idled, and in time are impoverished, as economic wheels grind to a halt. Depression time is readjustment time. Economic production is read justing to consumer demand, capital markets are correcting the mistakes made in the past, and labor markets are reassigning labor in response to changing demand. Cyclical Unemployment The public is poorly informed about cyclical unemployment. Un der the influence of Mainstream Economics, most people are led to be lieve that depressions are the evil fruit of the competitive order. In reality, depression and unemploy ment are the inevitable outcome of government interference with money and credit. They are the con sequences of boom-and-bust policies that lead to credit expansion, fol lowed by credit contraction. The harm is wrought during the eco nomic boom; it is corrected with much pain during the depression that follows.

Before the 1930s, when there was little government intervention, the 90 THE FREEMAN February depressions were relatively short and mild. There was little unem ployment. After all, there was no in stitutional restraint on the labor market, no minimum wage legisla tion, no unemployment compensa tion. When economic production was forced to readjust, labor would read just with equal speed and efficiency. It would freely move about the labor market and shop around for the best available position. Workers labored from dawn to dusk, especially dur ing depressions. Chronic unemploy ment was utterly alien to them. Institutional Unemployment The specter of mass unemploy ment first made its appearance when government became a back-seat driver. In 1930, when there was some cyclical unemployment, the govern ment urged business not to adjust, but to increase business spending. Municipalities and states were called upon to boost their spending for public works. The back-seat dri ver erected trade barriers, ran huge budgetary deficits, doubled in come taxes and raised business taxes, and in many instances, seized control over the car while denounc ing the driver. He set minimum wages, ordered fringe benefits, ex acted and paid unemployment com pensation, and introduced collective bargaining, all of which served to hamper the labor market. They gave rise to institutional unemployment.

Government is a necessary evil, like wheel-chairs and crutches. It protects the lives and property of its citizens from aggressors and wrong doers. Our need of it reveals that there is evil in the world. The evil is multiplied if government itself be comes the instrument of evil. It may govern too much and thereby kill the self-help and energy of the governed. It may neglect to protect the prop erty of the citizenry, or even prey on it for its own benefit or that of oth ers. It may engage in massive trans fer that seizes income and wealth from productive citizens and doles them out to its constituents. And in a moment of omnipotence it may in terfere with economic production and enforce wage rates that cause mass unemployment. Government may set minimum wages. For any number of political reasons, it may issue minimum-rate mandates and call on courts and po lice to enforce them. To judge the economic effects of this intervention it is important to determine the re lationship of the mandated rate to the market rate, that is, the mini mum rate imposed by courts and po lice versus the going rate paid in the labor market. There are three con ceivable possibilities with varying effects: 1. The police rate may be lower than the market rate; it may be $1 per hour, for instance, but everyone is earning more than the minimum.

1985 THE DEMAND FOR LABOR 91 No apparent ill effects may come from such intervention that actually does not intervene. It is potentially harmful, however, as the markets may change and cause some wage rates to fall below the minimum, in which case the minimum would now be higher than the market rate and. give rise to unemployment. More over, it is conceivable that some youngster may not yet produce the minimum, which would cause him to fall into unemployment or, if he chooses to ignore the mandate, be come a criminal in the eyes of the law. 2. The police rate may coincide with the market rate. Again, no ap parent ill effect may come of the mandate. However, market changes may cause the police rate to be higher than the rate the market would set. In this case the minimum costs of some workers would exceed their productivity; they would be come "submarginal" and face unemployment. 3. The police rate may be higher than the rate the unhampered mar ket would set. This is the normal case of minimum wage legislation.

After all, government means to lift the wage rates of poor people above the given rates in order to benefit them and earn their political sup port. It is unfortunate, however, that workers who produce less than the legal minimum tend to be unem ployed. Every time government raises the minimum it boosts the un employment rolls. It may want to raise the minimum from $5 an hour to $6 by mandating a higher hourly rate or adding fringe benefits. It may want to benefit millions of Ameri cans who are earning less than $6 an hour, by lifting their incomes by or der of court and police. The order is issued to all employers alike-prof itable employers, marginal employ ers who manage to cover their costs and earn a going rate of return, and submarginal employers who are earning less. Profitable employers earning re turns higher than the going rates, may be able to cover the higher labor costs. The minimum mandate merely prevents them from forming more capital and expanding their businesses, and may discourage them from hiring new labor. The marginal enterprises will become submarginal as a result of the min imum wage boost. They will be earn ing less than they could earn in fields that require no minimum wage la bor. In reaction, employer-entrepre neurs may choose to curtail their most expensive production. They may dismiss some labor, ineluding minimum wage labor. Submarginal enterprises may do the same. The pressure of competition may force them even more than the others to curtail loss-inflicting output and dis charge unneeded labor. The curtail ment by both, the marginal and sub92 THE FREEMAN February marginal enterprises, reduces the supply ofeconomic goods on the mar ket, which in time may raise their prices.

Consumers are the ultimate bosses of the production process. They set prices and determine the payroll. It is a wellknown fact that consumers usually buy fewer goods at higher prices, and therefore require less la bor. How much less? Noone can fore see the consumers' reaction, which may vary from product to product and may change over time . It is likely, however, that some are pre pared to pay higher prices, which will permit employers to pay higher wages. As no one can know in ad vance how high prices will rise in re action to the reduction in output and how many will pay the higher prices, no one can know in advance how many workers will find employment at $6 an hour. If 10 million people were to benefit from the wage man date, 8 million, perhaps, may enjoy the boost and 2 million may be cast from the employment rolls. At other times and in other places 5 million workers may partake of the boost while 5 million may be condemned to long years of unemployment.

Benefit Mandates Government intervention may take the form of benefit mandates for some or all workers. To be popular and "progressive" government may mandate new labor benefits. If wage rates are not reduced promptly to compensate for the boost in benefits, total labor cost may exceed the mar ginal productivity of some workers and, therefore, create unemploy ment. To reflect on employment and unemployment is to consider total cost, which usually comprises not only the workers' take-home pay and tax exaction, but also numerous em ployee benefits. Employers may be ordered to provide certain benefits or contribute to them. They may be directed to pay unemployment com pensation, workman's compensa tion, paid vacations, healthcare ben efits, and contribute to old-age and disability benefits and other labor causes. To ponder over the demand for la bor is to compare the productivity of labor with the cost of labor, that is, total cost. It is irrelevant to employ ers how the various shares of labor cost are to be distributed, as· take home payor fringe benefit, as pay roll tax or contractual contribution to Red Cross or the Little League.

What matters is a comparison of to tal cost of labor with its productivity. If the former is made to exceed the latter, unemployment sets in. Unemployment caused by benefit mandates may be temporary if other compensation is permitted to adjust. If a mandate raises labor cost by 10 percent and the unemployment in time depresses wage rates by 10 per cent, they cancel each other. In the 1985 THE DEMAND FOR LABOR 93 end, the mandate merely ordered benefits for workers and, by way of unemployment and wage rate ad justment, made them pay for the benefits. It is illusory to believe that government can for long force inves tors and entrepreneurs to grant ben efits without receiving labor in return. Some of the benefits accomplish the very opposite of what their po litical sponsors mean to accomplish. Unemployment compensation is de signed to alleviate the pains of un employment and facilitate the search for a job. But it is an unfor tunate fact that every boost in un employment taxation levied on em ployers raises the cost of labor and thus reduces the demand for labor.

In deep recessions with heavy un employment, state governments are quick to raise tax rates and bases, which invariably raises the unem ployment. States with high rates of unemployment taxation suffer from high rates of unemployment. Production Barriers Reduce Labor Efficiency Government may erect production barriers that reduce the productivity of labor. It may raise business taxes, boost environmental costs, erect trade barriers, impose regulations and controls. It may engage in def icit spending and consume business capital, reducing labor productivity. If labor costs are not reduced simultaneously they may exceed the mar ginal productivity of some workers and thereby create unemployment. To judge the import of production barriers it is important to distin guish between new and old barriers, between new and old government in tervention. New barriers are those to which the price and production structures have not yet fully ad justed. The new business tax has not yet raised goods prices, business may still be in the throes of adjustment through reduction in output and dis employment of labor. The new trade barrier may not yet have had its full effect on output, prices and wages.

The new budget deficit that is con suming business capital and reduc ing labor productivity, may not yet have run its course. Readjustment to new barriers takes time; it may take several years of painful readjust mentuntil the apparatus of produc tion has adjusted anew to consumer demand. Old harriers are those to which the price and production structures have fully adjusted. The painful readjust ment is over, wage rates are lower, goods prices are higher, and the un employment that forced the labor adjustment lies in the past. Present unemployment cannot be placed on the doorsteps of old barriers erected during the 1960s and 70s. The ap paratus of production has adjusted to them. Today's unemployment must be explained in terms of new 94 THE FREEMAN February barriers to which the labor market has not yet fully adjusted, and in terms of insurmountable barriers to which no legal adjustment is feasi ble. Price and cost adjustment can not easily overcome the minimum wage barrier that prevents the em ployment of much unskilled labor, nor can it readily compensate for the generous subsidies granted to the unemployed. For many workers their choice ofjob or joblessness may depend on the difference between la bor income and unemployment com pensation. For them, the utility of la bor tends to shrink and that of leisure may rise whenever leisure is subsidized.

Unemployment compensation con stitutes a production barrier in the sense that it may induce some work ers temporarily to withdraw from production. It reduces the supply of labor, which in turn raises the mar ginal productivity and wage rates of the remaining labor. The boost tends to be temporary unless the compen sation succeeds in creating a stand ing army of unemployed. In that case, it must not be overlooked that the increase is accomplished at the price of mass unemployment and grievous suffering of the unem ployed. It is financed by unemploy ment taxes exacted from the income of the employed, and is borne by all members of society who are made poorer by the idleness of some of its members. Unemployment compensation is a rather ineffective method of raising wage rates and improving the economic lot of working people. Interference with Prices Government may. interfere with the pricing process and thereby lower the productivity of labor. If la bor costs are not adjusted simulta neously some labor may become sub marginal. As government is most keenly interested in "essential"

products and services,· e.g., fuel, util ities, steel, and the like, it may for cibly hold their prices below market rates, thereby depressing labor productivity. Throughout the 1970s the Federal Government kept oil and gas prices far below world market prices. The price controls, together with a fuel allocation program, struck hard at economic production and employ ment. It brought Sunday closings of filling stations, created long lines on other days, lowered home and office thermostats, and reduced commer cial air service. It brought energy brown-outs, and energy-related in dustriallayoffs. Once self-sufficient in energy, the U.S. was forced by price controls to supplement gas and oil supplies with overseas purchases. By 1980 no fewer than 69 govern ment agencies and a dozen Congres sional Committees were exercising authority on energy questions. Un employment rose from some 4.1 mil lion Americans at the beginning of 1985 THE DEMAND FOR LABOR 95 the decade to nearly 6 million at the end.

This is not to imply that the en~ ergy chaos was solely responsible for soaring unemployment. There were many other policies that contributed to the evil. There cannot be any doubt that the comprehensive price and wage controls imposed in 1971 were largely responsible for the se~ vere recession that was to descend on all markets in 1974 and 1975. Av erage unemployment in 1975 was es timated at 7.8 million Americans. If it had not been for the rampant in flation that was to follow, the un employment undoubtedly would have ~own worse. Inflation and Unemployment Under the sway of Keynesian doc trines and recipes, governments the world over are practicing deficit spending and credit expansion in or der to alleviate unemployment. They are convinced that such policies con stitute an efficient method for grad ually lowering labor costs. Lower real wages raise the demand for la bor and actually reduce unemploy ment. But the success of Keynesian policies depends entirely on the abil ity to deceive the workers and their unions or, if this should fail, to per suade them to suffer losses in real income.

Inflation and credit expansion as an employment policy cease to be ef fective when the workers resist the obvious reduction in real income. They are foiling the Keynesian plan when they demand wage boosts that compensate for the rise in goods prices. In fact, they may create new unemployment pressures when their contract demands anticipate future purchasing power losses. This is why moderate dosages of inflation no longer cause real wages to decline and the demand for labor to rise. Application of ever larger doses of inflation must, in the end, lead to a complete breakdown of the mone tary system and to mass unemploy ment. Double-digit inflation causes businessmen to hedge for survival. They invest their working capital in inventory and capital equipment, or other durable goods that are .likely to escape the monetary depreciation. Investors buy real estate, precious metals, and collectors' items. Eco nomic output, especially for consum ers, tends to decline, which causes goods prices to rise and unemploy ment to soar.

The ultimate folly of the Keyne sian recipe is a combination of infla tion and price control. Both together instantly paralyze all markets, ham per economic production, encourage consumption, and create goods shortages. They cause the exchange system with its magnificent division of labor to disintegrate and give way to a primitive command sys tem. Disintegration causes mass unemployment.

96 THE FREEMAN February Labor Unions Long before there was a Keyne sian recipe governments began to rely on labor combinations for im proving labor conditions. Guided by popular notions of labor's disadvan tage they bestowed legal immunities and privileges on labor unions so that they would raise wage rates above those the unhampered market would set. Unfortunately, simple economics reveals that disemploy ment sets in wherever labor costs are forcibly lifted above market rates. It does not matter whether govern ment or union is imposing the coer cive rates. The effects are the same: institutional unemployment. The rates may differ according to the measure of coercion. Government edicts usually are more comprehen sive and, therefore, more restrictive than union rules. Minimum wage legislation may affect millions of workers. Union coercion may be lim ited to a few companies in a few in dustries, which obviously limits their restrictive powers. As long as unionism is a limited phenomenon, the disemployment it imposes may bring forth an adjustment in non unionized employment. The labor market may absorb the labor set free by unions and thus prevent mass unemployment.

Disemployed union labor reduces the marginal productivity of unor ganized labor and depresses its wage rates. It creates a visible difference between union rates and market rates, which is both boon and bane to unionism. The difference ob viously helps to promote the union ideology according to which unions do raise wage rates and improve the economic conditions of all working people. It is a bane because it gives rise to much suffering. It creates un employment among union members and depresses the wage rates of all others. When union rates amount to double or triple the market rates, the industry usually falls on hard times. With the demand for its products and services declining, it tends to con tract, releasing labor, until it ceases to function as a viable industry. For eign producers may ultimately fill the gap torn by union restriction and industry contraction. The decline of a unionized indus try is bound to accelerate when the quantity and quality of labor may decline as a result of diminishing ef fort and application by the workers themselves. They may choose to loaf and goof off, dally and tarry, or do shoddy and shabby work. They may steal from their employer, damage their tools and equipment, and oth erwise sabotage the production pro cess. Union labor usually is angry labor pressing its grievances. When labor productivity declines for any reason, wage rates must be reduced simultaneously. Failure to adjust la bor cost to declining labor productiv ity leads to unemployment.

1985 THE DEMAND FOR LABOR 97 An Invitation to Labor Human life is a constant want and a standing invitation to labor. In dic tatorships, the invitation becomes a command that is enforced by court and police. In free societies, it takes the form of business demand for workers. Employers are bidding for labor in order to serve consumers who are the directors of the produc tion process. Unemployment Consumers judge the efforts of every worker and determine his in come. They decide upon employment and unemployment. Being weighed on their sensitive scales of produc tivity and cost, some labor is found wanting. In free labor markets it is free to readjust. In markets con strained by onerous rules and reg ulations it is condemned to chronic unemployment. @ IDEAS ON LIBERTY REAL wage rates can rise only to the extent that, other things being equal, capital becomes more plentiful. If the government or the unions succeed in enforcing wage rates which are higher than those the un hampered market would have determined, the supply of labor exceeds the demand for labor. Institutional unemployment emerges.

Firmly committed to the principles of interventionism, governments try to check this undesired result of their interference by resorting to those measures which are nowadays called full-employment policy: un employment doles, arbitration of labor disputes, public works by means of lavish public spending, inflation and credit expansion. All these rem edies are worse than the evil they are designed to remove. Assistance granted to the unemployed does not dispose of unemploy ment. It makes it easier for the unemployed to remain idle. The nearer the allowance comes to the height at which the unhampered market would have fixed the wage rate, the less incentive it offers to the ben eficiary to look for a new job. It is a means of making unemployment last rather than of making it disappear. The disastrous financial impli cations of unemployment benefits are manifest. On the unhampered market there is always for each type of labor a rate at which all those eager to work can get a job. The final wage rate is that rate at which all job-seekers get jobs -and all employers [get] as many workers as they want to hire. Its height is determined by the marginal productivity of each type of work.

LUDWIG VON MISES Donald R. Wells L. S. Scruggs The Free Banking Alternative ON MARCH 31,1980, a major piece of legislation was passed by Congress to deregulate commercial banks and other deposit-type financial institu tions. This deregulation took the form of phasing out interest rate ceilings on various types of time de posits and of extending the type of assets thrift institutions were au thorized to hold. However, this act took three steps in the opposite di rection: it required all banks, mem ber and nonmember, and all thrift institutions offering checkable de posits to hold the same percentage of these checkable deposits as non interest reserves, either in vault cash or on deposit with the Federal Reserve; it increased federal deposit insurance to $100,000 per account; Dr. Wells teaches in the Department of Economics and Dr. Scruggs in the Department of Finance at Memphis State University, Memphis, Tennessee.