Special Problems in Labor Markets | Basic Economics by Thomas Sowell | Ch. 12

We ended the previous chapter talking about minimum wage laws and their adverse effects on minority ethnic and racial groups. In this chapter, we dive deeper into more specific issues often presented to us about labor and markets, and what their economic effects are.

If you want to see my previous chapter summaries for Thomas Sowell's Basic Economics, please go here. Otherwise, here is the summary and my thoughts for Chapter 12!

Chapter Summary

I want to begin this summary with the quote Sowell also produces at the beginning of the chapter, from Peter Bauer:

The promotion of economic equality and the alleviation of poverty are distinct and often conflicting

I think this is actually a great beginning point for the chapter. Despite labor and allocation of non-human resources being economically identical in principle, we often view them differently. We are more concerned with things like the condition of the work environment, or the security of jobs, or chances of exploitation of workers — things that don't appear when we consider allocating scarce non-human resources. Because of this fact, we need to consider these special issues mentioned when we look at work and pay in the market. Let's begin.

Unemployment Statistics

Unemployment statistics tell us how many people that are legally allowed to be part of the labor market (e.g. NOT children, military forces, prison inmates, etc.), and yet cannot find (for whatever reason) employment despite seeking for it. It's a valuable statistic that can help us to see the health of an economy, but has its limitations — inherent in its definitions.

For example, unemployment rates don't account for people who have stopped actively looking for jobs. In this scenario, it's possible for the unemployment rate to decrease as the number of people without jobs actually goes up. This happened during the Great Recession during 2009 all the way to 2013, when 3.7 million people went from unemployed to non-employed. While political authorities may have touted the decreasing unemployment rate, the number of people without jobs was actually still increasing. In terms of measurement, it would be more prudent to look at the proportion of non-institutional adults that are working vs. not working.

This becomes an even bigger problem when comparing different countries. With different laws, different welfare programs, and different ways to measure such things, it's almost impossible to compare unless you know every country's intricacies in the way they employ, measure employment, and treat non-working people.

But the essential thing is to understand that people who are not employed are not automatically classified as 'unemployed'. And furthermore, there are different ways to classify 'unemployed'. For example, college students who just graduated are 'unemployed', but often only because they are still looking for jobs, but aren't going to fill jobs like table waiting or cashiering. Though often still under the umbrella of “unemployed”, these kinds of people are often markedly different than those who have been unemployed for more than a year and a half.

It's also different from things like technological unemployment, where advances in technology puts people out of work. This often doesn't produce a net unemployment, because jobs lost due to advances in tech are often replaced with jobs to support that new tech. But the people who are unemployed because of the new tech are not the same as the ones that go into the new jobs, because they may have different skill requirements. Thus, again, it is difficult to measure.

Working Conditions

Because we generally care more about people and their labor than goods, governments often regulate working conditions. Better working conditions are more attractive to workers, but also often mean lower scaling of pay, since employers must spend money to create those the better working conditions.

As an example, political authorities will often create benefit mandates (i.e. healthcare) for employers. This would create better working conditions, but incentivize employers to not hire as many employees, since hiring one more would actually cost the company more in required benefits. They would rather pay overtime for their current employees. This doesn't mean, of course, that safety laws aren't necessary—after all, we don't need a child to die in order to make sure they're safe from harm from negligent business owners. Thus, there is a balance that must be struck when determining how to make working conditions better through either law or simply letting the markets function.

Speaking of which, child labor laws are also an important aspect of society. In most countries, these laws are passed even before adult working condition laws are passed. Certainly, most successful societies would want to provide special protection for their most vulnerable. However, many child labor laws now prevent teenagers from working as well, despite them being quite capable. Many organizations, such as labor unions, are incentivized to keep these child labor laws, and even increase the age limits, so as to keep young people in school longer, and out of competition with their members.

Working hours are also a consideration. Many governments of modern societies specify limits on the number of hours one can work in a week. Furthermore, employees often must be given paid holidays. The reduction in work hours is often made so that more workers can be hired. However, the problem is that many societies (like France) require that pay stay basically the same within the shorter work hours, and so employers can not often hire more workers. In reality, it creates a higher wage rate per hour, which often eventually reduces the number of people hired.

But isn't having better working conditions in modern societies better than third world ones? A lot of international corporations are criticized for their low pay and bad working conditions in these third world nations. However, many of the jobs provided by these companies are actually far better, and more in demand, than local ones. Factory jobs are in high demand due to both pay, as well as working conditions, so much so that in Cambodia, people will bribe factory insiders for a job.

Of course, it certainly would be better if these workers had as good of pay or working conditions as their first world counterparts. But that doesn't mean that writing any laws would help. This is because local businesses have to compete for workers with the multinational corporations, so they often need to to increase their own wages as well. And so, the reality is that wages increase as more and more international companies locate to poorer countries. For example, in 2013, the Economist reported that wages in both China and India had been increasing by double digit percentages annually. International or multinational companies force local ones to compete, raising wages and cutting hours, simply because they are incentivized to do so. This is the power of the free market.

Collective Bargaining

Let's talk about how employees negotiate pay and working conditions with employers, often through things like labor unions (for employees) and owner franchises (like major league sports owners).

In negotiation, there are two sides: employer and employee. Both sides have organizations which they are part of. However, the function of these things are still the same economically. When employers collectively agree to put a cap on salaries (e.g. professional sports salaries), they are basically forcing a lower output, aka forced to have lower productivity. This causes workers to then go to other industries where they will be paid more for their work, thus creating loss for consumers where there was demand.

On the other side, if employees force a higher rate of pay that isn't met by the demands of the market, employers will need to re-evaluate what kind of people to hire. Because there is a minimum, these employers are required to look for workers who produce a much higher output than normal. Such higher output workers are often those with the most skill and experience, thus increasing displacement of new and fresh workers from the industry, and so increasing unemployment.

Thus, in both cases, unemployment is actually increased.

Free markets, on the other hand, will over time tend to create a greater balance in pay. In an interesting reversal, when black slaves were freed after the Civil War in the United States, this poor, vulnerable population was beset by organized attempts of white employers to keep black wages low. However, many white employers began to disobey these agreed upon maximums, and were able to lure more workers away to their side. With more productivity on their side, the 'disobedient' white farmers were able to plant and harvest more crops. This competition eventually overrode the agreed upon maximum wages, and real market conditions pushed up both the pay for black Americans, as well as employment.

Such cases of employer association can only really last a longer time by having the law on their side. In this way, professional sports leagues like the MLB have been able to extend monopolistic tendencies, creating no competition, and being the only game in town.

Labor unions similarly displace workers, and have lower output. The automobile industry in the United States was once the greatest output. However, many members began unionizing, demanding higher pay and better working conditions. Japanese car companies, on the other hand, had no union members. In 1950, the United States once produced ¾ths of all the cars in the world, while Japan produced less than a percent of that. By 1990, Japanese car manufacturers had not only overtaken American ones, but had built factories in the United States so as to circumvent export laws the US was trying to create to reduce Japanese automobile exports. By the time we get to the 21st century, Detroit automakers were laying off thousands of people, while Toyota was hiring thousands of American workers.

This, and many other examples besides, has resulted in the decline of unionization among the American workers.


There isn't necessarily a single definition of exploitation, which makes this difficult to quantify. For some, it is not paying workers enough for their labor (which we discussed in previous chapters). But what about employers who are somehow able to receive a higher compensation by charging more than necessary or pay less than necessary to their employees?

The problem with this line of thought is that, when others realize they could somehow gain a higher wage for doing less, they will begin to flood into that very industry in which such is perceived. This creates real competition, which will eventually drive down the price, and force those who are actually not being very efficient to become more efficient, or lose their business. Thus, the market over time actually prevents this kind of exploitation from happening.

It is when governments, with the power and authority of law, step in that we begin to see problems, since they are often create the real barriers against competition, whether it's the state of the MLB or using law to protect unions and labor associations. When individuals are freely able to choose where to work, rather than being held by law or contracts (e.g. Babe Ruth and the New York Yankees), they are then able to drive the competition that will both increase their own wages (Babe Ruth was only paid $80,000 a year, despite his obvious contribution to the Yankees), as well as fairness from employers. It is a problem that current doctors have with government-run healthcare systems.

Let's look at job security laws. In many countries, especially industrial or modern ones, job security laws exist to help reduce unemployment in an industry. However, what they often do is make it much more difficult to dismiss an employee, even if that employee is extremely incompetent. Thus, countries with strong job securities laws actually have high unemployment rates than other modern countries without them. This is because employers who have realized that firing an unproductive employee is an extremely costly endeavor, and so resolve to not hire at all. Instead, once again, they tend to stick to more skilled and more experienced workers.

Occupational Licensing

There is another side as well—jobs which require better trained and skilled workers. These jobs, like doctors, physicians, and attorneys, require licenses before these people can operate (for obvious safety reasons). These licenses have certain requirements, often stringent, before practitioners can legally perform their trade.

The problem with these isn't the licenses, but rather how the licenses are handed out. There are often times when licenses are created, but automatically distributed to all existing practitioners rather than requiring them to perform the requirements. In other cases, there are limits placed on the number of licenses available. In the latter case, it often creates a situation where the license becomes artificially scarce, and drives up the cost to get the license for practitioners. Such a thing has happened to taxi driving in New York City, in which buying an authorization has risen from $10 in 1937 to millions of dollars in 2011.

My Thoughts

Wow, this was a long chapter! But definitely worth the read. Again, Sowell is often so thorough, that it's difficult to have much more to say on the topic.

The idea of governments coming into an industry to regulate it, even if intended to be publicly beneficial (e.g. job security, wages, etc.) has at this point become such a bad idea, talking about it is like beating a dead horse. Yet, today, a lot of people are focused on how government should regulate Big Tech today.

Of course, as people should know by now, we have really huge problems with Big Tech. From censorship to election meddling through ad suppression or promotion, there's a lot that can be said about the dubious practices of Facebook, Google, and the like. And recently, there's been a massive hubbub as the US Senate called Mark Zuckerburg, Jack Dorsey, and others to interrogate them about their companies' practices.

But as I think back on the history of digital technology, one thing has stood out to me: the lack of government intervention has actually benefited the tech industry massively, especially in the United States.

If you were alive in the 1970's to 1980's, the dominant companies in tech were the likes of IBM, Motorola, and Xerox. Crossing into the 80's and 90's, Microsoft, Apple, and Intel came to the fore, and the previous three giants mentioned took a pretty big back seat. Then, heading into the 21st century, companies like Yahoo, Google, and Amazon began to make headwinds into the space, while Apple almost went bankrupt. Microsoft, interestingly enough, kept its dominance, but began to lose a lot of profit in the late 2000s. Of course, we know of the revival of Apple with Steve Jobs coming back, and their subsequent product introductions, including smartphones, tablets, and iPods. But around the same time, Facebook, Youtube, and Twitter became bigger things. Today, these are the companies that have become the mainstays, while the likes of Xerox, Motorola, and IBM are barely even thought of. Even Intel is losing steam pretty fast.

All this to say: the market, unregulated, has been the best check so far on technology. Though we certainly have problems with censorship and things today, I think it would be a grave mistake to assume that government will be the answer to these problems.

I mean, really, have you seen how old those Senators are?