Regulations PaperworkTo reduce unemployment, we need a free market in labor.

by Richard A. Epstein

The latest government labor report indicates that job growth has slowed once again. It is now at a three-year low, with only an estimated 74,000 new jobs added this past month. To be sure, the nominal unemployment rate dropped to 6.7 percent, but as experts on both the left and the right have noted, the only reason for this “improvement” is the decline of labor force participation, which is at the lowest level since 1978, with little prospect of any short-term improvement.

The Economic Logic of Supply and Demand

One might think that these figures would be taken as evidence that a radical change in course is needed to boost labor market participation. The grounds for that revision rest on a straightforward application of the fundamental economic law of demand: As the cost of labor increases, the demand for labor will decrease. There are, of course, empirical disputes as to just how rapidly wage increases will reduce that demand for labor.

The federal government has apparently (and foolishly) assumed that these effects will be small, and that the unemployed can somehow be better helped by government interventions into the labor markets. However, only a free market in labor is able to balance changes in both supply and demand, so as to reduce the incidence of unemployment. Government efforts to impose various minimum wages will, happily, have little adverse effect if the market wage is greater than the government mandate. But the same form of increase could have devastating effects on labor markets when the required wage is set too high relative to market wages. The number of workers eager to take jobs at these higher levels will be great, but the number of jobs available at that wage level will shrink. Unemployment levels will increase, and working off the books could increase.

The correct policy choice is strong deregulation of labor markets, which will spur higher labor market participation, albeit at somewhat lower wages. But once people get into the labor force, they can hone their skills in ways that will allow them to command higher wages. Government mandates can never lead to sustainable wage increases. Higher levels of labor productivity can. And this critique of minimum wage laws is equally applicable to other labor market interventions, including overtime rules, family leave statutes, mandatory collective bargaining, and mandated healthcare benefits that likewise distort labor markets.

It is therefore disheartening to observe that the dismal failures in the current labor market have led to renewed calls for further government intervention at both the federal and state levels. More specifically, progressives are calling for a two-pronged program that couples increased unemployment benefits with increased worker protections on all these key fronts. This agenda will only deepen the current malaise.

The Living Wage Comes to de Blasio’s New York

The futility of these policies was made evident by two stories, which appeared side by side in the New York Times last week. The first of these stories carries the headline “After Winning a Raise, 175 Workers At a Queens Casino Lose Their Jobs.” That result would never have happened if the workers had won their raises by demonstrating higher levels of productivity to their employer, The Resorts World Casino. Instead, these wage increases were dictated by a labor arbitrator who doubled the base wages for workers in the casino under the living wage arrangement that he imposed on the firm.

No one should be thrilled that restaurant workers have to settle for wages of $5 per hour plus tips. But a steady job at that level is better than no job at the $12 base pay ordered by the arbitrator. The casino sought to raise food prices to compensate for the increased costs, but the law of demand applies to consumers as well. In hard times, they won’t stand for the increased prices, so the casino closed a food operation that could only operate at a loss, leaving 175 union members to scramble for jobs.

This sobering reality has not made the slightest impression on Mayor Bill de Blasio, who inserted himself strongly into the decision of the New York City Council to elect Melissa Mark-Viverito as its Speaker. Ms. Mark-Viverito served as a top labor union organizer in the healthcare industry before she joined the City Council in 2005, and her defiant acceptance speech echoed the long-term sentiments of de Blasio in seeking greater justice and equality for all New Yorkers. She pushed an agenda that will lead to further debacles in the mold of Resorts World Casino.

At this juncture, there can be no doubt that the control of the City Council has passed from more traditional Democrats, who showed commendable awareness of the downside of aggressive labor market intervention, to firebrands who think that they can help their constituents by initiating legislative warfare against the business interests whose health is essential to job creation in New York City.

The dominant force behind Ms. Mark-Viverito’s rise to power was the Working Families Party, so we can be sure that all restraint has been cast to the wind. The WFP is headed by a shrewd activist and union organizer Dan Cantor, who champions massive government interference in labor and housing markets in New York City. The WFP aggressive agenda calls for the living wage laws on projects that receive City funding, which will translate into fewer projects that the City will be able to afford.

For folks like Dan Cantor and his allies, demand curves do not slope downward, so in their minds the greater burdens on employers will result in simple wealth transfers to workers, without any adverse collateral effects whatsoever, including loss of jobs. That short-sighted thinking is sure to have adverse effects on the economic prospects of New York City. Existing employers may not abandon the City entirely, but they will surely cut back on their operations wherever possible by locating key portions of their businesses in more hospitable jurisdictions. Other investors who might have thought about coming to New York are more likely to look elsewhere. The mindless jubilation of the New York City Council is likely to be curtailed once these dim realities set in.

Congressional Mischief

The economic naiveté in New York City does not stand alone. The same pressures are at work at the federal level as well, where the bad employment numbers have been used to justify further federal intervention into labor markets. A recent angry New York Times editorial is entitled “No Jobs, No Benefits, and Lousy Pay.” As an accurate reflection of the state of the U.S. economy, the title should lead the Times to reconsider the policies that it has long defended in the face of their obvious failure. No such luck: The Times is determined to double-down on policies that have already failed.

It is strongly in favor of the use of long-term unemployment benefits to cushion the blow to those who are unemployed. But it never asks the hard questions about the potential downsides of these programs. This initiative creates an incentive for others to cut back on their search for new jobs. At best, it is just not certain which way the causality runs. Do unemployment benefits create the very risk of long-term unemployment that they are intended to respond to? Do the taxes that are needed to fund these benefits take resources out of the private sector, which helped to drag the rate of job creation to its current low levels?

The same can be said about the Times’ support for sharp increases in the minimum wage laws, which are based on the dubious grounds that the minimum wage historically stood at half the average wages, not the third of averages wages ($7.25 to $20.10) that it stands at today. But the Times offers no explanation as to why that historical ratio supplies the correct normative benchmark for thinking about labor regulation. The closer the minimum wage gets to average wages, the greater its distortions on market activity. Moreover, these distortions will have synergistic interactions with other forms of labor regulation, including the proposals for mandated sick leave with pay, which is high on the WFP’s agenda for New York City. In combination, such policies are likely to further aggravate the effects of government intervention.

That point is, however, totally lost on Ross Eisenbrey of the Economic Policy Institute, which is a faithful backer of additional interference in labor markets. Writing in the Times, he claims that it is now time to expand the Fair Labor Standards Act of 1938 so that it covers a higher percentage of salaried workers. Once again, the historical averages are thought to supply the proper benchmark, and Eisenbrey of course has no trouble establishing that relative to inflation, fewer salaried workers are now exempted from overtime protections, which he regards as a key feature of the labor markets. To be sure, Eisenbrey recognizes that this new turn of the regulatory screw could deter employers from asking workers to work overtime. But he regards that shift as commendable because it could lead in his view to the creation of new jobs to fill the excess demand, which is in line with the views of the 1938 New Deal champions of the bill.

But it is all an exercise in wishful thinking, for there are many other scenarios that could take hold once the overtime limits are done. Eisenbrey does not ask whether it would be exceedingly difficult to add new workers to the mix if there is no place for them to work, whether the cost of additional training makes this option prohibitive, whether the new workers will need to receive costly certifications to take their new positions, or whether the short-term requirements of additional labor makes it unwise to add on workers.

Once these possibilities are on the table, it is clear the rosy predictions of the New Deal managers ignore a range of unpleasant possibilities that could follow from the tightening of overtime rules. For example, some current workers could be sacked from their positions and replaced by a smaller number of higher-salaried workers who are still exempt from these overtime restrictions. Or the business could decide to reduce the scale of operations, costing other workers jobs, because it cannot turn at existing levels of operation once the new restrictions are imposed.

The Better Way: Deregulation

It is just fantasy to think that the addition of any new constraint to labor markets will make matters better than they are. Efforts to make workers better off by making employers worse off will not have their desired effect. It is of course easy to take employers down a notch. But the second half of the program is far harder to implement, given that employers have incentives to minimize their losses from regulation, and will do what it takes to avert the adverse effect of new external constraints.

Labor markets are no different from other markets. They work because they create win/win relationships. In contrast, the government’s regulatory efforts to create win/lose relations will not work. What those efforts will get are the lose/lose scenarios that have been the bitter fruit of recent labor market regulations.

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This article is reprinted from Defining Ideas, a journal of Stanford University’s Hoover Institution.

Richard A. Epstein, Peter and Kirsten Bedford Senior Fellow at the Hoover Institution, Laurence A. Tisch Professor of Law at New York University, and senior lecturer at the University of Chicago, researches and writes on a broad range of constitutional, economic, historical, and philosophical subjects. He has taught administrative law, antitrust law, communications law, constitutional law, corporate law, criminal law, employment discrimination law, environmental law, food and drug law, health law, labor law, Roman law, real estate development and finance, and individual and corporate taxation. His publications cover an equally broad range of topics. His most recent book, published in 2013, is The Classical Liberal Constitution: The Uncertain Quest for Limited Government (2013). He is a past editor of the Journal of Legal Studies (1981–91) and the Journal of Law and Economics (1991–2001).

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