Governments Assault on Freedom to Work


Dr. DiLorenzo holds the Probasco Chair of Free Enterprise at the University of Tennessee at Chattanooga;

This essay suggests ways of thinking about one of the most important economic freedoms—the freedom to earn a living. Economic freedom may be defined generally as the freedom to trade or to engage in any consensual economic activity.[1] In the context of the labor market, economic freedom means the freedom of an employee or a group of employees to “trade” labor services in return for remuneration.

Since free trade in the labor market is mutually advantageous, it benefits both parties. Moreover, labor market freedom entails many other freedoms, such as freedom of contract, of choice, and of association. To maximize their own well-being, workers and employers must be free to contract with whomever they want, to associate with whomever they want, and to have as wide a choice of labor market options as possible, so long as they don’t interfere with the equal rights of others. Thus, an unregulated labor market is most conducive to individual workers’ (and employers’) pursuit of happiness and economic well-being as they subjectively value it.

Government can play two different roles regarding the labor market. One role is to serve as a “referee” by enforcing voluntary contracts, protecting private property rights, and generally maintaining the rule of law. Government, in other words, can enforce the rules of the game without directly determining the outcome.

The second role of government is to make rules that determine the outcome by passing legislation and issuing regulations that affect wages, working conditions, and other aspects of labor markets. This second role is the predominant objective of governmental labor policy in democratic countries, and it conflicts with the objective of economic freedom. Rather than protecting private contracts and private property, government all too often attenuates the rights of both individual workers and employers.

The reason governments do a poor job of protecting these rights is the basic asymmetry in political decision-making in democratic countries. Generally speaking, governments pass legislation to benefit relatively small, well-organized, and well-financed interest groups. The costs of the legislation are usually hidden and widely dispersed among the general public. To promise voters well-defined and exaggerated benefits, and to hide the costs, is the route to a successful political career.

Thus, labor legislation is typically (but not always) intended to improve the economic well-being of one group by diminishing another’s. Such laws infringe on the economic liberties of individuals and groups that axe less politically effective.[2] Most labor legislation, in other words, amounts to protectionism—it tries to protect the jobs and incomes of one group of employees by restricting the opportunities of others. Like protectionist trade policies, such laws tend to impoverish an entire nation while providing benefits to a relatively small, politically active minority.

The types of legislation (and their economic effects) to be discussed are: 1) union legislation, 2) domestic labor legislation, and 3) immigration legislation. Given that there are literally thousands of labor laws and regulations, the following analysis is at best a preliminary assessment of economic freedom in the labor market. Only the most severe labor market interventions are considered.

Although preliminary, Such an analysis is important because labor market freedom is arguably the most important economic freedom of all. Without the freedom to earn a living, citizens are bound to become ever more subservient to the state.

I. Union Legislation

Much labor legislation deals with the relationships between unions and employers. From the perspective of economic freedom—especially freedom of association—there is nothing particularly objectionable about “combinations of labor” any more than there is about any other combination of individuals for whatever purpose, so long as the group does not interfere with the equal rights of others. A government that respects economic freedom will not restrict the rights of individuals to associate freely with one another, nor will it restrict the fights of individuals who choose not to be associated with any such groups.

Labor law in democratic countries contains much rhetoric about protecting freedom of association, but in reality it does a poor job of it. Governments interfere or meddle with private contractual relationships between workers (or their unions) and employers on a massive scale. Most union legislation attempts to replace private, voluntary labor contracts and agreements with governmental edicts. In essence, it socializes labor relations. Furthermore, much legislation confers special privileges on labor unions often to the detriment of individual workers and employers.

Compulsory Unionism. One example of such legislation is laws that encourage or even mandate unionization. In the United States, for example, labor legislation discusses the importance of freedom of association, but then it talks of such freedom in terms of freedoms “to form, join, or assist labor organizations[3] for the purpose of collective bargaining. Many of the employee “rights” protected by U.S. labor law are ones that can be advanced only through unionization.

Thus, an important measure of labor market freedom is the degree to which labor law protects individual workers rather than unions as organizations. Since the interests of individual workers are quite often in conflict with the interests of union officials, a legal framework that encourages or mandates unionization diminishes individual economic freedom. Laws that mandate collective bargaining, for example, are a restriction of workers’ (and employers’) freedom. A worker may prefer to bargain individually, and an employer may prefer to ignore a union.

The benefits of individual, rather than collective, bargaining are clear. Research in labor economics has shown that collective bargaining tends to reduce the dispersion of wages. More specifically, more productive workers are usually paid less than they could have earned had they bargained individually, whereas less productive workers often earn more, as union wages are set at something close to the median wage within a bargaining unit. Thus, if collective bargaining imposes an outcome on all employees, it is bound to make some of them—usually the most productive ones—worse off.

Despite the fact that some workers are made worse off, it is illegal for workers in a unionized industry in the United States and many other countries to bargain individually. Such bargaining is deemed an “unfair labor practice” and is a punishable offense.

Yellow Dog Contracts. With regard to employers’ rights, it is illegal in many countries for an employer to refuse to bargain with a union. In the United States it is a per se violation of the National Labor Relations Act to refuse to bargain with a union, but it is not illegal for a union to refuse to bargain with an employer. So-called “yellow-dog” contracts—agreements between employers and employees not to have a union—have been illegal in the United States and many other countries for decades.

Labor historians have found that one of the reasons for such contracts (which, it is worth stressing, were voluntary) was the desire by workers to avoid the work disruptions and loss of wages during strikes that characterize unionized industries.[4] Moreover, since such agreements were voluntary, they must have benefitted employers and employees, just as all voluntary free market agreements do. Either party was free to end the employment relationship “at will” if dissatisfied.

The only way that such agreements could persist in a free marketplace is if they were “efficient” in the sense that they enhanced the welfare of both parties—the anti-union employees and employers who must have believed that unionization would not be in their best interest. Thus, legislation that outlaws such contracts must necessarily make some workers and employers worse off.

Exclusivity. Another aspect of labor legislation that grants special privileges to unions at the expense of economic freedom for workers is so-called exclusive representation. Exclusivity gives a union, once it has been certified, the legal right to be the exclusive bargaining agent for all workers in a bargaining unit, whether they wish to be represented or not. Any attempt by employers or workers to bargain individually—even over the most mundane things—is illegal.

Exclusivity gives unions a legal monopoly in the employee representation business. It not only is illegal for workers to bargain individually with their employers; exclusive representation legislation also prohibits bargaining through another, competing union, or any other agent.[5]

Protected from competition by exclusive representation laws, unions act like all other monopolists: they restrict their “output” and raise their prices. Bemuse unions face no competition in the employee representation business, they are less constrained than they otherwise would be from charging excessive dues and also are likely to provide fewer services to their members.

Evidence of the latter type of behavior abounds. In the United States, unions are major participants in all sorts of political muses that are unrelated to labor relations or to the economic welfare of their members. Unions have been active in the pro-abortion movement; they have spent considerable resources in support of left-wing authoritarian governments in Central America, Africa, and elsewhere; they are part of the anti-nuclear power movement; they have lobbied for sanctions against the South African government; and they actively lobby for socialistic economic policies (i.e., price controls and nationalization of some industries) that, by hampering economic growth, are not in the best interests of the workers they represent.[6]

Exclusivity allows unions to shirk some of their basic responsibilities, such as contract administration, bargaining, and grievance handling, in order to pursue political causes that are irrelevant or even harmful to the economic welfare of workers. An indication of how far afield American unions have strayed from their basic responsibilities is a 1989 Supreme Court decision that it is unconstitutional to compel workers to pay union dues to finance activities that are not directly related to bargaining, contract administration, and grievance procedures. In the case of Beck v. Communication Workers of America, the Court found that the union spent less than 20 percent of its dues revenues on appropriate expenses. The other 80 percent was spent on politics. Other cases have found that as little as 10 percent of dues revenues are spent on legitimate purposes. The Supreme Court ruling will likely weaken the monopolistic grip that unions have over their members, but exclusivity continues to entrench much of their monopoly power.

Because of the monopoly powers granted to them by exclusivity legislation, unions may also be unresponsive to their members’ demands for changes in collective bargaining strategies. There have been many cases in the United States, for example, where workers were convinced that they would have to make concessions if they wanted to remain employed. Union officials, however, often have refused to heed the preferences of their members, sometimes causing the members to lose their jobs. Unions would be more likely to cater to their members’ preferences if there were competitors in the employee representation business, but such freedom of choice is precluded by law.

Agency Shop. A further infringement on the economic liberties of workers is the so-called agency shop, whereby workers who do not belong to a union must nevertheless pay union dues. The rationale for the agency shop is derived from exclusivity. Since unions are required to bargain for all workers (union and nonunion) in a bargaining unit, it is supposedly necessary to compel all workers to pay for bargaining services.

In the terminology of economics, collective bargaining is said to provide workers with “public goods,” and compulsory union dues supposedly are necessary to prohibit free riding. But since government created the situation where all workers are forced to submit to a single monopoly bargaining agent, a better phrase than “free riders” would be “forced riders.” Workers are forced to accept the results of union bargaining and, where an agency shop exists, also are forced to support the union financially. To workers who are worse off because of this arrangement, exclusivity creates a “public bad,” not a public good: workers are forced to pay dues for the “privilege” of being made worse off. An agency shop literally constitutes taxation without representation and is a serious encroachment on economic freedom.

Union Violence. The long history of union violence can be readily explained by economic theory. In order to push wages above competitive levels, unions must restrict the supply of labor services on the market. They strike or threaten to strike in order to do this, and strikes are often more effective if workers who choose not to strike can be intimidated by violence. Employers also can be subjected to violence, threats of violence, and the destruction of property unless they acquiesce to union demands.

II. Domestic Labor Legislation

Governments also deprive workers of economic freedom through laws and regulations that affect wages and working conditions. Although these restrictions vary greatly, they all share the common element that they substitute governmental for individual (or market) decision-making. They all are carried out under the pretense that government somehow has better knowledge of the “best” wages, hours of work, types of jobs, and so on, than individual workers and employers have. This type of thinking is what F. A. Hayek calls “the fatal conceit” because of the dire economic consequences to which it lends intellectual support.

Minimum Wage Legislation. Most democratic countries have a minimum wage law that raises wages of low-skilled workers above going market rates. Virtually any economics text explains that mandating above-market rates causes unemployment by pricing low-skilled workers out of jobs. There is no better example of a law that hurts those whom it purports to help or that constitutes a clearer infringement on economic liberties. As Adam Smith said in The Wealth of Nations, “The patrimony of a poor man lies in the strength and dexterity of his hands,” and to deprive him of this through restrictive labor legislation “is a manifestencroachment upon the just liberty both of the workman, and of those who might be disposed to employ him.”

The minimum wage law even harms workers who are not priced out of the market by it. If employers are forced to pay higher wages, they either will lay off some workers or cut back on other fringe benefits so that the total compensation package doesn’t exceed each worker’s marginal productivity. Thus, freedom of choice is diminished for workers who may prefer a different mix of wages and fringe benefits.

The minimum wage law is inefficient and inequitable, but it persists for several political reasons. First, it lends itself to demagoguery better than most government policies. It is natural for politicians to claim to be able to solve social problems by simply passing a law, and what nicer law than one mandating higher wages for the poor?

A second reason is that unions want to price unskilled nonunion labor, which competes with more skilled, union labor, out of the market. In the name of compassion for the poor, unions lobby for legislation that makes the poor even poorer. The minimum wage is a device through which the poor are used as political pawns to the benefit of demagogic politicians and politically active unions seeking protectionist legislation.

Maximum-Hour Legislation. Another infringement on economic liberties is maximum-hour legislation which, in general, limits the number of hours that workers can work and/or mandates that higher wages must be paid for any work hours over a specified amount. Since overtime pay provisions increase labor costs, the effect is to reduce the level of production and, consequently, the number of hours worked. Individuals who prefer to work more hours or to vary their work hours over the course of a week may be precluded from doing so.

Davis-Bacon Laws. Another related measure of labor market intervention is the existence of laws, such as the Davis-Bacon Act in the United States, which mandate that government-specified wages be paid. In the case of Davis-Bacon, the government-specified “prevailing wage” in an area must be paid on all Federally supported construction projects, even if the Federal support is less than 1 percent of the cost of the project. The “prevailing” wage is almost always the union wage, and the effect of the Act is to drive lower-wage, nonunion labor from the market. Making wages artificially high restricts competition from lower-wage firms, depriving their owners, managers, and employees of economic opportunities.

Restrictions on Child and Female Labor. For over a century various countries have prohibited or limited child and female labor. The rationale behind the restrictions is that they supposedly are needed to protect women and children from being exploited by employers.

Even though this rationale for regulation is widely accepted by the general public, the regulations are not likely to protect the intended beneficiaries. It is difficult to perceive that regulations prohibiting such work would benefit those individuals who voluntarily chose to work. If they felt they were being made worse off by their employment situation, they would simply quit.

There is evidence, moreover, that when such regulation originally was being proposed in England there was fierce opposition to it by the women whom the regulation was supposed to help. It is likely, therefore, that such regulation may always have been designed to protect incumbent workers from competition.

Occupational Licensing Laws. Occupational licensing laws have been shown to create barriers to entry in literally hundreds of professions in the United States and many other countries.[7] The restrictions come in many forms, such as license fees, educational requirements, and regional or national examinations.

Licensing has been defended on the grounds that it assures professional competence and pro-texts consumers from lower-quality products and services. These arguments may or may not have merit, and they will not be discussed in detail here. But regardless of the motivation for the laws, their effect is to make it more difficult to enter regulated professions. Consequently, many individuals are deprived of employment opportunities.

This licensing-induced reduction of employment opportunities likely imposes a greater burden on lower-income individuals rather than on higher-income people since it often deprives the former group of valuable opportunities to accumulate human capital—opportunities they may not otherwise be able to obtain.

Again, there is much evidence that occupational licensing is often a political response to pressures from incumbent practitioners who want protection from competition. An anecdote will illustrate what I believe to be typical of the politics of occupational licensure.

Economist Walter Williams recently appeared on a televised debate with Congressman Charles Rangel. Williams, who is black, made the point that the licensing of hairdressers in Rangel’s home state of New York discriminates against blacks. It does so, said Williams, because to become certified as a hairdresser one must pass a practical exam as well as a more academic one that includes math problems. (The relationship between the ability to cod hair and the ability to do mathematics is, to say the least, dubious.) Williams pointed out that an equivalent percentage of blacks passed the practical exam as whites, but the failure rate of blacks on the academic exam was several times higher than the whites. Williams blamed the discrepancy on inferior government schools that so many black New Yorkers are compelled to attend.

Congressman Rangel, who also is black, did not dispute the test results and did not deny that the system kept many of his constituents unemployed. But he nevertheless supported the licensing system. His preferred “remedy” for urban unemployment was not to eliminate the sources of unemployment, such as occupational licensing laws, but to increase welfare spending.

This type of behavior is readily explained by elementary public-choice logic. On the “demand side,” the unionized practitioners are well organized and well financed politically, and are able to use the political process to protect themselves from competition with occupational licensing regulations. Those who are harmed by the regulations are not well organized and, hence, are less politically effective.

From a “supply side” perspective, politicians can win votes from the incumbents by supporting licensing, and they can also win votes from those who are denied employment opportunities because of licensing by offering them welfare payments or government patronage jobs.

In this instance the citizens whose liberties are abridged are made effective wards of the state either as welfare recipients or by relying on another form of handout—a government job—for their livelihood. Thus, occupational licensing is yet another way in which the poor are used as mere political pawns by cynical political opportunists.

Equal Pay for Equal Work Laws. These laws are intended to protect certain groups, particularly women, from wage discrimination by mandating that employers pay equal wages for the “same” work performed by workers of different sex and race. The irony is that these laws result in reduced employment opportunities for those who are supposedly helped.

If an employer pays females less than males, for example, it is because he subjectively values female labor less highly. He may genuinely believe that his female employees are less productive and less capable, or he may simply be discriminating against them because they are women. In either ease, equal pay for equal work laws will induce the employer to hire fewer female workers. If forced to pay equal wages, the employer will prefer male workers. Thus, women who are willing to work at least temporarily for lower wages in order to prove that they can do the job are denied the opportunity.

In other words, women can provide employers with economic incentives to hire them, despite discrimination, but are not permitted to do so because of “equal pay” laws. Thus, equal pay for equal work rules, which are supposed to reduce discrimination, actually increase it.

That these laws harm the groups they are supposed to help is made clear by the fact that in some countries, such as South Africa, there is no pretense that the laws are supposed to protect people who are discriminated against. In South Africa, white racist labor unions lobbied for “equal pay” laws for black workers because they knew the laws would protect white employees from competition by relatively less shred black workers. Since most blacks were less experienced, forcing employers to pay them wages that exceeded their marginal productivity would price them out of jobs.[8] In other countries the motivation behind the laws may be well-intentioned, but the effects are the same.

Equal pay for equal work laws reduce economic freedom, but “equal pay for work of comparable value” legislation would be even worse. This is a proposed system of governmental wage determination whereby government bureaucrats, rather than the marketplace, would set wages, I will not say anything more about this other than it’s already been tried—in the Soviet Union, China, and Eastern Europe—and it doesn’t work. History shows that such governmental control over wages is grossly inefficient and inequitable.

Employment Quotas. Most democratic governments have policies that require employers to make some of their hiring and promotional decisions solely on the basis of non-economic factors, such as race or sex. Obviously, this denies individuals the freedom to seek employment or career advancement based on merit.

In the United States, employment quotas originally were enacted with the promise that they would not be used to force employers to make decisions based solely on race. The late Senator Hubert Humphrey promised that the Civil Rights Act of 1964 “does not require an employer to achieve any kind of racial balance in his work force by giving preferential treatment to any individual or group.” The phrase “affirmative action” was coined by President Kennedy in his executive order that “affirmative action” should be taken to assure that Federal contractors do not make employment decisions based on race, creed, color, or national origin.[9]

In practice, so-called affirmative action policies do exactly the opposite of what their proponents claimed they would. They require that employment decisions be made specifically according to employees’ race, creed, color, or national origin. Consequently, “non-preferred” individuals who may be more qualified are passed over by employers who must satisfy the government’s preferences for discrimination in the workplace. There is mounting evidence, moreover, that even many of the “protected” minorities are denied economic opportunities because of affirmative action policies.

Economist Thomas Sowell has found that the relative economic position of “protected” minority groups in the United States actually fell after employment quotas were instituted. “In 1969, before the federal imposition of numerical ‘goals and timetables,’ Puerto Rican family income was 63 percent of the national average. By 1977, it was down to 50 percent. In 1969, Mexican American family income was 76 percent of the national average. By 1977 it was down to 73 percent. Black family income fell from 62 percent of the national average to 60 percent over the same span.”[10]

Sowell also found that blacks with less education and job experience have fallen farther behind, while blacks with more education and experience have been advancing even faster than their white counterparts. He offers a clear explanation of this phenomenon:

Affirmative action hiring pressures make it costly to have no minority employees, but con-tinning affirmative action pressures at the promotion and discharge phases also make it costly to have minority employees who do not work out well. The net effect is to increase the demand for highly qualified minority employees while decreasing the demand for less qualified minority employees or for those without a sufficient track record to reassure employers.

Those who are most vocal about the need for affirmative action are of course the more articulate minority members—the advantaged who speak in the name of the disadvantaged. Their position on the issue may accord with their own personal experience, as well as their own self-interest.[11]

Thus, like the minimum wage and occupational licensing laws, employment quotas deny employment opportunities to those who need them the most—relatively unskilled and uneducated minorities who are “targeted” for help by the government.

Government “Jobs” Programs. All democratic governments have long been involved in employment or job training programs. Despite their popularity, however, they reduce economic liberties and employment opportunities.

It is impossible for government to “create” jobs because of the law of opportunity cost. Government may “create” some jobs with such programs, but it necessarily destroys other private-sector jobs by diverting financial resources from the private sector (through taxes, government borrowing, or inflationary money creation) to pay for the government jobs. At best, government “jobs” programs alter the composition of employment, but not the aggregate level.

Furthermore, many government jobs are wasteful because they don’t meet legitimate consumer demands. The history of government jobs programs is filled with examples of “make work” jobs that seem to emphasize poetical patronage more than employment opportunity.[12]

The reason government jobs programs remain popular despite their failure to stimulate employment (or training, for that matter) is that the benefits are well defined—job recipients know where the jobs came from and whom to thank (or vote for)—whereas the costs are hidden. Those unemployed because of the crowding-out effect of these programs have no idea of the cause of their unemployment.

This is one way—generating unemployment—that government jobs programs diminish economic freedom. They also impair economic freedom and opportunity because the kinds of jobs and training determined by government bureaucrats are not necessarily those that people would freely choose in the private sector. This allows government bureaucrats to exert a degree of control over what types of jobs will exist and what types of skills people will possess.

Giving government such powers opens the door for ever-expanding governmental control of the allocation of labor. In totalitarian regimes such as the Soviet Union there is a nearly complete domination of the labor market by government. Its “jobs programs” are so extensive that everyone works for the state. The only “real” jobs in the Soviet Union are ones held by black marketeers.

In Nazi Germany, government officials were allowed to monitor and control every proposed job change, thereby directing workers into those endeavors the bureaucrats thought served “national interests” regardless of the interests of individuals who comprised the nation.

Of course, modern democratic governments don’t possess anything like the powers over labor markets that the Soviet Union does or Nazi Germany did. But the differences are only a matter of degree (albeit a large degree). Along with extensive employment programs, all democratic countries keep extremely detailed personal information on workers and labor markets, and they use that information to shape government policy.

Government employment programs threaten economic freedom in a very general sense in that consumer sovereignty is replaced by bureaucratic sovereignty. In a free market the types of jobs created are those that serve the desires of consumers. Government jobs, on the other hand, usually are designed to serve the whims of political authorities, which often are in conflict with consumers. After all, if there is a legitimate consumer demand, there is an incentive for a private entrepreneur to meet it and to hire workers to assist him in doing so. Thus, to a large extent, government jobs are created to provide goods or services that consumers either have not expressed a preference for or, if they have expressed a preference, it was a negative one.

Mandatory Government Arbitration. All the labor market interventions discussed thus far involve government’s attempt to intervene in private contractual relations between workers (or their unions) and employers by setting wages, establishing bargaining procedures, and so forth. In addition, governments also intervene in the arbitration of labor disputes. The U.S. government, for example, has a “Federal Mediation and Conciliation Service” that cajoles negotiating parties into “voluntarily” cooperating in order to end a labor dispute. The federal government has only limited power to mandate a settlement for most workers (with the exception of those covered by the Railway Labor Act), but it can apply significant political pressures to achieve that end in virtually any industry. The effect of this intervention is that disagreements between workers (or their unions) and employers often are settled according to criteria established by the Federal Mediation and Conciliation Service, not by the negotiating parties.

Although there is no formal power to force such agreements on most industries, the federal government’s ability to “induce” an agreement should not be underestimated. American industry is so heavily regulated, and so many businesses accept government subsidies, that government has a tremendous amount of leverage over the private sector. Government has a long list of “carrots and sticks” it can use to affect private bargaining outcomes. It can threaten regulation and the withdrawal of subsidies, or it can bribe the bargaining firms and unions with promises of subsidies and other governmental favors.

Occupational Safety and Health Regulation. Modern democracies also heavily regulate “occupational safety and health.” This intervention gives government enormous powers over private labor relations because an argument can be made that almost any aspect of a business operation is at least tangentially related to safety and health. Governments have taken advantage of these broad powers to regulate everything from the construction of ladders to the shape of toilet seats.

Research has shown, however, that occupational safety and health regulation is not likely to improve workplace safety, despite massive expenditures.[13] Furthermore, the regulation has interfered with market forces, which “address” the problem through compensating wage differentials. That is, in a free market, employees in more dangerous jobs will be paid higher wages, all other things equal. Employers must pay higher wages to attract workers to more dangerous jobs. This won’t necessarily eliminate or even reduce the incidence of workplace accidents but, then, neither does regulation. Furthermore, reliance on compensating wage differentials, rather than regulation, would avoid the loss of jobs associated with the heavy costs of occupational safety and health regulation. It also would give workers and employers more freedom in determining how to improve workplace safety, rather than relying on bureaucratic edicts.

There is much to commend this market approach, for no one has stronger incentives to assure a safe workplace than employees themselves. Regardless of how well-intentioned the safety regulators may be, they just don’t have the incentive or the detailed knowledge required.

It should be kept in mind that there are economic (and common-sense) incentives to reduce workplace accidents, for accidents are costly to employers and especially to workers. And it should be remembered that governmental “safety” regulation can provide a false sense of security. Job safety depends ultimately on how careful and responsible individual workers are. If they are told by governmental safety inspectors that their workplace is “safe,” they may be less inclined to take their own precautions. The end result may be a less safe workplace.

Employer Payroll Taxes. All democratic countries have mandatory employer payroll taxes, the most significant of which are taxes for unemployment insurance and old-age pensions, or social security. A detailed examination of the economic effects of such programs is beyond the scope of this essay, but several aspects of them are particularly relevant to economic freedom.

First, these programs constitute what might be called “mandated benefits,” whereby governments compel employers to finance certain benefits on behalf of their employees. One implication of this is that employees consequently have less freedom of choice to determine their own mix of wage and non-wage remuneration• Furthermore, even though the taxes are at least partly paid by employers, they are passed on to employees in the form of lower wages or other benefits, thereby constituting a hidden tax on workers. Because the tax is hidden, workers are less able to make well-informed choices regarding their own compensation mix.

Government-operated unemployment insurance and social security programs often allow governments to become monopolists in the provision of those services. There are many actual and potential substitutes for these government-controlled programs but it is difficult, if not impossible, for them to compete with government. For example, individual retirement accounts (IRAs) compete with the Social Security system in the United States, but since the system drains so much income from workers through mandatory payments, there is much less available for private retirement plans.

It also would be possible for individual workers to contribute to an IRA-type account to be used as unemployment insurance, but governments usually prohibit such options. This is especially unfortunate in light of the many failures of governmental unemployment insurance, which essentially pays people not to work by offering unemployed work-crs “replacement income” as a percentage—sometimes close to 100 percent—of their prior wages.

By reducing the cost to workers of being unemployed, unemployment insurance lengthens the duration of unemployment. It also increases unemployment by indirectly subsidizing industries that experience seasonal or cyclical variations in employment.

For example, without unemployment insurance a firm with an unstable employment pattern would have to pay higher wages to attract workers. The higher wage would be necessary to compensate workers for the risk of becoming unemployed. But with unemployment insurance the government compensates workers for bee ming unemployed. This in turn makes unstable employment more attractive to workers than it otherwise would be. The increased supply of labor in those industries will reduce wage rates, which in turn diminish the incentive for firms to do anything about unstable employment patterns. Thus, unemployment insurance encourages unstable sectors of the economy to expand, resulting in higher overall unemployment.

Both unemployment insurance and social security taxes are major infringements on the economic liberties of workers and employers, because they place severe limitations on freedom of choice, freedom of exchange, freedom of contract, and freedom of association. Because government controls a significant portion of workers’ income through these programs, and because the programs crowd out private-sector alternatives—if the law permits alternatives at all—individuals are denied all these freedoms.

Peter Ferrara describes how the Social Security system infringes upon individual economic liberties. Government-controlled social security, he writes,

. . . forces individuals to enter into contracts, exchanges, and associations with the government that they should have the right to refuse. It prohibits individuals from entering into alternative contracts, exchanges, and associations with others concerning the portion of their incomes that social security consumes. It prevents individuals from choosing courses of action other than participation in social security, although these courses of action will hurt no one. It prevents individuals from enjoying the fruits of their own labor by taking control of a major portion of each individual’s income. The program prevents individuals from arranging their own affairs and controlling their own lives. It operates by the use of force and coercion against individuals rather than through voluntary consent. The social security program thus restricts individual liberty in major and significant ways, violating rights that are worthy of great respect.[14]

The same can be said for any government-mandated benefit program.

Taxes on Labor Income. Perhaps the most important interference with an individual worker’s economic freedom is the income tax. The income tax denies a worker the ability to keep the fruits of his or her own labor, and is truly a way in which workers are exploited—by government.

Karl Marx’s labor exploitation thesis was half right. He complained that labor was unfairly exploited because it supposedly produced all value—an incredibly naive and simplistic assumption—yet it received only a small part of it in the form of wages. Marx was correct about labor being exploited, but he was wrong about who the exploiters were. By blaming capitalists, he ignored the productive contributions of capital and entrepreneurs. He also ignored the fact that government is the major source of worker exploitation by expropriating income to which government itself has no legitimate claim. Ironically, Marx was a strong proponent of progressive income taxation, which exploits workers even more than proportional taxation.

Income taxation is, in effect, a form of slavery or forced labor. It forces individuals to pay taxes so that part of their income is given away to someone else—farmers, corporations, welfare recipients, defense contractors, unions, and thousands of other well-organized special interest groups—who did nothing to earn or deserve it. H. L. Mencken’s dictum that an election is an advance auction in stolen property is as true as it is trite.

Of come, not all income that is taxed is necessarily used for government-mandated income transfers. To the extent that some of it is used to finance a criminal justice system, national defense, and in generally maintaining the rule of law, it enhances rather than diminishes economic freedoms. However, these functions are a relatively minor aspect of the modern welfare state. The modern state is a vast income redistribution machine that shuffles wealth around within the middle class.

Mandating Job Security. Many countries have various laws and regulations that supposedly guarantee “job security” by restricting the flow of capital Laws that make it more costly or prohibitive to close down a plant are examples. Such laws may be well-intentioned, but they deprive workers and business owners of economic freedom and are undeniably harmful to a nation’s economy By hampering economic growth, they ultimately impoverish the workers in whose name the laws are enacted. Job security laws, in other words, reduce job security.

Advocates of such legislation usually ignore the fact that workers and employers often negotiate various types of “job security” provisions in their contracts. It must be realized that if, for example, a union wants a contract that includes severance pay if the plant doses down, that provision will be “paid” for by a negotiated reduction in wages or other fringe benefits. There is no free lunch; acquiring such benefits requires trade-offs. That’s why laws that mandate job security provisions reduce economic freedom. They deprive workers of freedom of choice by forcing them to accept one particular benefit—a benefit they may not want if they know how much it costs them in terms of for-gone wages. So-called job security legislation also deprives employers and business owners (shareholders) of economic freedom. It prohibits them from making the best use of their resources, which can only be impoverishing.

III. Immigration

Freedom of migration is a basic human right that is essential if individuals are to be free from governmental oppression. The ability to change employment or to seek employment elsewhere—even in another country—is a hallmark of economic freedom. Thus, free immigration and emigration is most conducive to economic freedom and opportunity.

No country in the world has perfectly free immigration. The United States is generally regarded as among the most free—there are about twice as many immigrants entering the U.S. each year as there are in all the rest of the world combined. Yet America does place restrictions on immigration.

Since all countries place some limits on immigration, one method of comparing them is by calculating the allowable number of immigrants as a percentage of the nation’s population.

Taxes on Immigration. Some countries charge immigrants fees or taxes. In such cases large statutory numbers of allowable immigrants may not be very meaningful if the charges are so high as to exclude large numbers of people. Therefore, the existence of “entrance fees” into a country is another criterion that may be used. The amount of the fee may be standardized as a percentage of average annual income in the country receiving the immigrants.

Enforcement. Many countries are concerned about illegal immigrants. From the perspective of labor market freedom, however, the more illegals the better. The fact that the United States finds that its enforcement of illegal immigration is weak, and that its borders are “out of control,” is a plus. Consequently, another measure of labor market freedom is the budget of the appropriate immigration enforcement agency as a percentage of the nation’s total governmental budget. The higher the budget allocation, the stronger the enforcement and the lesser the degree of economic freedom.

Labor Market Tests and Lists of “Undesirables.” In some countries, laws specifically outlaw immigration if the immigration enhances a free market in labor. In the United States, immigrants are required to prove that their employment won’t displace an American worker and that their presence won’t reduce wages. This is clearly a protectionist law instigated by organized labor.

Some countries limit immigration according to racial or ethnic criteria. America has a long history of discriminating against Chinese and Japanese immigrants in this way, although such discrimination was outlawed in 1965.

Amnesty. Granting amnesty to illegal immigrants who over a period of years have established “roots” in a country dilutes immigration restrictions and, consequently, enhances economic freedom.

Temporary Workers. Since a half a loaf is better than none, countries that allow temporary “guest workers” exhibit a higher degree of economic freedom, all other things equal, than those that don’t.

Concluding Thought

Government at all levels spends hundreds of billions of dollars each year ostensibly to help theunemployed and others living in or near poverty. Despite these massive expenditures, however, the welfare state is a failure. Paying people not to work only fosters perpetual dependency.

Rather than continuing to fund a counterproductive welfare system, a more direct means of reducing poverty would be the deregulation of labor markets. As this essay has shown, the major forms of government intervention in labor markets serve only to “protect” certain groups of workers from competition by denying job opportunities to others. More often than not, those workers who are denied job opportunities because of government intervention are those most in need: the least skilled, least educated, and least affluent. []

1. Economic freedom requires a set of customs, moral constraints, or laws that prevent individuals or groups from committing violent or coercive acts against others. Thus, mutual consent between two burglars plotting a robbery, for example, is not an example of economic freedom in the sense we are discussing.

2. See Bernard Siegan, Economic Liberties and the Constitution (Chicago: University of Chicago Press, 1980); Richard Epstein, Takings (Cambridge, Mass.: Harvard University Press, 1985); and Terry L. Anderson and Peter J. Hill, The Birth of a Transfer Society (Stanford, Calif.: Hoover Institution Press, 1980).

3. National Labor Relations Act, Section 7 (emphasis added). Quoted in James T. Bennett, Dan C, Heldman, and Manuel H. Johnson, Deregulating Labor Relations (Dallas: Fisher Institute, 1981), p. 50.

4. Morgan O. Reynolds; Power and Privilege: Labor Unions in America (New York: Universe Books, 1984), p. 98.

5. Thomas J. DiLorenzo, “Exclusive Representation in Public Employment: A Public Choice Perspective,” Journal of Labor Research, Fall 1984, pp. 371-90.

6. For a detailed discussion of the political agenda of organized labor in the United States see James T. Bennett and Thomas J. DiLorenzo, Destroying Democracy: How Government Funds Partisan Politics (Washington, D.C.: Cato Institute, 1985), chapter 13.

7. A thorough discussion of the economics of occupational licensing is found in S. David Young, The Rule of Eperts: Occupational Licensing in America (Washington, D.C.: Cato Institute, 1987). See also R. D. Blair and S. Rubin. Regulating the Professions (Lexington, Mass.: Lexington Books, 1980); and Timothy R. Muzondo and Bohumir Pazderka, “Occupational Licensing and Professional Incomes in Canada,” Canadian Journal of Economics, November 1980, pp. 659-67.

8. Waiter E. Williams, South Africa’s War Against Capitalism (New York: Praeger, 1989).

9. Thomas Sowell, Civil Rights: Rhetoric or Reality? (New York: William Morrow & Co., 1984), p. 39.

10. Ibid., p. 51.

11. Ibid., p. 53.

12. Thomas J. DiLorenzo, “The Myth of Government Job Creation,” Cato Institute Policy Analysis, February 1984.

13. W. Kip Viscusi, “The Impact of Occupational Safety and Health Regulation.” Bell Journal of Economics, Spring 1979.

14. Peter J. Ferrara, Social Security: The Inherent Contradiction (Washington, D.C.: Cato Institute, 1980). pp, 275-76.


September 1991

comments powered by Disqus


* indicates required
Sign me up for...


July/August 2014

The United States' corporate tax burden is the highest in the world, but innovators will always find a way to duck away from Uncle Sam's reach. Doug Bandow explains how those with the means are renouncing their citizenship in increasing numbers, while J. Dayne Girard describes the innovative use of freeports to shield wealth from the myriad taxes and duties imposed on it as it moves around the world. Of course the politicians brand all of these people unpatriotic, hoping you won't think too hard about the difference between the usual crony-capitalist suspects and the global creative elite that have done so much to improve our lives. In a special tech section, Joseph Diedrich, Thomas Bogle, and Matthew McCaffrey look at various ways these innovators add value to our lives--even in ways they probably never expected.
Download Free PDF