April Freeman Banner 2014

ARTICLE

Jobsand How Not to Increase Them

FEBRUARY 01, 1982 by P. DEAN RUSSELL

When jobs are plentiful, all other domestic problems of a nation can be solved. But when jobs are scarce, other problems automatically become worse—especially social problems.

The individual who cannot find a job will eventually become either hopeless or desperate. If hopeless, he degenerates into a permanent liability on society. If desperate, he is a likely prospect for revolution. These two possibilities are equally destructive of the person and his society. Thus, from every viewpoint—social, economic, moral, or whatever—it is vital that we understand what causes unemployment. For only then can we work effectively toward solving this most pressing of all social problems—jobs for all who want to work.

As normal human beings, naturally we are distressed by the suffering that comes to the families of persons without jobs. But fortunately for the unemployed, our interest in the matter goes beyond mere pity. There is a far more vital reason why we want everybody in the United States to have a job. It is a selfish reason that directly concerns our own families. It is this. When they have jobs they can buy more from us and our jobs are thereby made more secure and better paying. That’s a powerful incentive and a primary reason why we should support any policy, and participate in any program, that will provide more permanent jobs at higher real wages.

When all is said and done, there is finally only one reason why any person in the United States who wants to work can’t get a job: His potential employers believe that the cost of hiring him is more than the anticipated income from his production or service; for no one—neither you nor I nor any employer—will knowingly hire workers at a loss.

An obvious way to test the validity of that statement is to assume that it’s false, and then to examine the consequences. So let us assume that there are unemployed persons who want to work, and that the product of their labor will sell for more than the cost of employing them, and that the potential employers know this, and that they just deliberately and knowingly refuse to add to their profits by hiring these men.

Such an assumption just doesn’t make any sense; for no businessman really prefers lower profits to higher profits. Businessmen have been accused of many things, but never that! The reason we can know with certainty that no businessman acts this way is because you and I don’t act this way. You and I would like to have more money for many reasons; the desire for a Caribbean cruise is included, as well as our wish to feed little children who are starving to death all around the world today. For in a “money economy” such as ours, the only thing that will keep them alive is money. That’s why you and I will always choose more money over less money, if that is the only issue involved. And that’s why businessmen will never choose smaller profits over larger profits in the long run. For businessmen are people too—as are stockholders and employees—and we all have a use for more money.

A Universal Principle

This universal principle of human motivation and action applies to everyone, regardless of the use to which the additional money may be put. Obviously, we never hire a person voluntarily if we believe that the cost of employing that person will exceed the income from that person’s pro duction or service. Stated positively, we will always hire a person when we believe that we can thereby increase profits.

When you get right down to it, this same universal motivation of self-interest is what causes the unemployed person to search for a job in the first place. He, too, has a long list of desires that require money for fulfillment; and the fact that food and housing and medicine come ahead of his desire to donate to charity does not in any way deny this universal principle of human action.

Now before we try to use this particular theory as an aid in solving the problem of unemployment, we first need to understand another (and closely related) principle that is also based on universal human action. The textbooks in economics usually list it under the heading of “marginal analysis”—in its various forms of cost, price, production, and so on. The explanations in those textbooks, however, sometimes become unduly involved with “tables and charts,” and the authors tend to forget that what we are talking about is not mathematics but human beings and why and how we exchange our goods and services.

All of us understand, of course, that no two persons are ever equal in all things, including their desires and abilities to work. We know in advance that when we measure the production of a group of persons, some will have produced more than others—unless, of course, it is forbidden by some law or regulation. Over a significant period of time, there is always one person who produces less than anyone else in the group; he is called the marginal producer or worker. That means simply that he’s the one whose production results in the least profit. Presuming that he’s paid the same hourly rate as his fellow-workers, the cost of hiring him will (under certain conditions) sometimes exceed the income from the sale of his product. Naturally this “marginal employee” is the one we let go first when someone has to be laid off. Obviously we don’t lay off the best workers first, not if we have any real choice in the matter.

The Marginal Unit

While we observe and practice this procedure all the time, we often forget just why we act this way. It’s because we prefer profits to losses, higher profits to lower profits, and higher wages and salaries to lower wages and salaries.

That’s why no employee keeps his job if he continually produces less than he is paid—other things being equal, of course, and presuming that his pay-production ratio is the only issue involved. The jobs of these marginal workers are always in danger. Any increase in costs of em ployment (without an offsetting increase in production and income) will always cause a decrease in jobs in any situation where pay is based on production.

This cannot be otherwise; for since we human beings are not equal, there is always a worker “at the margin” where profit shades into loss. And even a minor increase in costs can push him across the line. And when he loses his job, there is always another “marginal worker” right be hind him. For the purpose of illustrating how this works, assume that the “cost of employment” for a given worker is $4 per hour, and “sale of his hourly product” is $4.10. As long as this relationship continues to exist, that job is reasonably secure; for no company wants to decrease its income, not even by ten cents an hour.

Now increase payroll taxes—Social Security, for example—by four per cent, thus raising “cost of employment” above “income from sale of product.” Presuming that production and sales remain the same—and presuming no increase in the price of the product—that man loses his job. This must automatically follow; for a company will soon go bankrupt if its policy is to hire men who cost more than they produce. Such a policy would accomplish nothing except to throw all of that company’s employees into the ranks of the unemployed persons we wish to help. You might think that such a simple truism is understood by everyone; but as we shall soon see, it isn’t.

There are a score and more other ways that this same loss of jobs can be achieved—wage increase with no increase in production, decreased production at the same wage, a decrease in price with no increase in sales, and so on. Always the marginal worker (including, of course, the marginal worker on the management level) loses his job when cost of employment increases relative to income from production. Nor does it make any difference whose fault it is—government, union, or management; the job still disappears. And, of course, there are “marginal departments” and “marginal companies” in exactly the same sense that there are marginal workers; the only difference is that groups of persons lose their jobs when costs of a department or company exceed income from the production of that department or company. That’s what “red ink” means—cost has exceeded income; there are no profits, but only bankruptcies, loss of capital, and unemployment.

Creating More Jobs

With this background on how and why you and I act the way we do—and why managers of successful companies act exactly the same way—perhaps we are in a better position to study some of the measures now being proposed to increase jobs in industry. Among them are the shorter work week at the same (or more) pay, double time for overtime, increased minimum wages, longer paid vacations, earlier retirement with higher pensions, increased social security coverage, and a host of others. The argument in support of these measures is that they will force employers to hire additional men, or that the measures will increase incomes and spending and thus (indirectly) will increase jobs, or both of these hoped-for results at the same time.

Clearly, each of these proposals has an effect on costs of production. Thus, necessarily, each has an effect on jobs. Since the minimum wage is perhaps the most popular (and certainly the least understood) of these measures, let’s here use it as representative of all of them. Just what is the relationship between jobs and minimum wages?

Apparently the advocates of minimum wage laws are unfamiliar with marginal analysis and the fact that every human being has a long list of unsatisfied wants. Even though the advocates of minimum wages will never knowingly spend two dollars to get back one dollar, they fail to understand that all businessmen are bound by this same principle of universal human action. For example, the overwhelming majority of the advocates of a minimum hourly wage of $3.35 for restaurant and laundry workers will not pay 30 per cent more than they now pay for a meal in a restaurant or for the work done by commercial laundries. Like you and me, they never spend their money for something they value less when they are free to spend it for what they value more. Thus because they need their money for more pressing desires (a new spring outfit, for example), they will eat at home and patronize the local laundromat—while continuing to advocate compulsory wage levels above those that have been determined by their own voluntary spending practices.

They don’t understand that every businessman who lays off a worker because of an increase in costs is acting just as they do when they eat at home because restaurant meals have increased in price but not in quality or quantity. The principle is not merely related, it is identical. Any person who has ever refused to make a purchase “because it cost too much” was following this universal principle of human motivation and action.

Consumer Preferences

Sometimes the advocates of increased minimum wages argue that if all restaurants and laundries were compelled to pay the same wages, then no employee would lose his job. The reasoning here is that since costs would rise equally for all, no restaurant or laundry would be put at a competitive disadvantage. Since sales and income would remain about as before—with the weakest (or marginal) firm retaining its former relative position—there would be no reason for laying off any workers.

That argument only demonstrates again the absence of any understanding of how and why people (including themselves) act as they do when they exchange their goods and services. For when people are free to choose, any increase in costs—for any reason—will cause a decrease in sales and thus in jobs. The fact that costs and prices may have increased for everyone in the restaurant business is beside the point. You and I react to price increases by buying less or going without or using a substitute. Since at any given time, our incomes are allocated in a certain spending pattern, a hefty increase in laundry and restaurant prices will necessarily cause a re-allocation of our customary spending. This cannot be avoided. Since you and I value “music lessons for our children” more than we value that customary restaurant meal—and since we must now choose between them—we choose to eat out less often;.and another restaurant worker “at the margin” thereby loses his job.

There is nothing that any government or law (or for that matter, union) can do to change how and why we human beings choose first to spend our money on what we value most. True enough, governments can (and often do) initiate measures that cause the appearance of more money in the economy than is called for by the annual increase in production of goods and services. This procedure tends to conceal or suppress for a while the customary marginal effects of increasing costs and prices; for a ten per cent increase in prices doesn’t greatly affect your spending pattern if you get a ten per cent increase in income at the same time. But since this procedure is in no sense a solution, the problem itself continues to be with us. In due course, this process of increasing the money supply usually begins to operate on a sort of speeded-up “treadmill principle”; like Alice of “Looking Glass” fame, we must then begin to run twice as fast merely to stand still. If “more money” could really solve our problems, obviously our government would have solved them long ago. Let us remember that in spite of a steady increase in money over the past half century, large-scale unemployment has continued to be our most pressing social problem in peacetime.

Please the Customer

When all is said and done, there is only one way the unemployed person can get a lasting job in an economy where we consumers are free to buy or not to buy. Obviously, he must offer a product or service at a price that someone else is willing to pay. The “asking price” for a product must be in harmony with the “market price” if the product is to sell; just so must the unemployed person reduce the “asking price” for his labor to a point where the income from his production will exceed the cost of hiring him—if he wants to be hired. When that happens, every potential employer will be pleased indeed to bid for his services because the employer himself thereby expects to have more money to spend for the goods and services he wants to buy; a self-interest factor is added.

If the “market price” (that is, what you and I and others will voluntarily pay) for labor is below the minimum wage that is set by law, the unemployed worker necessarily remains unemployed. For neither you nor I nor any potential employer will knowingly hire him at a loss; no human being spends $3 to get back $2. An unknown number of workers without jobs today are unemployed because the minimum wage is above their productive capabilities as determined by the actions of consumers who are free to buy or not buy the product or service. That’s too bad for the unemployed, but there is absolutely nothing that potential employers can do about it; clearly, the responsibility lies with Congress which made the law.

Now it is true that employees in high productivity companies don’t need to worry about minimum wage laws directly. Every such employee is paid more than the current or proposed minimum; he’s paid more because he produces more, and because the price that consumers are willing to pay for the product of his labor is more than the cost of his labor. That’s why wages in such companies are so high. Thus an increase in minimum wages doesn’t affect those employees directly.

An Indirect Effect

Indirectly, however, there is an effect—a most undesirable effect. When marginal workers in other industries lose their jobs because of uneconomic wage increases, they can no longer consume as much as before. And when sales of high productivity company products fall off, the marginal producers in those companies also lose their jobs—or take a substantial cut in pay. This must happen because the product of their labor no longer sells at the price or volume needed to cover the cost of hiring them. It is too often forgotten that there are marginal workers at every level of pay.

Thus it is that minimum wage laws always cause a reduction in jobs below what they would or could be if there were no such laws. Based on how and why you and I act, the result cannot be otherwise. For you and I (and others) simply will not pay the higher prices for certain products and services that have been caused by increases in minimum wages. We would rather spend our money for something else that we value more highly. Exhortations and wishful thinking won’t make any difference. We won’t—in fact, we can’t—continue to buy the product; for the increased prices compel us to re-allocate the spending of our money, which has not been increased by the minimum wage laws. It so happens that those products at higher prices turn out to be the marginal products—the ones we give up first or decrease the use of.

Every employer acts exactly the same way you and I act, and for exactly the same reason. He won’t continue to pay $3.35 for a product or service (wages for an hour) when he discovers that he can sell the product of the labor for only $3.00. He won’t do it because his company would suffer decreased profits, and perhaps losses. That, in turn, would decrease his own earnings, perhaps drastically. Then he would have to give up some product or service that he wants—and that he values far more highly than he values hiring a worker at a loss! Thus the employer lays off the unfortunate marginal worker who has been “assisted” toward a higher level of living by law. There really isn’t anything else he can do. And to call him nasty names is about as logical as cursing yourself because you refuse to buy a $15 item when you have only $10 to spend.

The Difference Between Coercive and Voluntary Measures

Legal measures to increase wages and jobs simply do not do so—not in the long run and when all the effects are understood. Such measures can’t bring the desired results because they do nothing to increase productivity or sales or profits. In a society where people are free to spend their own earnings, there is only one possible way to increase wages and jobs permanently: Make it profitable for one person to hire another person. Then—and only then—will there be an increase in real and lasting jobs. We can be certain that the employers will then hire more workers be cause they can thereby earn more money to be used to buy the things they want, including better education for their children, donations to the Salvation Army, trips around the world, or whatever it is they value most. We cannot know what the employers will use the money for. We can know only that their motivation is identical to the motivation that causes you and me to act. When we refuse to buy the product they manufacture, they, in turn, must refuse to buy the products that go to make it up—including, for the most part, human labor. But when we buy their goods and services at a price that is profitable to them, they then automatically buy more of the “raw ma terials” that go to make up the product or service, including, for the most part, human labor. To understand how you act is to understand how the employer acts. The motivation is identical.

And all along the way, each employer acts exactly as you and I act when we decide to buy or not to buy a given product. If we are getting more than we are giving up for it (in our opinion), we will buy; otherwise we won’t buy. Whether the product is labor or the result of labor has no bearing. Whether the purchaser is an employee, employer, or consumer makes no difference; basically we all act alike when we voluntarily exchange our goods and services. While our tastes and value scales differ radically, no person ever gives up something he values more for something he values less—not when all the factors are considered.

Freedom to Choose

Always and everywhere this relationships exists. This is as true in Russia as it is in the United States. The Russians, too, are people—and thus they will not willingly and knowingly spend two rubles to get back one. To the greatest possible extent, they will always arrange it the other way around. True enough, the Russians have less freedom of choice than we have. But to the extent that each is free to choose, each will always do his buying and hiring on this principle of universal human action. This applies to the Communist manager of a cement factory (with his positive production quota and his potential bonus) as well as to the non-Communist peasant who uses his little “privately assigned” plot of ground to grow beets and cucumbers to sell to the highest bidder.

Again, all of us have a real and selfish reason for wanting everybody in the United States to have a job; our own jobs thereby tend to become more secure and better paying. That’s why we are anxious to find and support those policies that will provide more permanent jobs at higher real wages. And that’s why we must ask this question about any program or policy that promises more jobs or higher pay. Do these programs and policies increase costs without an identifiable increase in productivity and profits? If so, we know that jobs will be lost. We know this because no human being will spend his money for something he values less (continuing to pay a worker to produce at a loss, for example) when he is free to spend it for something he values more. Any law or policy that increases costs ahead of income cannot be of value in solving problems of unemployment. []

[Dr. Russell is professor of management, School of Business Administration, University of Wisconsin at La Crosse.]

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February 1982

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