Tuesday, April 29, 2014

The free market and working people

Left wingers have an awfully perverse way of helping workers. Their primary means of doing so is to call for higher minimum wages and more labor unions.

The raising the minimum wage is a proven way to kill jobs since workers who don't produce revenues equal or greater than the minimum wage become costs to their employers. In fact, 85% of the most credible studies on minimum wage laws find that they create unemployment among low skilled workers [1].

Unions on the other hand are labor cartels which the number of workers in a company in order to boost the remaining workers wages, a scheme which is great for unionized workers but detrimental to non-unionized workers and the economy as a whole.

According to economists Richard K. Vedder and Lowell E. Gallaway, unions have cost the US economy $50 trillion between 1947 and 2000 [2]. Unions have been found to increase unemployment and lower investment, in fact, unionized industries tend to grow the slowest [3].

All that left wingers have to offer workers is benefits for some at the expense of others. Free market policies on the other hand attempt to raise worker's wages (at no one else's expense) by increasing their productivity (since wages are a function of productivity [4]).

According to the Free Marteteer, taxes which reduce the incentive to work or invest in capital will harm worker productivity growth and thus slow the growth of worker's wages. In fact, the marketeer acknowledges that restraining government spending, increasing economic freedom, and pro-growth tax reform are the best ways to boost workers wages. Consider the the following:

- Empirical research on the size of government consistently finds that government spending is significantly negatively correlated with economic growth (even when controlling for numerous other confounding variables) [5].

- "If government expenditures as a share of GDP in the United States had remained at their 1960 level, real GDP in 1996 would have been $9.16 trillion instead of $7.64 trillion, and the average income for a family of four would have been $23,440 higher." [6]

- "[T]he average income of the poorest 10% [of income earners in the most economically free countries] was $10,556, compared
to $932 [for the poorest 10% of income earners in the least economically free countries] in 2011US (PPP) dollars" [7]

- Abolishing the current federal tax system and replacing it with a progressive sales tax would increase worker's real (inflation adjusted) wages by around 10%  and increase employment between 5-10% over the current system according to several studies. [8]

- Abolishing the corporate income tax would raise worker's wages by 12-13% thanks to increased investment in capital and correspondingly higher worker productivity according to a recent study [9].

Ultimately, the free marketer is the realist who acknowledges that wages cannot simply be raised according to the will of politicians. Rather, raising worker's wages is best done by instituting pro-growth policies which encourage work, investment, and growing worker productivity. Lastly, unlike the policies of the left winger, those advocated by the marketeer raise wages at no one's else's expense. As Milton Friedman once noted:

“When unions get higher wages for their members by restricting entry into an occupation, those higher wages are at the expense of other workers who find their opportunities reduced. When government pays its employees higher wages, those higher wages are at the expense of the taxpayer. But when workers get higher wages and better working conditions through the free market, when they get raises by firm competing with one another for the best workers, by workers competing with one another for the best jobs, those higher wages are at nobody's expense. They can only come from higher productivity, greater capital investment, more widely diffused skills. The whole pie is bigger - there's more for the worker, but there's also more for the employer, the investor, the consumer, and even the tax collector.

That's the way the free market system distributes the fruits of economic progress among all people. That's the secret of the enormous improvements in the conditions of the working person over the past two centuries.”

[1] http://www.socsci.uci.edu/~dneumark/min_wage_review.pdf
[2] http://www.ncpa.org/sub/dpd/index.php?Article_ID=5589
[3] http://www.heritage.org/research/reports/2009/05/what-unions-do-how-labor-unions-affect-jobs-and-the-economy
[4] http://www.sparknotes.com/economics/micro/labormarkets/labordemand/section1.rhtml
[5] http://www.ifn.se/wfiles/wp/wp858.pdf
[6] http://frihetspartiet.net/function.pdf
[7] http://www.freetheworld.com/2013/EFW2013-complete.pdf
[8] http://being-classical-liberal.blogspot.com/2014/03/its-no-secret-that-our-current-federal.html
[9] http://www.kotlikoff.net/sites/default/files/Corporate%20Income%20Tax%20NBER%20WP%2019757.pdf

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