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Labour Markets Are Not Special

Labour Markets Are Not Special

Ideas have consequences. One body of ideas with wholly baleful consequences was the economics of Karl Marx. Although now largely defunct, it led to untold human misery in the twentieth century.

What were the central ideas of Marxist economics?

A key plank was the abolition of private property in the name of the socialist goal of equalisation of incomes. But the absence of rights to property blunts incentives to work, save and raise incomes generally. Private property is also the ultimate guarantee of personal freedoms against state oppression.

Another element of Marxism was ‘public ownership of the means of production, distribution and exchange’, which led to widespread nationalisation of industry. This trend has been reversed in the last quarter century as the evidence became conclusive that, on average and over time, privately owned businesses outperform state-owned enterprises.

Progressive taxation – the notion that people should not just pay proportionately more tax as incomes rise but disproportionately more – is another Marxist idea. It can be shown to rest only on envy, not on any concept of fairness, and on the notion that incentives to be productive don’t matter in the cooperative socialist utopia where income is distributed ‘from each according to his means, to each according to his needs’. Interestingly, it is the countries of Eastern Europe and the former Soviet Union that have moved most strongly to proportional or flat taxes in recent years.

One of the hoariest of Marxist chestnuts is the idea that labour markets are different (in an economic sense) from other markets and are characterised by unequal bargaining power. Marx argued that employers (‘capitalists’) would use their stronger bargaining power to drive wages down to subsistence levels and create a ‘reserve army of the unemployed’.

This fallacy is debunked in a recently published Business Roundtable study, Power In Employment Relationships: Is There an Imbalance?, by Geoff Hogbin, an economic consultant and former academic at Monash University, Melbourne.

Hogbin explains that elementary economic analysis suggests that, as for other goods and services traded through markets, wages and other terms of employment are determined largely by supply and demand. There is no reason to suppose that the employer side of the market has inherent power over the employee side.

The ‘bargaining inequality’ fallacy is readily exposed by reference to several empirical findings:

Far from falling to subsistence levels (the logical consequence of inherent power imbalance) real wages in modern economies have risen steadily over the last two centuries to levels that would have seemed incredible to Marx.

Aggregate labour income in modern economies accounts for around 65-75 percent of GDP and is not higher in the more heavily regulated labour markets of the world. Indeed it seems to be relatively higher in some of the most lightly regulated labour markets, such as the United States.

If employers had inherent power to set wages below the value of labour’s contribution to production, rates of return on capital should be higher in labour-intensive industries than in capital-intensive industries, but this is not the case.

If employees were disadvantaged by their allegedly weak bargaining power, there are many other ways in which they could engage in productive activities (eg through self-employment, independent contracting, labour hire companies, or workers’ cooperatives). The fact that individual employment contracts have remained the dominant arrangement for over two centuries is compelling evidence that they deliver greater net benefits for most workers than these alternatives.

At times there may be a sellers’ or buyers’ market for labour, due to supply and demand conditions, but this is so for other markets and does not reflect a systematic imbalance of bargaining power. As for other markets, wage adjustments facilitate market ‘clearance’ and the attainment of full employment.

The study concludes that a freely functioning labour market conducive to full employment provides the best protection for employees and employers alike against opportunistic exploitation by the other party and that labour market regulation should be neutral between individual and collective contracting.

Hogbin says, “The argument that laws to encourage the formation of trade unions and strengthen their bargaining power are required to counteract the superior bargaining power of employers is not tenable.”

The alleged power imbalance is central to the view that labour markets are special and require special regulation. New Zealand’s Employment Relations Act 2000 is based on the premise of an “inherent inequality of bargaining power in employment relationships”.

The implications of the finding that the Marxist view of labour markets is wrongheaded are clear. New Zealand does not need the complex labour market regulation embodied in the Employment Relations Act. A basic framework of contract law which provides firms and employees with the freedom to choose arrangements that suit them best would be more conducive to productivity gains, higher wages and better employment relationships in New Zealand.


Roger Kerr is the executive director of the New Zealand Business Roundtable.

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