A Free Market in Labour is in the Best Interests of the Unemployed

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Politicians love talking about jobs, not only here in South Africa but all over the world. They are fond of reminding us how much they want to create jobs. But it is clear that government has been the only thing that can and has reduced the potential to create employment.

If you want jobs, reduce the government-imposed costs of hiring an individual to zero. Simple, right? Not if you are allied to unions with an interest in keeping out competing workers, who would drive down wages. This is the basic supply-demand curve: increasing the supply of labour drives down the price of labour. Incidentally, that’s why unions tend to be economic nationalists. They want to restrict the influx of competing labour from other countries as well as raise the price of imports produced in foreign markets with cheap labour or machines.

Now, the government-imposed cost of hiring someone includes, but is not limited to, the following:

1) The minimum wage.

2) Collective bargaining. Without the ability to negotiate, a mutually-beneficial settlement is not reached between employer and employee. Instead, a settlement that is acceptable to the union bosses has to be reached regardless of the interests of any individual worker.

3) Ease of firing. If firing unproductive workers is too difficult, companies will tend to be more unproductive than they would otherwise be, meaning that relative to less restrictive global peers, you are forced to accept less returns and global capital will respond accordingly. If it’s hard to fire, it will be more expensive to hire in the sense that any new employee is a high risk if they turn out to be unproductive.

4) Income tax. When employment is taxed, you get less employment; unless you believe taxing sugar, taxing alcohol, taxing cigarettes, etc. has no effect on the demand for these products.

This is not a comprehensive list, of course, but it does serve to illustrate the point.

The inescapable conclusion that arises from all of this is that unions have strong incentives to use government force to restrict new entrants into the labour market, in the same way that a large corporation has an incentive to use that force to restrict new competitors from entering the market. In fact, along with woeful employment growth, South Africa has experienced woeful small business growth. That’s why you have NEDLAC.

The National Economic Development and Labour Council (NEDLAC) is a very strange beast in a country with a Competition Commission that’s supposed to fight against collusion and promote free market competition. NEDLAC, after all, is composed of big business and big labour setting rules by which other market participants have to abide by. It’s obvious that a consequence of such an entity is likely to be anaemic job and small business growth.

If you are poor and unemployed, it is in your interest to have both small business as well as employment creation. The one relies on the other – without small business, it is impossible to maximise job growth because big corporates are in the business of consolidation, not growth. But government cronies from big labour and big business won’t allow this. This is despite the media narrative of ‘big business versus labour’, the reality of which being that both big business and big labour are enabled by government to act against the interests of the poor.

4 COMMENTS

  1. If you want to hear about politicians’ cons listen to some YouTube talks by Milton Friedman and how exposes the fallacies that US politicians and government agencies spin and indoctrinate their voters with.

    • Thank you for the recommendation, I’ve listened to a few and I love how he destroys some long-held myths, particularly about the causes of the great depression(although I don’t agree with his proposed remedy)

  2. I have to smile 🙂 Provocative and good arguments. BUT as I come from Austria we had through a long time a very responsible way of collective bargaining between union and chambers.

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