Economics in One Lesson

Economics in One Lesson
The unemployment need not necessarily be greatest, in percentage
terms, among the unions whose wages have been advanced the most;
for unemployment will be shifted and distributed in relation to the rel-
ative elasticity of the demand for different kinds of labor and in rela-
tion to the “joint” nature of the demand for many kinds of labor. Yet
when all these allowances have been made, even the groups whose
wages have been advanced the most will probably be found, when
their unemployed are averaged with their employed members, to be
worse off than before. And in terms of
welfare,
of course, the loss suf-
fered will be much greater than the loss in merely arithmetical terms,
because the psychological losses of those who are unemployed will
greatly outweigh the psychological gains of those with a slightly
higher income in terms of purchasing power.
Nor can the situation be rectified by providing unemployment relief.
Such relief, in the first place, is paid for in large part, directly or indirectly,
out of the wages of those who work. It therefore reduces these wages.
“Adequate” relief payments, moreover, as we have already seen,
create
unemployment. They do so in several ways. When strong labor unions
in the past made it their function to provide for their own unemployed
members, they thought twice before demanding a wage that would cause
heavy unemployment. But where there is a relief system under which the
general taxpayer is forced to provide for the unemployment caused by
excessive wage rates, this restraint on excessive union demands is
removed. Moreover, as we have already noted, “adequate” relief will
cause some men not to seek work at all, and will cause others to consider
that they are in effect being asked to work not for the wage offered, but
only for the 
difference
between that wage and the relief payment. And
heavy unemployment means that fewer goods are produced, that the
nation is poorer, and that there is less for everybody.
The apostles of salvation by unionism sometimes attempt another
answer to the problem I have just presented. It may be true, they will
admit, that the members of strong unions today exploit, among others,
the nonunionized workers; but the remedy is simple: unionize every-
body. The remedy, however, is not quite that simple. In the first place,
in spite of the enormous, political encouragements (one might in some
EconOne_Prf2_Q5_to_client.qxd 3/3/2008 8:42 AM Page 126

---

cases say compulsions) to unionization under the Wagner Act and other
laws, it is not an accident that only about a fourth of this nation’s gain-
fully employed workers are unionized. The conditions propitious to
unionization are much more special than generally recognized. But even
if universal unionization could be achieved, the unions could not pos-
sibly be equally powerful, any more than they are today. Some groups of
workers are in a far better strategic position than others, either because
of greater numbers, of the more essential nature of the product they
make, of the greater dependence on their industry of other industries,
or of their greater ability to use coercive methods. But suppose this
were not so? Suppose, in spite of the self-contradictoriness of the
assumption, that all workers by coercive methods could raise their
wages by an equal percentage? Nobody would be any better off, in the
long run, than if wages had not been raised at all.
3
This leads us to the heart of the question. It is usually assumed
that an increase in wages is gained at the expense of the profits of
employers. This may of course happen for short periods or in special
circumstances. If wages are forced up in a particular firm, in such
competition with others that it cannot raise its prices, the increase will
come out of its profits. This is much less likely to happen, however, if
the wage increase takes place throughout a whole industry. The indus-
try will in most cases increase its prices and pass the wage increase
along to consumers. As these are likely to consist for the most part of
workers, they will simply have their real wages reduced by having to
pay more for a particular product. It is true that as a result of the
increased prices, sales of that industry’s products may fall off, so that
volume of profits in the industry will be reduced; but employment
and total payrolls in the industry are likely to be reduced by a corre-
sponding amount.
It is possible, no doubt, to conceive of a case in which the profits
in a whole industry are reduced without any corresponding reduction
in employment—a case, in other words, in which an increase in wage
rates means a corresponding increase in payrolls, and in which the