Saturday, June 25, 2016

Cheap Labor Does Not Just Favor Big Business

Those who favor strong restrictions on immigration1, or who fight for high tariffs and other trade restrictions2, sometimes complain about "big business" trying to draw in cheap labor. They suggest that somehow this only favor only the "fat cats" and the like. I want to show that "cheap labor", and that includes buying cheaper goods from overseas, favors us all. That "cheap labor" is, in fact, to the benefit, not detriment, of the common man.

Well, let us first start by pointing out that "labor" is  no a uniform commodity. Communists and labor unions and protectionists want us to think so, so they use a single term and pretend that any additional unit of "labor" reduces the worth of all labor, but it just isn't so. Let us look at it this way, in the late 19th century, when the railroads were importing tons of Chinese to labor on the railroads, did it lowers the wages of surgeons in New York? Of course not. In fact, it didn't change the wages of bricklayers in New York, or even (except in the most abstract sense3) even the wages of unskilled labor in New York. For that matter, it wasn't changing the wages of surgeons of skilled masons in California either. The only people it might have touched significantly were those unskilled laborers in the west the Chinese directly replaced. And that shows our first important rule, even something as seemingly uniform4 as wheat varies in price due to quality and location, and that same is true of labor. Skills, experience and location cause the price of labor to vary.

The second thing to consider is, without Chinese labor, how much money would the railroads have cost? Would they have been completed at all5? But without the railroads, exactly how much would, say, western produce cost, if it were available at all? The use of cheap labor definitely reduced the overall cost of rail transport, and of those goods carried by rail, as the railroad for years to come needed to repay less labor cost from their founding. And that is the second important point, labor cost is embedded in everything we buy, lower labor cost reduces the cost of everything, and makes some things possible that would not exist at all without cheap labor.

Perhaps it would be easier though, if we ignored some distinctions. Let us, for sake of argument, forget our first point. Let us assume all labor is the same, and you could substitute a ditch digger for a skilled mason, or for a master electrician, or for a brain surgeon. This is essentially the world the unions depict (though maybe not the surgeon part, since they have a nebulous line between white and blue collar), and is the worst case scenario in terms of wages for bringing in cheap labor, as it means every additional unit of labor causes all wages to drop across the boards. In fact, to maximize that last effect, let us also assume zero cost to relocation, and an absolute willingness to change jobs or relocate. That would mean all labor is 100% interchangeable, as in simplistic video games or  some communist theories. This will cause the effect of population increases to be pushed to a maximum.

In such a scenario, the union types, and protectionists and others, would tell you it is suicidal to let in immigrants as they will depress wages. But this is actually a backwards view. As I wrote elsewhere it is akin to saying you buy things to justify working, instead of the truth that you work so you can buy things. It looks at production as the end and consumption as merely a byproduct, rather than the truth that we produce so we can consume. For those who doubt this, let me ask, does the farmer eat his food so he has room to plant more? Or does he plant crops to have food to eat? See? Consumption is the end, production but the means. So, rather than thinking every bit of labor reduces wages, we may want to say it reduces costs. If you do so, it suddenly becomes positive, rather than negative. Admittedly as one sided as the union position, but since consumption is more important than production, at least to individuals, it is arguable consumption should take precedence. But, fortunately, there is an even better argument that takes both into account. If we look at this in a more balanced sense, we will see that, viewing the matter in terms of consumption AND production, the end result is the same as a purely consumption driven view.

Let us imagine wages are depressed by 10%. In our hypothetical world, this would reduce all wages across the board. But, since it would reduce costs, all items would see a 10% reduction in the costs of labor as well. And labor, being the single component used universally, this would mean the cost of not just labor, but components would be reduced by 10%. So, superficially, it would appear this would be a wash. Since the rate of profit would be the same, and labor is at the root of the cost of all components6, prices would likely fall as much as wages did, and thus we would end up in the same situation as at the start.

But we are forgetting the initial cause for wages to decline, an increase in total labor. Since labor is required for any project, reducing the cost and increasing the supply makes some projects possible that would not have been possible before7. So increased labor would allow for an expansion of the economy, either new ventures producing old goods and services in greater quantities, or new products and services previously unavailable. Given that, demand would be greatly changed. Either increased supply would drop costs farther, resulting in even lower prices, or else new goods and services would absorb some demand, causing other goods to become cheaper, as demand drops for them. Either way, the greater supply of goods will increase total overall wealth, which will result in lower prices, and, as a result, though there is more labor, there is greater purchasing power, despite decreased wages. In short, lower labor costs enrich us all.

Or maybe a more simple example would make this more clear.

Let us assume you are on a desert island. During the day, you perform various tasks. You empty rain barrels into your makeshift cistern so you have water on dry days, you fish and gather coconuts and fruit, you chop firewood, you mend clothes, make tools and so on. Maybe two thirds of your efforts are providing food and water, the rest is either repair work or building new amenities of some sort.

Now, let us imagine a second person washes ashore. Is it good or bad? Well, considering how lonely you are I imagine your first reaction is excitement, but let us look at it in economic terms. Since it takes about two thirds of an individual's labor to feed himself, that means every individual can spend one third of his time repairing and building new goods. So, assuming you split these new goods evenly, it looks like it is a wash, s you still get the proceeds of one third day of labor and so does he. So, in the end, everything is the same.

But that ignores three other factors. Before, you had to take time to change form fishing to gathering to water hauling, to chopping wood and so on. Now, one person can do the task for two people, while the other performs another. This allows for less time required to stop and switch tasks, and increases efficiency. And it also, as the second effect, allows for a degree of specialization, which gives an additional increase of efficiency. Finally, there are tasks open to two or more people that one just could not do. It was unlikely you could haul the large stones from inland to build stone housing, or drag the larger tree trunks to try to build a boat for yourself. Now that you have help, new horizons are open to you.

So, in the end, adding a person enriches both of you.

And adding a third does this even more. And a fourth. At some point, you have enough people that you can completely specialize and quit switching tasks at all. This allows for total specialization and each person adds in much more labor than he consumes.

And that is ignoring other side effects, such as the increasing probability of discoveries by a greater number of individuals. We are not talking about just big inventions, either. Even tiny ones, such as a small improvement to fishing nets or better ways to move logs still help increase productivity, and statistically the more people doing a job and thinking about it, the more likely one may come up with such an innovation.

And what is true for a desert island is true for a nation. More labor, and that is what "cheaper labor" usually means, is a net benefit to society, and, in the end, enriches everyone. How could it help to do so? After all labor is not a zero sum game. If one is laboring, he produces, and thus, more labor equals more output, and more output means more wealth for all.

But, we have been ignoring one factor to which we need to return, as I am sure it will help us anticipate the objections of some protectionists. You see, when they say "cheap labor" sometimes they mean, not so much more labor, as bringing in less skilled (or less costly) labor to replace more costly and more skilled labor. There are a lot of assumptions in such argument, and in the end, sometimes their argument seem to amount to immigrants keeping unions from overcharging, but we shall deal with that after the more general discussion.

First, let us establish something, skilled labor is not easily replaced by unskilled labor. If it were, we would be doing so with domestic unskilled labor8. So, unless someone is working far below his skill level (in which case he would presumably be paid at the cost of unskilled labor making him unattractive to replace), he is not going to be replaced with unskilled labor. The only case where I can see a costly worker being replaced by less costly labor is when his wage is held at above market prices by union policy, but that is an argument against unions, not against immigration. By making workers MORE costly, unions impoverish us all for the slight benefit of a few. ("Slight" because their wage increase is partly eaten up by the decrease in total wealth and increase in prices.)

In short, the only argument against cheap labor, at least economically, is that it hurt union labor that is already being paid more than it should be9. I don't see that as much of a case, and certainly does not prove cheap labor only helps "big business". Sorry, I know it upsets a lot of nominal conservatives to hear it, but cheap labor is actually beneficial10.

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1. I am not here arguing the entire immigration question, as there are many different arguments to be made on that topic. Were it purely economic, that is a matter of restricting wages, I would favor unlimited immigration. As there are other issues, the welfare state, assimilation, hostile nations and factions, health and so on (not all of which are necessarily legitimate), I will discuss immigration at a later time. For purposes of this essay, we are only considering the cost of labor.

2. For some discussion of all the issues relating to trade barriers see "Beware Populist Deception", "Protectionism Right and Left", "Fear of Trade", "The Inevitable Corruption of Protectionism", "Fear of the 'Big'", "Cheap Lighters, Overseas Dumping and Monopolies", "Free Trade, Employment, Outsourcing, and Protectionism", "Jobs, Jobs, Jobs, and More Jobs", "Overly Simplified Economics and Confused Interpretations", "Production and Consumption" and "Clarifying a Reality of Capitalism". Some of these duplicate parts of this essay, but in less detail.

3. To be absolutely accurate, because the high demand for unskilled labor on the railroads would have bid up all labor of any kind nationwide by a few fractions of a cent per day, ALL labor lost out on a slight pay increase, and unskilled labor, being the closest substitute, lost out n maybe even a cent a day, at least those close enough to easily relocate. But the Chinese did nothing to lower the worth of pre-existing unskilled labor elsewhere, simply preventing a slight bidding up by the railroads.

4.  Wheat is actually not terribly uniform, it varies in a number of characteristics and is priced accordingly, just look at any commodities exchange listing to see (eg Wheat, No.1 Hard Red Winter, ordinary protein, FOB Gulf of Mexico, US$ per metric ton). But to anyone who does not routinely deal in wheat it seems pretty uniform, so made a good example of something apparently uniform being priced differently.

5. Railroads may not be the best example, as the government provided subsidies and thus they were not entirely market driven, but they are the best example of large scale importation of "cheap labor", so for the moment discount the involvement of public funds.

6. This is not to endorse the wage theory of price. Price is set by marginal utility. But costs are determined by inputs, and at its root, all costs are set by labor, since everything can be replaced by labor in one sense or another (either using brute force to replace a missing tool or machine, or using new labor to produce a substitute resource, etc.) Because our hypothetical is at first a steady-state system, with wages magically instantly dropping and consumption patterns remaining the same, reducing costs would effectively reduce prices until consumption patterns changed to reflect the new market clearing point. We shall be looking at this in the next bit. Just did not want to seem to endorse a mistaken theory of price.

7. Some might argue this would just increase unemployment, but there are several problems with that. Despite the claims of Marxists and others on the left, the unemployed do not change wages. If a worker is available but not employed, it is because he is not worth the wages he is asking (barring union meddling with labor markets, inflationary collapse and the like, but for the most part this is true, especially with unlimited relocation), and thus he could not drive down labor costs, as he is, effectively not in play. Anyone offering labor which would produce more than it costs would be picked up. (This ignores union interference, but our initial situation pretty much assumes an absence of unions, as unions would prevent free replacement of labor.)

8. I am ignoring minimum wage laws here, as they are a separate issue, and not an argument against immigration, but against minimum wage laws. If a job cannot be performed at the minimum wage, then, yes, it will be filled with one form of "illegal" labor or another, domestic or foreign, but that is because it is a bad law, not because immigration is harmful or "stealing jobs from Americans".

9. Unions can only drive wages above market if given governmental or quasi-governmental power, so this is really another version of the minimum wage issue. See "The Harm of Closed Shops and Collective Bargaining", "The Interests of Labor Versus the Interests of Laborers" and "Pro-Labor Cannibalism, A Look At The Union Food Chain".

10. If cheap labor is bad, (1) the US would have failed in the late 19th century, rather than seeing the greatest increase in prosperity we had to that point in time and (2) relatively underpopulated countries like Canada would be economic powerhouses. Or, to make a foreign comparison, in the 1930s France would have been outperforming Germany industrially, rather than the other way around. (Well, there are issues with inflation and bad regulations, so maybe not a perfect example, but it matches the pattern in broad outline.)

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POSTSCRIPT

Some additional discussion of labor costs can be found in "How Wages Work", "Employment A to Z", "Contra 'Trickle Down'", "More Thoughts on Wage Disparities", "Capitalism and Its Consequences", "Competition", "Another Look At Exploitation", "Fairness and the Free Market", "Exploited Labor", "Capital Investment", "Exploiting Workers?" and "Two Sided Processes and Claims of 'Unfair' Outcomes".

One other note. Until we started paying welfare and offering "unemployment insurance", chronic unemployment was unknown. It is not a coincidence. If you are not getting a government check, more jobs look acceptable and you will adopt a more realistic idea of your worth. If you can hold out because of a subsidy, you will wait for a better job longer. Thus, as has been said before, we get as much employment as we buy. See "Peanut Butter and Disability". See also "Numbering the Unquantifiable".


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