People Are Not Bananas (Except for Tim Worstall)

As a proud “Fellow at the Adam Smith Institute in London,” you’d think the one thing Forbes blogger Tim Worstall might have a firm grasp of is, well, Adam Smith. But you wouldn’t know it from Tim’s nuance-free depiction of the labor market:

This is very basic economic stuff: If we have a surplus of something then that means that the price is above the market clearing price. This is true of bananas and it’s also true of labor. The answer to getting all the bananas sold is to lower the price. The answer to getting all the people who want to offer labor employed is to lower the price of that labor.

Oy. If by “very basic” Tim means “simplistic to the point of absurdity,” then sure.

The most obvious problem with Tim’s labor/bananas analogy is that people are not bananas. For example, if the demand for bananas far outstrips supply, people can always choose to eat apples or oranges or any number of other fruits. Because markets! But regardless of the state of the labor market, people still need to eat. And as Smith explains in The Wealth of Nations, this fundamental human condition — eat or die — is just one of the factors that inherently distorts the labor market decisively to the advantage of employers:

What are the common wages of labour, depends everywhere upon the contract usually made between those two parties, whose interests are by no means the same. The workmen desire to get as much, the masters to give as little as possible. The former are disposed to combine in order to raise, the latter in order to lower the wages of labour.

It is not, however, difficult to foresee which of the two parties must, upon all ordinary occasions, have the advantage in the dispute, and force the other into a compliance with their terms. … In all such disputes the masters can hold out much longer. A landlord, a farmer, a master manufacturer, a merchant, though they did not employ a single workman, could generally live a year or two upon the stocks which they have already acquired. Many workmen could not subsist a week, few could subsist a month, and scarce any a year without employment. In the long run the workman may be as necessary to his master as his master is to him; but the necessity is not so immediate.

According to Tim, the most efficient (and broadly beneficial) market is one in which prices are set purely through the unadulterated interplay between supply and demand. But even if true, that’s not the way unregulated labor markets have ever functioned. For as Smith explains, wages are set by contract. They are negotiated. And particularly at the low end of the scale, employers enjoy a distinct negotiating advantage.

And as a result, wages are also influenced by bias — the natural bias of employers to keep their labor costs low. As Smith bluntly put it:

[W]hoever imagines, upon this account, that masters rarely combine, is as ignorant of the world as of the subject. Masters are always and everywhere in a sort of tacit, but constant and uniform combination, not to raise the wages of labour above their actual rate. To violate this combination is everywhere a most unpopular action, and a sort of reproach to a master among his neighbours and equals. We seldom, indeed, hear of this combination, because it is the usual, and one may say, the natural state of things, which nobody ever hears of.

Perhaps there’s no clearer real-world example of this “natural state of things” than our nation’s perennial shortage of truck drivers. After a brief collapse during the Great Recession, the shortage of truck drivers quickly reemerged, climbing from 38,000 in 2014 to 48,000 in 2015. According to the latest research from American Trucking Associations, the shortage could balloon to 175,000 by 2024. Trucking companies routinely turn away business.

Given the critical role of trucking in our economy (69 percent of all freight tonnage moves by road), Worstallian Economics predicts that industry wages will gradually rise until the supply of truckers matches demand, and the market clears. Yet as Neil Irwin observed in the New York Times, the industry’s bias against raising wages has prevented the market from doing its magic:

[T]he idea that there is a huge shortage of truck drivers flies in the face of a jobless rate of more than 6 percent, not to mention Economics 101. The most basic of economic theories would suggest that when supply isn’t enough to meet demand, it’s because the price — in this case, truckers’ wages — is too low. Raise wages, and an ample supply of workers should follow.

But corporate America has become so parsimonious about paying workers outside the executive suite that meaningful wage increases may seem an unacceptable affront. In this environment, it may be easier to say “There is a shortage of skilled workers” than “We aren’t paying our workers enough,” even if, in economic terms, those come down to the same thing.

By 2014, adjusted for inflation, truckers were earning 6 percent less, on average, than they did a decade before. And yet trucking executives would rather leave business on the table than raise pay to attract more truckers. “It takes a peculiar form of logic to cut pay steadily and then be shocked that fewer people want to do the job,” observes Irwin.

Obviously, wages in the trucking industry aren’t immune to the tugs of supply and demand. But they sure as hell aren’t dictated by them.

And its not just the trucking industry. As the housing market recovers, the construction industry has faced a looming worker shortage of its own, even against the backdrop of persistent unemployment. And here in Washington State, produce is left rotting in the fields for want of enough farmworkers at harvest time. Pay them and they will come, Econ 101 teaches. But in industry after industry, the masters of capital simply refuse.

Minimum wage opponents like Worstall insist that the market determines the value of labor. And yet the wage-suppressing evidence of extra-market forces are all around us. Walk into a Sam’s Club and observe cashiers doing the exact same job for $5 an hour less than cashiers at the Costco down the street. The market didn’t set those prices; employers did. Or, look at the history of manufacturing in America, which didn’t broadly generate middle-class wages until collective bargaining forced it to. Supply and demand didn’t build the Great American Middle Class; unions did.

Or, look around your own workplace. You’ll likely find similar people with similar skill sets performing similar jobs but for different wages. Sometimes dramatically different wages. The invisible hand of the market? No. Some people are simply better at negotiating their own wage than others.

So enough of this bullshit about wage floors distorting the natural efficiencies of the market. You can’t distort something that doesn’t exist.