Chapter 12

SPECIAL PROBLEMS IN
LABOR MARKETS

The promotion of economic equality and the alleviation of poverty are distinct and often conflicting.

Peter Bauer {381}

Although the basic economic principles underlying the allocation of labor are not fundamentally different from the principles underlying the allocation of inanimate resources, it is not equally easy to look at labor and its pay rates in the same way one looks at the prices of iron ore or bushels of wheat. Moreover, we are concerned about the conditions where people work in a way that we are not concerned about the conditions where machinery is used or where raw materials are processed, except in so far as these conditions affect people.

Other issues that arise with labor that do not arise with inanimate factors of production include job security, collective bargaining, occupational licensing and questions about whether labor is “exploited” in any of the various meanings of that word.

The statistics that measure what is happening in labor markets also present special problems that are not present when considering statistics about inanimate factors of production. The unemployment rate is one example.

UNEMPLOYMENT STATISTICS

The unemployment rate is a very important statistic, as an indicator of the health of the economy and society. But, for that very reason, it is necessary to know the limitations of such statistics. 

Because human beings have volition and make choices, unlike inanimate factors of production, many people choose not to be in the labor force at a given time and place. They may be students, retired people or housewives who work in their own homes, taking care of their families, but are not on any employer’s payroll. Children below some legally specified age are not even allowed to be gainfully employed at all. Those people who are officially counted as unemployed are people who are in the labor force, seeking employment but not finding it. Patients in hospitals, people serving in the military forces and inmates of prisons are also among those people who are not counted as part of the labor force.

While unemployment statistics can be very valuable, they can also be misleading if their definitions are not kept in mind. The unemployment rate is based on what percentage of the people who are in the labor force are not working. However, people’s choices as to whether or not to be in the labor force at any given time means that unemployment rates are not wholly objective data, but vary with choices made differently under different conditions, and varying from country to country. 

Although the unemployment rate is supposed to indicate what proportion of the people in the labor force do and do not have jobs, sometimes the unemployment rate goes down while the number of people without jobs is going up. The reason is that a prolonged recession or depression may lead some people to stop looking for a job, after many long and futile searches.  Since such people are no longer counted as being in the labor force, their exodus will reduce the unemployment rate, even if the proportion of people without jobs has not been reduced at all.

In the wake of the downturn of the American economy in the early twenty-first century, the unemployment rate rose to just over 10 percent.  Then the unemployment rate began to decline—as more and more people stopped looking for jobs, and thus dropped out of the labor force. The labor force participation rate declined to levels not seen in decades. Although some saw the declining unemployment rate as an indication of the success of government policies, much of that decline represented people who had simply given up looking for jobs, and subsisted on resources provided by various government programs. For example, more than 3.7 million workers went on Social Security disability payments from the middle of 2009 to early 2013, “the fastest enrollment pace ever,” according to Investor’s Business Daily.{382}

Rather than relying solely on the unemployment rate, an alternative way of measuring unemployment is to compare what percentage of the adult population outside of institutions (colleges, the military, hospitals, prisons, etc.) are working. This avoids the problem of people who have given up looking for work not being counted as unemployed, even if they would be glad to have a job if they thought there was any reasonable chance of finding one. In the first half of 2010, for example, while the unemployment rate remained steady at 9.5 percent, the proportion of the non-institutional adult population with jobs continued a decline that was the largest in more than half a century.{383} The fact that more people were giving up looking for jobs kept the official unemployment rate from rising to reflect the increased difficulty of finding a job.

Things become more complicated when comparing different countries.  For example, The Economist magazine found that more than 80 percent of the male population between the ages of 15 and 64 were employed in Iceland but fewer than 70 percent were in France.{384} Any number of things could account for such differences. Not only are there variations from country to country in the number of people going to college but there are also variations in the ease or difficulty with which people qualify for government benefits that make it unnecessary for them to work, or to look for work, or to accept jobs that do not meet their hopes or expectations. 

High as the unemployment rate has been in France for years, French unemployment statistics tend to understate how many adults are not working. That is because the French welfare state makes it easier for senior citizens to withdraw from the labor force altogether—and unemployment rates are based on the size of the labor force. Thus, while more than 70 percent of people who are from 55 to 64 years of age are working in Switzerland, only 37 percent of the people in that same age bracket are working in France.{385} 

The point here is that, while people who choose not to look for work are not employed, they are also not automatically classified as unemployed.  Therefore statistics on employment rates and unemployment rates do not necessarily move in opposite directions. Both rates can rise at the same time or fall at the same time, depending on how easy or how difficult it is for people to live without working. Unemployment compensation is one obvious way for people to live for some period of time without working.  How long that time is and how generous the benefits are vary from country to country. According to The Economist, unemployment compensation in the United States “pays lower benefits for less time and to a smaller share of the unemployed” than in other industrialized countries. It is also true that unemployed Americans spend more time per day looking for work—more than four times as much time as unemployed workers in Germany, Britain or Sweden.{386}

“Even five years after losing his job, a sacked Norwegian worker can expect to take home almost three-quarters of what he did while employed,” The Economist reported. Some other Western European countries are almost as generous for the first year after losing a job: Spain, France, Sweden and Germany pay more than 60 percent of what the unemployed worker earned while working, but only in Belgium does this level of generosity continue for five years. In the United States, unemployment benefits usually expire after one year, {387}though Congress has, at some times, extended these benefits longer.

There are various kinds of unemployment, and unemployment statistics alone cannot tell you what kind of unemployment currently exists. There is, for example, what economists call “frictional unemployment.” People who graduate from high school or college do not always have jobs waiting for them or find jobs the first day they start looking. Meanwhile, job vacancies remain unfilled while there are unemployed people looking for work, because it takes time for the right employers and the right workers to find one another. If you think of the economy as a big, complex machine, then there is always going to be some loss of efficiency by social versions of internal friction. That is why the unemployment rate is never literally zero, even in boom years when employers are having a hard time trying to find enough people to fill their job vacancies. 

Such transient unemployment must be distinguished from long-term unemployment. Countries differ in how long unemployment lasts. A study by the Organisation for Economic Co-operation and Development showed that, among the unemployed, those who were unemployed for a year or more constituted 9 percent of all unemployed in the United States, 23 percent in Britain, 48 percent in Germany and 59 percent in Italy.{388} In short, even the difference between American and European rates of unemployment as a whole understates the difference in a worker’s likelihood of finding a job. Ironically, it is in countries with strong job security laws, like Germany, where it is harder to find a new job. Fewer job opportunities in such countries often take the form of fewer hours worked per year, as well as higher unemployment rates and longer periods of unemployment.

One form of unemployment that has long stirred political emotions and led to economic fallacies is technological unemployment. Virtually every advance in technological efficiency puts somebody out of work. This is nothing new:

 

By 1830 Barthélemy Thimonnier, a French tailor who had long been obsessed with the idea, had patented and perfected an effective sewing machine. When eighty of his machines were making uniforms for the French army, Paris tailors, alarmed at the threat to their jobs, smashed the machines and drove Thimonnier out of the city.{389}

 

Such reactions were not peculiar to France.  In early nineteenth century Britain, people called Luddites smashed machinery when they realized that the industrial revolution threatened their jobs. Opposition to technological efficiency—as well as other kinds of efficiency, ranging from new organizational methods to international trade—has often focused on the effects of efficiency on jobs. These are almost invariably the short run effects on particular workers, in disregard of the effects on consumers or on workers in other fields. 

The rise of the automobile industry, for example, no doubt caused huge losses of employment among those raising and caring for horses, as well as among the makers of saddles, horseshoes, whips, horse-drawn carriages and other paraphernalia associated with this mode of transportation. But these were not net losses of jobs, as the automobile industry required vast numbers of workers, as did industries producing gasoline, batteries, and car repair services, as well as other sectors of the economy catering to motorists, such as motels, fast food restaurants, and suburban shopping malls.

WORKING CONDITIONS

Both governments and labor unions have regulated working conditions, such as the maximum hours of work per week, safety rules, and various amenities to make the job less stressful or more pleasant.

The economic effects of regulating working conditions are very similar to the effects of regulating wages, because better working conditions, like higher wage rates, tend to make a given job both more attractive to the workers and more costly to the employers. Moreover, employers take these costs into account thereafter, when deciding how many workers they can afford to hire when there are higher costs per worker, as well as how high they can afford to bid for workers, since money spent creating better working conditions is the same as money spent for higher wage rates per hour.

Other things being equal, better working conditions mean lower pay than otherwise, so that workers are in effect buying improved conditions on the job. Employers may not cut pay whenever working conditions are improved but, when rising worker productivity leads to rising pay scales through competition among employers for workers, those pay scales are unlikely to rise as much as they would have if the costs of better working conditions did not have to be taken into account. That is, employers’ bids are limited not only by the productivity of the workers but also by all the other costs besides the rate of pay. In some countries, these non-wage costs of labor are much higher than in others—about twice as high in Germany, for example, as in the United States, making German labor more expensive than American labor that is paid the same wage rate.

While it is always politically tempting for governments to mandate benefits for workers, to be paid for by employers—since that wins more votes from workers than it loses among employers, and costs the government nothing—the economic repercussions seldom receive much attention from either the politicians who create such mandates or from the voting public. But one of the reasons why the unemployed may not begin to be hired as output increases, such as when an economy is rising out of a recession, is that working the existing workers overtime may be cheaper for the employer than hiring new workers.

That is because an increase in working hours from existing employees does not require paying for additional mandated benefits, as hiring new workers would. Despite higher pay required for overtime hours, it may in many cases still be cheaper to work the existing employees longer, instead of hiring new workers.

In November 2009, under the headline “Overtime Creeps Back Before Jobs,” the Wall Street Journal reported: “In October, the manufacturing sector shed 61,000 people, while those still employed were working more hours: Overtime increased.” The reason: “Overtime enables companies to increase productivity to meet rising customer orders without adding fixed costs such as health-care benefits for new hires.”{390} It also enables companies to meet temporary increases in demand for their products without taking on the expenses of training people who will have to be let go when the temporary increase in consumer demand passes. The cost of training a new worker includes reducing the output of an already trained worker who is assigned to train the new worker, both of them being paid while neither of them is producing as much output as other workers who are already trained.

Although it is easier to visualize the consequences of more costly working conditions in a capitalist economy, where these can be conceived in dollars and cents terms, similar conditions applied in the days of the socialist economy in the Soviet Union. For example, a study of the Soviet economy noted that “juveniles (under 18) are entitled to longer holidays, shorter hours, study leave; consequently managers prefer to avoid employing juveniles.”{391} There is no free lunch in a socialist economy any more than in a capitalist economy.

Because working conditions were often much worse in the past—fewer safety precautions, longer hours, more unpleasant and unhealthy surroundings—some advocates of externally regulated working conditions, whether regulated by government or unions, argue as if working conditions would never have improved otherwise. But wage rates were also much lower in the past, and yet they have risen in both unionized and non-unionized occupations, and in occupations covered and those not covered by minimum wage laws. Growth in per capita output permits both higher pay and better working conditions, while competition for workers forces individual employers to make improvements in both, just as they are forced to improve the products they sell to the consuming public for the same reason.

Safety Laws

While safety is one aspect of working conditions, it is a special aspect because, in some cases, leaving its costs and benefits to be weighed by employers and employees leaves out the safety of the general public that may be affected by the actions of employers and employees. Obvious examples include pilots, truck drivers, and train crews, because their fatigue can endanger many others besides themselves when a plane crashes, a big rig goes out of control on a crowded highway, or a train derails, killing not only passengers on board but also spreading fire or toxic fumes to people living near where the derailment occurs. Laws have accordingly been passed, limiting how many consecutive hours individuals may work in these occupations, even if longer hours might be acceptable to both employers and employees in these occupations.

Child Labor Laws

In most countries, laws to protect children in the workplace began before there were laws governing working conditions for adults. Such laws reflected public concerns because of the special vulnerability of children, due to their inexperience, weaker bodies, and general helplessness against the power of adults. At one time, children were used for hard and dangerous work in coal mines, as well as working around factory machinery that could maim or kill a child who was not alert to the dangers. However, laws passed under one set of conditions often remain on the books long after the circumstances that gave rise to those laws have changed. As a twenty-first century observer noted:

 

Child labor laws passed to protect children from dangerous factories now keep strapping teenagers out of air-conditioned offices.{392}

 

Such results are not mere examples of irrationality. Like other laws, child labor laws were not only passed in response to a given constituency—humanitarian individuals and groups, in this case—but also developed new constituencies among those who found such laws useful to their own interests. Labor unions, for example, have long sought to keep children and adolescents out of the work force, where they would compete for jobs with the unions’ own members. Educators in general and teachers’ unions in particular likewise have a vested interest in keeping young people in school longer, where their attendance increases the demand for teachers and can be used politically to argue for larger expenditures on the school system.

While keeping strapping teenagers from working in air-conditioned offices might seem irrational in terms of the original reasons for child labor laws advanced by the original humanitarian constituency, it is quite rational from the standpoint of the interests of these new constituencies. Whether it is rational from the standpoint of society as a whole to have so many young people denied legal ways to earn money, while illegal ways abound, is another question.

Hours of Work

One of the working conditions that can be quantified is the length of the work week. Most modern industrial countries specify the maximum number of hours per week that can be worked, either absolutely or before the employer is forced by law to pay higher rates for overtime work beyond those specified hours. This imposed work week varies from country to country. France, for example, specified 35 hours as the standard work week, with employers being mandated to continue to pay the same amount for this shorter work week as they had paid in weekly wages before. In addition, French law requires employees to be given 25 days of paid vacation per year, plus paid holidays{393}—neither of which is required under American laws.

Given these facts, it is hardly surprising that the average number of hours worked annually in France is less than 1,500, compared to more than 1,800 in the United States and Japan. Obviously the extra 300 or more hours a year worked by American workers has an effect on annual output and therefore on the standard of living. Nor are all these differences financial. According to BusinessWeek magazine:

 

Doctors work 20% less, on average. Staff shortages in hospitals and nursing homes due to the 35-hour week was a key reason August’s heat wave killed 14,000 in France.{394}

 

The French tradition of long summer vacations would have made the under-staffing problem worse during an August heat wave.

Sometimes, in various countries, especially during periods of high unemployment, a government-mandated shorter work week is advocated on grounds that this would share the work among more workers, reducing the unemployment rate. In other words, instead of hiring 35 workers to work 40 hours each, an employer might hire 40 workers to work 35 hours each. Plausible as this might seem, the problem is that shorter work weeks, whether imposed by government or by labor unions, often involve maintaining the same weekly pay as before, as it did in France. What this amounts to is a higher wage rate per hour, which tends to reduce the number of workers hired, instead of increasing employment as planned.

Western European nations in general tend to have more generous time-off policies mandated by law. According to the Wall Street Journal, the average European worker “took off 11.3 days in 2005, compared with 4.5 days for the average American.”{395}

Spain is especially generous in this regard. The Wall Street Journal in 2012 reported that in Spain the law requires that workers receive 14 paid holidays off annually, plus 22 days of paid vacation, 15 days off to get married and 2 to 4 days off when anyone in an employee’s family has a wedding, birth, hospitalization or death. Employees who themselves are off from work due to illness can continue to get most or all of their wages paid, if they have a note from a doctor, for the duration of their illness, up to 18 months. Should the employer choose to fire an ill worker, the severance pay required to compensate that worker can be up to what that worker would have earned in two years.{396}

Such mandated generosity is not without its costs, not simply to the employer but to the economy in general and workers in particular. Spain has had chronically high levels of unemployment—25 percent in 2012, but ranging up to 52 percent for younger workers.{397} Moreover, 49 percent of the unemployed in Spain in the second quarter of 2013 had been unemployed for a year or more, compared to 27 percent in the United States.{398}

The labor market is affected not only by mandated employer benefits to workers, but also by government-provided benefits that make it unnecessary for many people to work. In Denmark, for example, a 36-year-old single mother of two “was getting about $2,700 a month, and she had been on welfare since she was 16,” according to the New York Times, which also noted that “in many regions of the country people without jobs now outnumber those with them.”{399}

Third World Countries

Some of the worst working conditions exist in some of the poorest countries—that is, countries where the workers could least afford to accept lower pay as the price of better surroundings or circumstances on the job. Multinational companies with factories in the Third World often come under severe criticism in Europe or America for having working conditions in those factories that would not be tolerated in their own countries. What this means is that more prosperous workers in Europe or America in effect buy better working conditions, just as they are likely to buy better housing and better clothing than people in the Third World can afford. If employers in the Third World are forced by law or public pressures to provide better working conditions, the additional expense reduces the number of workers hired, just as wage rates higher than would be required by supply and demand left many Africans frustrated in their attempts to get jobs with multinational companies.

However much the jobs provided by multinational companies to Third World workers might be disdained for their low pay or poor working conditions by critics in Europe or the United States, the real question for workers in poor countries is how these jobs compare with their local alternatives. A New York Times writer in Cambodia, for example, noted: “Here in Cambodia factory jobs are in such demand that workers usually have to bribe a factory insider with a month’s salary just to get hired.”{400} Clearly these are jobs highly sought after. Nor is Cambodia unique. Multinational companies typically pay about double the local wage rate in Third World countries.

It is much the same story with working conditions. Third World workers compare conditions in multinational companies with their own local alternatives. The same New York Times writer reporting from Cambodia described one of these alternatives—working as a scavenger picking through garbage dumps where the “stench clogs the nostrils” and where burning produces “acrid smoke that blinds the eyes,” while “scavengers are chased by swarms of flies and biting insects.” Speaking of one of these scavengers, the Times writer said:

 

Nhep Chanda averages 75 cents a day for her efforts. For her, the idea of being exploited in a garment factory—working only six days a week, inside instead of in the broiling sun, for up to $2 a day—is a dream.{401}

 

Would it not be even better if this young woman could be paid what workers in Europe or America are paid, and work under the same kinds of conditions found on their jobs? Of course it would. The real question is: How can her productivity be raised to the same level as that of workers in Europe or the United States—and what is likely to happen if productivity issues are waved aside and better working conditions are simply imposed by law or public pressures? There is little reason to doubt that the results would be similar to what happens when minimum wage rates are prescribed in disregard of productivity.

This does not mean that workers in poorer countries are doomed forever to low wages and bad working conditions. On the contrary, to the extent that more and more multinational companies locate in poor countries, working conditions as well as productivity and pay are affected when increasing numbers of multinationals compete for labor that is increasingly experienced in modern production methods—that is, workers with increasing amounts of valuable human capital, for which employers must compete in the labor market. In 2013, The Economist magazine reported, “Wages in China and India have been going up by 10–20% a year for the past decade.” A decade earlier, “wages in emerging markets were a tenth of their level in the rich world.” But between 2001 and 2011, the difference between what computer programmers in India were paid and what computer programmers in the United States were paid constantly narrowed.{402}

The competition of multinational corporations for workers has affected wages not only among their employees, but also among employees of indigenous businesses that have had to compete for the same workers. In 2006, BusinessWeek magazine reported that a Chinese manufacturer of air-conditioner compressors “has seen turnover for some jobs hit 20% annually,” with the general manager observing that “it’s all he can do to keep his 800 employees from jumping ship to Samsung, Siemens, Nokia, and other multinationals” operating in his area.{403} In Guangdong province, factories “have been struggling to find staff for five years, driving up wages at double-digit rates,” the Far Eastern Economic Review reported in 2008.{404}

These upward competitive pressures on wages have continued. According to the New York Times in 2012, “Labor shortages are already so acute in many Chinese industrial zones that factories struggle to find enough people to operate their assembly lines” and “often pay fees to agents who try to recruit workers arriving on long-haul buses and trains from distant provinces.”{405} That same year the Wall Street Journal reported that average urban wages in China rose by 13 percent in one year.{406}

Competitive pressures have affected working conditions as well as wages:

 

That means managers can no longer simply provide eight-to-a-room dorms and expect laborers to toil 12 hours a day, seven days a week. . . In addition to boosting salaries, Yongjin has upgraded its dormitories and improved the food in the company cafeteria. Despite those efforts, its five factories remain about 10% shy of the 6,000 employees they need.{407}

 

In 2012 the New York Times reported that workers assembling iPads in a factory in China, who had previously been sitting on “a short, green plastic stool” that left their backs unsupported and sore, were suddenly supplied with decorated wooden chairs with “a high, sturdy back.” Nor were such changes isolated, given the competitive labor markets, where even companies in different industries were competing for many of the same workers. According to the New York Times:

 

“When the largest company raises wages and cuts hours, it forces every other factory to do the same thing whether they want to or not,” said Tony Prophet, a senior vice president at Hewlett-Packard. “A firestorm has started, and these companies are in the glare now. They have to improve to compete. It’s a huge change from just 18 months ago.”{408}

 

The difference between having such improvements in working conditions emerge as a result of market competition and having them imposed by government is that markets bring about such improvements as a result of more options for the workers—due to more employer competition for workers, who are increasingly more experienced and therefore more valuable employees—while government impositions tend to reduce existing options, by raising the cost of hiring labor in disregard of whether those costs exceed the labor’s productivity.

A free market is not a zero-sum system, where the gains of one party have to come at the expense of losses to another party. Because this is a process that creates a larger total output as workers acquire more human capital,  these workers, their employers and the consumers can all benefit at the same time. However, politicians in various Asian countries have sought to simply impose higher pay rates through minimum wage laws, {409}which can impede this process and create other problems that are all too familiar from the track record of minimum wage laws in other countries.

Informal pressures for better working conditions by international non-governmental organizations likewise tend to disregard costs and their repercussions when setting their standards. Tragic events, such as the 2013 collapse of a factory in Bangladesh that killed more than a thousand workers, create international public opinion pressures on multinational corporations to either pay for safer working conditions or to leave countries whose governments do not enforce safety standards.{410} But such pressures are also used to push for higher minimum wage laws and more labor unions, usually without regard to the costs and employment repercussions of such things.

Third-party observers face none of the inherent constraints and trade-offs that are inescapable for both employers and employees, and therefore these third parties have nothing to force them to even think in such terms.

COLLECTIVE BARGAINING

In previous chapters we have been considering labor markets in which both workers and employers are numerous and compete individually and independently, whether with or without government regulation of pay and working conditions. However, these are not the only kinds of markets for labor. Some workers are members of labor unions which negotiate pay and working conditions with employers, whether employers are acting individually or in concert as members of an employers’ association.

Employer Organizations

In earlier centuries, it was the employers who were more likely to be organized and setting pay and working conditions as a group. In medieval guilds, the master craftsmen collectively made the rules determining the conditions under which apprentices and journeymen would be hired and how much customers would be charged for the products. Today, major league baseball owners collectively make the rules as to what is the maximum of the total salaries that any given team can pay to its players without incurring financial penalties from the leagues.

Clearly, pay and working conditions tend to be different when determined collectively than in a labor market where employers compete against one another individually for workers and workers compete against one another individually for jobs. It would obviously not be worth the trouble of organizing employers if they were not able to gain by keeping the salaries they pay lower than they would be in a free market. Much has been said about the fairness or unfairness of the actions of medieval guilds, modern labor unions or other forms of collective bargaining. Here we are studying their economic consequences—and especially their effects on the allocation of scarce resources which have alternative uses.

Almost by definition, all these organizations exist to keep the price of labor from being what it would be otherwise in free and open competition in the market. Just as the tendency of market competition is to base rates of pay on the productivity of the worker, thereby bidding labor away from where it is less productive to where it is more productive, so organized efforts to make wages artificially low or artificially high defeat this process and thereby make the allocation of resources less efficient for the economy as a whole.

For example, if an employers’ association keeps wages in the widget industry below the level that workers of similar skills receive elsewhere, fewer workers are likely to apply for jobs producing widgets than if the pay rate were higher. If widget manufacturers are paying $10 an hour for labor that would get $15 an hour if employers had to compete with each other for workers in a free market, then some workers will go to other industries that pay $12 an hour. From the standpoint of the economy as a whole, this means that people capable of producing $15 an hour’s worth of output are instead producing only $12 an hour’s worth of output somewhere else. This is a clear loss to the consumers—that is, to society as a whole, since everyone is a consumer.

The fact that it is a more immediate and more visible loss to the workers in the widget industry does not make that the most important fact from an economic standpoint. Losses and gains between employers and employees are social or moral issues, but they do not change the key economic issue, which is how the allocation of resources affects the total wealth available to society as a whole. What makes the total wealth produced by the economy less than it would be in a free market is that wages set below the market level cause workers to work where they are not as productive, but where they are paid more because of a competitive labor market in the less productive occupation.

The same principle applies where wages are set above the market level. If a labor union is successful in raising the wage rate for the same workers in the widget industry to $20 an hour, then employers will employ fewer workers at this higher rate than they would at the $15 an hour rate that would have prevailed in free market competition. In fact, the only workers that will be worth hiring are workers whose productivity is at least $20 an hour. This higher productivity can be reached in a number of ways, whether by retaining only the most skilled and experienced employees, by adding more capital to enable the labor to turn out more products per hour, or by other means—none of them free.

Those workers displaced from the widget industry must go to their second-best alternative. As before, those worth $15 an hour producing widgets may end up working in another industry at $12 an hour. Again, this is not simply a loss to those particular workers who cannot find employment at the higher wage rate, but a loss to the economy as a whole, because scarce resources are not being allocated where their productivity is highest.

Where unions set wages above the level that would prevail under supply and demand in a free market, widget manufacturers are not only paying more money for labor, they are also paying for additional capital or other complementary resources to raise the productivity of labor above the $20 an hour level. Higher labor productivity may seem on the surface to be greater “efficiency,” but producing fewer widgets at higher cost per widget does not benefit the economy, even though less labor is being used. Other industries receiving more labor than they normally would, because of the workers displaced from the widget industry, can expand their output. But that expanding output is not the most productive use of the additional labor. It is only the artificially-imposed union wage rate which causes the shift from a more productive use to a less productive use.

Either artificially low wage rates caused by an employer association or artificially high wage rates caused by a labor union reduces employment in the widget industry. One side or the other must now go to their second-best option—which is also second-best from the standpoint of the economy as a whole, because scarce resources have not been allocated to their most valued uses. The parties engaged in collective bargaining are of course preoccupied with their own interests, but those judging the process as a whole need to focus on how such a process affects the economic interests of the entire society, rather than the internal division of economic benefits among contending members of the society.

Even in situations where it might seem that employers could do pretty much whatever they wanted to do, history often shows that they could not—because of the effects of competition in the labor market. Few workers have been more vulnerable than newly freed blacks in the United States after the Civil War. They were extremely poor, most completely uneducated, unorganized, and unfamiliar with the operation of a market economy. Yet organized attempts by white employers and landowners in the South to hold down their wages and limit their decision-making as sharecroppers all eroded away in the market, amid bitter mutual recriminations among white employers and landowners.{411}

When the pay scale set by the organized white employers was below the actual productivity of black workers, that made it profitable for any given employer to offer more than the others were paying, in order to lure more workers away, so long as his higher offer was still not above the level of the black workers’ productivity. With agricultural labor especially, the pressure on each employer mounted as the planting season approached, because the landowner knew that the size of the crop for the whole year depended on how many workers could be hired to do the spring planting. That inescapable reality often over-rode any sense of loyalty to fellow landowners. The percentage rate of increase of black wages was higher than the percentage rate of increase in the wages of white workers in the decades after the Civil War, even though the latter had higher pay in absolute terms.

One of the problems of cartels in general is that, no matter what conditions they set collectively to maximize the benefits to the cartel as a whole, it is to the advantage of individual cartel members to violate those conditions, if they can get away with it, often leading to the disintegration of the cartel. That was the situation of white employer cartels in the postbellum South. It was much the same story out in California in the late nineteenth and early twentieth centuries, when white landowners there organized to try to hold down the pay of Japanese immigrant farmers and farm laborers.{412} These cartels too collapsed amid bitter mutual recriminations among whites, as competition among landowners led to widespread violations of the agreements which they had made in collusion with one another.

The ability of employer organizations to achieve their goals depends on their being able to impose discipline on their own members, and on keeping competing employers from arising outside their organizations. Medieval guilds had the force of law behind their rules.  Where there has been no force of law to maintain internal discipline within the employer organization, or to keep competing employers from arising outside the organization, employer cartels have been much less successful. 

In special cases, such as the employer organization in major league baseball, this is a monopoly legally exempted from anti-trust laws. Therefore internal rules can be imposed on each team, since none of these teams can hope to withdraw from major league baseball and have the same financial support from baseball fans, or the same media attention, when they are no longer playing other major league teams. Nor would it be likely, or even feasible, for new leagues to arise to compete with major league baseball, with any hope of getting the same fan support or media attention. Therefore, major league baseball can operate as an employer organization, exercising some of the powers once used by medieval guilds, before they lost the crucial support of law and faded away. 

Labor Unions

Although employer organizations have sought to keep employees’ pay from rising to the level it would reach by supply and demand in a free competitive market, while labor unions seek to raise wage rates above where they would be in a free competitive market, these very different intentions can lead to similar consequences in terms of the allocation of scarce resources which have alternative uses.

Legendary American labor leader John L. Lewis, head of the United Mine Workers from 1920 to 1960, was enormously successful in winning higher pay for his union’s members. However, an economist also called him “the world’s greatest oil salesman,” because the resulting higher price of coal and the disruptions in its production due to numerous strikes caused many users of coal to switch to using oil instead. This of course reduced employment in the coal industry.

By the 1960s, declining employment in the coal industry left many mining communities economically stricken and some became virtual ghost towns. Media stories of their plight seldom connected their current woes with the former glory days of John L. Lewis. In fairness to Lewis, he made a conscious decision that it was better to have fewer miners doing dangerous work underground and more heavy machinery down there, since machinery could not be killed by cave-ins, explosions and the other hazards of mining.

To the public at large, however, these and other trade-offs were largely unknown. Many simply cheered at what Lewis had done to improve the wages of miners and, years later, were compassionate toward the decline of mining communities—but made little or no connection between the two things. Yet what was involved was one of the simplest and most basic principles of economics, that less is demanded at a higher price than at a lower price. That principle applies whether considering the price of coal, of the labor of mine workers, or anything else.

Very similar trends emerged in the automobile industry, where the danger factor was not what it was in mining. Here the United Automobile Workers’ union was also very successful in getting higher pay, more job security and more favorable work rules for its members. In the long run, however, all these additional costs raised the price of automobiles and made American cars less competitive with Japanese and other cars, not only in the United States but in markets around the world.

As of 1950, the United States produced three-quarters of all the cars in the world and Japan produced less than one percent of what Americans produced. Twenty years later, Japan was producing almost two-thirds as many automobiles as the United States and, ten years after that, more automobiles.{413} By 1990, one-third of the cars sold within the United States were Japanese. In a number of years since then, more Honda Accords or Toyota Camrys were sold in the United States than any car made by any American car company. All this of course had its effect on employment. By 1990, the number of jobs in the American automobile industry was 200,000 less than it had been in 1979.{414}

Political pressures on Japan to “voluntarily” limit its export of cars to the U.S. led to the creation of Japanese automobile manufacturing plants in the United States, hiring American workers, to replace the lost exports. By the early 1990s, these transplanted Japanese factories were producing as many cars as were being exported to the United States from Japan—and, by 2007, 63 percent of Japanese cars sold in the United States were manufactured within the United States.{415} Many of these transplanted Japanese car companies had work forces that were non-union—and which rejected unionization when votes were taken among the employees in secret ballot elections conducted by the government. The net result, by the early twenty-first century, was that Detroit automakers were laying off workers by the thousands, while Toyota was hiring American workers by the thousands.

The decline of unionized workers in the automobile industry was part of a more general trend among industrial workers in the United States. The United Steelworkers of America was another large and highly successful union in getting high pay and other benefits for its members. But here too the number of jobs in the industry declined by more than 200,000 in a decade, while the steel companies invested $35 billion in machinery that replaced these workers, {416} and while the towns where steel production was concentrated were economically devastated.

The once common belief that unions were a blessing and a necessity for workers was now increasingly mixed with skepticism and apprehension about the unions’ role in the economic declines and reduced employment in many industries. Faced with the prospect of seeing some employers going out of business or having to drastically reduce employment, some unions were forced into “give-backs”—that is, relinquishing various wages and benefits they had obtained for their members in previous years. Painful as this was, many unions concluded that it was the only way to save members’ jobs. A front page news story in the New York Times summarized the situation in the early twenty-first century:

 

In reaching a settlement with General Motors on Thursday and in recent agreements with several other industrial behemoths—Ford, DaimlerChrysler, Goodyear and Verizon—unions have shown a new willingness to rein in their demands. Keeping their employers competitive, they have concluded, is essential to keeping unionized jobs from being lost to nonunion, often lower-wage companies elsewhere in this country or overseas.{417}

 

Unions and their members had, over the years, learned the hard way what is usually taught early on in introductory economics courses—that people buy less at higher prices than at lower prices. It is not a complicated principle, but it often gets lost sight of in the swirl of events and the headiness of rhetoric.

The proportion of the American labor force that is unionized has declined over the years, as skepticism about unions’ economic effects spread among workers who have increasingly voted against being represented by unions. Unionized workers were 32 percent of all workers in the middle of the twentieth century, but only 14 percent by the end of the century.{418} Moreover, there was a major change in the composition of unionized workers.

In the first half of the twentieth century, the great unions in the U.S. economy were in mining, automobiles, steel, and trucking. But, by the end of that century, the largest and most rapidly growing unions were those of government employees. By 2007, only 8 percent of private sector employees were unionized.{419} The largest union in the country by far was the union of teachers—the National Education Association.

The economic pressures of the marketplace, which had created such problems for unionized workers in private industry and commerce, did not apply to government workers. Government employees could continue to get pay raises, larger benefits, and job security without worrying that they were likely to suffer the fate of miners, automobile workers, and other unionized industrial workers. Those who hired government workers were not spending their own money but the taxpayers’ money, and so had little reason to resist union demands. Moreover, they seldom faced such competitive forces in the market as would force them to lose business to imports or to substitute products. Most government agencies have a monopoly of their particular function.{xx} Only the Internal Revenue Service collects taxes for the federal government and only the Department of Motor Vehicles issues states’ driver licenses.

In private industry, many companies have remained non-union by a policy of paying their workers at least as much as unionized workers received. Such a policy implies that the cost to an employer of having a union exceeds the wages and benefits paid to workers. The hidden costs of union rules on seniority and many other details of operations are for some companies worth being rid of for the sake of greater efficiency, even if that means paying their employees more than they would have to pay to unionized workers. The unionized big three American automobile makers, for example, have required from 26 hours to 31 hours of labor per car, while the largely non-unionized Japanese automakers required from 17 to 22 hours.{420}

Western European labor unions have been especially powerful, and the many benefits that they have gotten for their members have had their repercussions on the employment of workers and the growth rates of whole economies. Western European countries have for years lagged behind the United States both in economic growth and in the creation of jobs. A belated recognition of such facts led some European unions and European governments to relax some of their demands and restrictions on employers in the wake of an economic slump. In 2006, the Wall Street Journal reported:

 

Europe’s economic slump has given companies new muscle in their negotiations with workers. Governments in Europe have been slow to overhaul worker-friendly labor laws for fear of incurring voters’ wrath. That slowed job growth as companies transferred operations overseas where labor costs were lower. High unemployment in Europe depressed consumer spending, helping limit economic growth in the past five years to a meager 1.4% average in the 12 countries that use the euro.{421}

 

In the wake of a relaxation of labor union and government restrictions in the labor market, the growth rate in these countries rose from 1.4 percent to 2.2 percent and the unemployment rate fell from 9.3 percent to 8.3 percent.{422} Neither of these statistics was as good as those in the United States at the time, but they were an improvement over what existed under previous policies and practices in the European Union countries.

EXPLOITATION

Usually those who decry “exploitation” make no serious attempt to define it, so the word is often used simply to condemn either prices that are higher than the observer would like to see or wages lower than the observer would like to see. There would be no basis for objecting to this word if it were understood by all that it is simply a statement about someone’s internal emotional reactions, rather than being presented as a statement about some fact in the external world. We have seen in Chapter 4 how higher prices charged by stores in low-income neighborhoods have been called “exploitation” when in fact there are many economic factors which account for these higher prices, often charged by local stores that are struggling to survive, rather than stores making unusually high profits. Similarly, we have seen in Chapter 10 some of the factors behind low pay for Third World workers whom many regard as being “exploited” because they are not paid what workers in more prosperous countries are paid.

The general idea behind “exploitation” theories is that some people are somehow able to receive more than enough money to compensate for their contributions to the production and distribution of output, by either charging more than is necessary to consumers or paying less than is necessary to employees. In some circumstances, this is in fact possible.  But we need to examine those circumstances—and to see when such circumstances exist or do not exist in the real world.

As we have seen in earlier chapters, earning a rate of return on investment that is greater than what is required to compensate people for their risks and contributions to output is virtually guaranteed to attract other people who wish to share in this bounty by either investing in existing firms or setting up their own new firms. This in turn virtually guarantees that the above-average rate of return will be driven back down by the increased competition caused by expanded investment and production whether by existing firms or by new firms. Only where there is some way to prevent this new competition can the above-average earnings on investment persist. 

Governments are among the most common and most effective barriers to the entry of new competition. During the Second World War, the British colonial government in West Africa imposed a wide range of wartime controls over production and trade, as also happened within Britain itself.  This was the result, as reported by an economist on the scene in West Africa:

 

During the period of trade controls profits were much larger than were necessary to secure the services of the traders. Over this period of great prosperity the effective bar to the entry of new firms reserved the very large profits for those already in the trade.{423}

 

This was not peculiar to Africa or to the British colonial government there. The Civil Aeronautics Board and the Interstate Commerce Commission in the United States have been among the many government agencies, at both the national and local levels, which have restricted the number of firms or individuals allowed to enter various occupations and industries. In fact, governments around the world have at various times and places restricted how many people, and which people, would be allowed to engage in particular occupations or to establish firms in particular industries.  This was even more common in past centuries, when kings often conferred monopoly rights on particular individuals or enterprises to engage in the production of salt or wine or many other commodities, sometimes as a matter of generosity to royal favorites and often because the right to a monopoly was purchased for cash.

The purpose or the net effect of barriers to entry has been a persistence of a level of earnings higher than that which would exist under free market competition and higher than necessary to attract the resources required.  This could legitimately be considered “exploitation” of the consumers, since it is a payment over and beyond what is necessary to cause people to supply the product or service in question. However, higher earnings than would exist under free market competition do not always or necessarily mean that these earnings are higher than earnings in competitive industries.  Sometimes inefficient firms are able to survive under government protection when such firms would not survive in the competition of a free market. Therefore even modest rates of return received by such inefficient firms still represent consumers being forced to pay more money than necessary in a free market, where more efficient firms would produce a larger share of the industry’s output, while driving the less efficient firms out of business by offering lower prices.

While such situations could legitimately be called exploitation—defined as prices higher than necessary to supply the goods or services in question—these are not usually the kinds of situations which provoke that label. It would also be legitimate to describe as exploitation a situation where people are paid less for their work than they would receive in a free market or less than the amount necessary to attract a continuing supply of people with their levels of skills, experience, and talents. However, such situations are far more likely to involve people with high skills and high incomes than people with low skills and low incomes.

Where exploitation is defined as the difference between the wealth that an individual creates and the amount that individual is paid, then Babe Ruth may well have been the most exploited individual of all time. Not only was Yankee Stadium “the house that Ruth built,” the whole Yankee dynasty was built on the exploits of Babe Ruth. Before he joined the team, the New York Yankees had never won a pennant, much less a World Series, and they had no ballpark of their own, playing their games in the New York Giants’ ballpark when the Giants were on the road. Ruth’s exploits drew huge crowds, and the huge gate receipts provided the financial foundation on which the Yankees built teams that dominated baseball for decades.

Ruth’s top salary of $80,000 a year—even at 1932 prices—did not begin to cover the financial difference that he made to the team. But the exclusive, career-long contracts of that era meant that the Yankees did not have to bid for Babe Ruth’s services against the other teams who would have paid handsomely to have him in their lineups. Here, as elsewhere, the prevention of competition is essential to exploitation. It is also worth noting that, while the Yankees could exploit Babe Ruth, they could not exploit the unskilled workers who swept the floors in Yankee Stadium, because these workers could have gotten jobs sweeping floors in innumerable offices, factories or homes, so there was no way for them to be paid less than comparable workers received elsewhere.

In some situations, people in a given occupation may be paid less currently than the rate of pay necessary to continue to attract a sufficient supply of qualified people to that occupation. Doctors, for example, have already invested huge sums of money in getting an education in expensive medical schools, in addition to an investment in the form of foregone earnings during several years of college and medical school, followed by low pay as interns before finally becoming fully qualified to conduct their own independent medical practice. Under a government-run medical system the government can at any given time set medical salary scales, or pay scales for particular medical treatments, which are not sufficient to continue to attract as many people of the same qualifications into the medical profession in the future.

In the meantime, however, existing doctors have little choice but to accept what the government authorizes, if the government either pays all medical bills or hires all doctors. Seldom will there be alternative professions which existing doctors can enter to earn better pay, because becoming a lawyer or an engineer would require yet another costly investment in education and training. Therefore most doctors seldom have realistic alternatives available and are unlikely to become truck drivers or carpenters, just because they would not have gone into the medical profession if they had known in advance what the actual level of compensation would turn out to be.

Low-paid workers can also be exploited in circumstances where they are unable to move, or where the cost of moving would be high, whether because of transportation costs or because they live in government-subsidized housing that they would lose if they moved somewhere else, where they would have to pay market prices for a home or an apartment, at least while being on waiting lists for government-subsidized housing at their new location. In centuries past, slaves could of course be exploited because they were held by force. Indentured servants or contract laborers, especially those working overseas, likewise had high costs of moving, and so could be exploited in the short run. However, many very low-paid contract workers chose to sign up for another period of work at jobs whose pay and working conditions they already knew about from personal experience, clearly indicating that—however low their pay and however bad their working conditions—these were sufficient to attract them into this occupation.  Here the explanation was less likely to be exploitation than a lack of better alternatives or the skills to qualify for better alternatives.

Where there is only one employer for a particular kind of labor, then of course that employer can set pay scales which are lower than what is required to attract new people into that occupation. But this is more likely to happen to highly specialized and skilled people, such as astronauts, rather than to unskilled workers, since unskilled workers are employed by a wide variety of businesses, government agencies, and even private individuals. In the era before modern transportation was widespread, local labor markets might be isolated and a given employer might be the only employer available for many local people in particular occupations. But the spread of low-cost transportation has made such situations much rarer than in the past.

Once we see that barriers to entry or exit—the latter absolute in the case of slaves or expensive in the case of exit for doctors or for people living in local subsidized housing, for example—are key, then the term exploitation often legitimately applies to people very different from those to whom this term is usually applied. It would also apply to businesses which have invested large amounts of fixed and hard to remove capital at a particular location. A company that builds a hydroelectric dam, for example, cannot move that dam elsewhere if the local government doubles or triples its tax rates or requires the company to pay much higher wage rates to its workers than similar workers receive elsewhere in a free market. In the long run, however, fewer businesses tend to invest in places where the political climate produces such results—the exit of many businesses from California being a striking example—but those who have already invested in such places have little recourse but to accept a lower rate of return there.

Whether the term “exploitation” applies or does not apply to a particular situation is not simply a matter of semantics. Different consequences follow when policies are based on a belief that is false instead of beliefs that are true. Imposing price controls to prevent consumers from being “exploited” or minimum wage laws to prevent workers from being “exploited” can make matters worse for consumers or workers if in fact neither is being exploited, as already shown in Chapters 3 and 11. Where a given employer, or a small set of employers operating in collusion, constitute a local cartel in hiring certain kinds of workers, then that cartel can pay lower salaries, and in these circumstances a government-imposed increase in salary may—within limits—not result in workers losing their jobs, as would tend to happen with an imposed minimum wage in what would otherwise be a competitive market. But such situations are very rare and such employer cartels are hard to maintain, as indicated by the collapsing employer cartels in the postbellum South and in nineteenth-century California.

The tendency to regard low-paid workers as exploited is understandable as a desire to seek a remedy in moral or political crusades to right a wrong.  But, as noted economist Henry Hazlitt said, years ago:

 

The real problem of poverty is not a problem of “distribution” but of production. The poor are poor not because something is being withheld from them but because, for whatever reason, they are not producing enough.{424}

 

This does not make poverty any less of a problem but it makes a solution more difficult, less certain and more time-consuming, as well as requiring the cooperation of those in poverty, in addition to others who may wish to help them, but who cannot solve the problem without such cooperation.  The poor themselves may not be to blame because their poverty may be due to many factors beyond their control—including the past, which is beyond anyone’s control today. Some of those circumstances will be dealt with in Chapter 23.

Job Security

Virtually every modern industrial nation has faced issues of job security, whether they have faced these issues realistically or unrealistically, successfully or unsuccessfully. In some countries—France, Germany, India, and South Africa, for example—job security laws make it difficult and costly for a private employer to fire anyone. Labor unions try to have job security policies in many industries and in many countries around the world. Teachers’ unions in the United States are so successful at this that it can easily cost a school district tens of thousands of dollars—or more than a hundred thousand in some places—to fire just one teacher, even if that teacher is grossly incompetent.

The obvious purpose of job security laws is to reduce unemployment but that is very different from saying that this is the actual effect of such laws. Countries with strong job security laws typically do not have lower unemployment rates, but instead have higher unemployment rates, than countries without widespread job protection laws. In France, which has some of Europe’s strongest job security laws, double-digit unemployment rates are not uncommon. But in the United States, Americans become alarmed when the unemployment rate approaches such a level. In South Africa, the government itself has admitted that its rigid job protection laws have had “unintended consequences,” among them an unemployment rate that has remained around 25 percent for years, peaking at 31 percent in 2002.  As the British magazine The Economist put it: “Firing is such a costly headache that many prefer not to hire in the first place.”{425} This consequence is by no means unique to South Africa.

The very thing that makes a modern industrial society so efficient and so effective in raising living standards—the constant quest for newer and better ways of getting work done and more goods produced—makes it impossible to keep on having the same workers doing the same jobs in the same way. For example, back at the beginning of the twentieth century, the United States had about 10 million farmers and farm laborers to feed a population of 76 million people. By the end of the twentieth century, there were fewer than one-fifth this many farmers and farm laborers, feeding a population more than three times as large. Yet, far from having less food, Americans’ biggest problems now included obesity and trying to find export markets for their surplus agricultural produce. All this was made possible because farming became a radically different enterprise, using machinery, chemicals and methods unheard of when the century began—and requiring the labor of far fewer people.

There were no job security laws to keep workers in agriculture, where they were now superfluous, so they went by the millions into industry, where they added greatly to the national output. Farming is of course not the only sector of the economy to be revolutionized during the twentieth century. Whole new industries sprang up, such as aviation and computers, and even old industries like retailing have seen radical changes in which companies and which business methods have survived. More than 17 million workers in the United States lost their jobs between 1990 and 1995.{426} But there were never 17 million Americans unemployed at any given time during that period, nor anything close to that. In fact, the unemployment rate in the United States fell to its lowest point in years during the 1990s. Americans were moving from one job to another, rather than relying on job security in one place. The average American has nine jobs between the ages of 18 and 34.{427}

In Europe, where job security laws and practices are much stronger than in the United States, jobs have in fact been harder to come by. During the decade of the 1990s, the United States created jobs at triple the rate of industrial nations in Europe.{428} In the private sector, Europe actually lost jobs, and only its increased government employment led to any net gain at all. This should not be surprising. Job security laws make it more expensive to hire workers—and, like anything else that is made more expensive, labor is less in demand at a higher price than at a lower price. Job security policies save the jobs of existing workers, but at the cost of reducing the flexibility and efficiency of the economy as a whole, thereby inhibiting production of the wealth needed for the creation of new jobs for other workers.

Because job security laws make it risky for private enterprises to hire new workers, during periods of rising demand for their products existing employees may be worked overtime instead, or capital may be substituted for labor, such as using huge buses instead of hiring more drivers for more regular-sized buses. However it is done, increased substitution of capital for labor leaves other workers unemployed. For the working population as a whole, there may be no net increase in job security but instead a concentration of the insecurity on those who happen to be on the outside looking in, especially younger workers entering the labor force or women seeking to re-enter the labor force after taking time out to raise children.

The connection between job security laws and unemployment has been understood by some officials but apparently not by much of the public, including the educated public. When France tried to deal with its high youth unemployment rate of 23 percent by easing its stringent job security laws for people on their first job, students at the Sorbonne and other French universities rioted in Paris and other cities across the country in 2006.{429}

OCCUPATIONAL LICENSING

Job security laws and minimum wage laws are just some of the ways in which government intervention in labor markets makes those markets differ from what they would be under free competition. Among the other ways that government intervention changes labor markets are laws requiring a government-issued license to engage in some occupations. One cannot be a physician or an attorney without a license, for the obvious reason that people without the requisite training and skill would be perpetrating a dangerous fraud if they sought to practice in these professions. However, once the government has a rationale for exercising a particular power, that power can be extended to other circumstances far removed from that rationale. That has long been the history of occupational licensing.

Although economists often proceed by first explaining how a free competitive market operates and then move on to show how various infringements on that kind of market affect economic outcomes, what happened in history is that controlled markets preceded free markets by centuries. Requirements for government permission to engage in various occupations were common centuries ago. The rise of free markets was aided by the rise and spread of classical economics in the nineteenth century. Although both product markets and labor markets became freer in the nineteenth century, the forces that sought protection from competition were never completely eradicated. Gradually, over the years, more occupations began to require licenses—a process accelerated in bad economic times, such as the Great Depression of the 1930s, or after government intervention in the economy began to become more accepted again.

Although the rationale for requiring licenses in particular occupations has usually been to protect the public from various risks created by unqualified or unscrupulous practitioners, the demand for such protection has seldom come from the public. Almost invariably the demand for requiring a license has come from existing practitioners in the particular occupation. That the real goal is to protect themselves from competition is suggested by the fact that it is common for occupational licensing legislation to exempt existing practitioners, who are automatically licensed, as if it can be assumed that the public requires no protection from incompetent or dishonest practitioners already in the occupation.

Occupational licensing can take many forms. In some cases, the license is automatically issued to all the applicants who can demonstrate competence in the particular occupation, with perhaps an additional requirement of a clean record as a law-abiding citizen. In other cases, there is a numerical limit placed on the number of licenses to be issued, regardless of how many qualified applicants there are. A common example of the latter is a license to drive a taxi. New York City, for example, has been limiting the number of taxi licenses since 1937, when it began issuing special medallions authorizing each taxi to operate. The resulting artificial scarcity of taxis has had many repercussions, the most obvious of which has been a rising cost of taxi medallions, which first sold for $10 in 1937, rising to $80,000 in the 1980s and selling for more than a million dollars in 2011.{430}