FreeColorado.com, a journal of politics and culture.

Wednesday, March 11, 2009

Wage Controls Cause Unemployment

Apparently Congressman Jared Polis is now a cosponsor of the Employee Free Choice Act, which would encourage more unionization by replacing the secret ballot with the non-secret "card check" process for demanding unionization. ["[T]he legislation would eliminate employers' right to insist that workers hold a secret-ballot election, while retaining the option for workers," Colorado Media Matters breathlessly clarifies, because we all know that the real motivation of union bosses is to "retain the option" to let employees vote by secret ballot.] Notably, the measure would amend the National Labor Relations Act, or Wagner Act, a law that significantly contributed to the economic downturn of 1937 and 1938 (as discussed.)

The basic issue is fairly straight-forward: federally encouraged unionization acts as a type of wage control, artificially boosting the monetary wages of some at the cost of lower wages and more unemployment for others.

As George Reisman explains, people acting on a free market adjusts to deflation by cutting prices and (nominal) wages, which gets the economy moving and sets the stage for gains in real wages. Full employment is necessary for full production: people who are out of work aren't producing goods and services.

A major problem with U.S. auto manufacturers is that unionization has seriously damaged the competitiveness of the U.S. industry. That's a big reason why tax payers are now asked to subsidize car makers, when many struggling firms should go into bankruptcy.

The fact that the U.S. struggles under wage controls -- and seems set to add more of them -- means that the economy cannot readily adjust to deflation. Another consequences is that the federal government has put the nation at risk of serious inflation by expanding the money supply.

As of January, the unemployment rate in Colorado was 6.6 percent, compared to 8.1 percent nationally. This is a big problem, though of course nothing like the unemployment rates during the Great Depression. As noted, even by the most optimistic figures unemployment never fell below 9 percent from the end of Hoover's term through FDR's first two terms.

A period of rising unemployment is the worst possible time for more severe wage controls.

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