Wages, Unemployment and Markets
Gavin R. Putland
[Reprinted from a World Bank online discussion on
poverty, March 2000]
The state of the labour market is a leading determinant -- perhaps
THE leading determinant -- of economic equality or inequality. If
employers must compete with each other to attract labour, they offer
the best wages and conditions that they can, and life is good for
those who live by their labour. If labourers must compete with each
other to obtain work, wages fall to subsistence levels. Thus the
causes of unemployment are almost synonymous with the causes of
poverty. Hence the importance of the question posted by Indrajit Roy
(Tata Institute of Social Sciences, Mumbai, India), concerning the
apparent link between free trade and mass unemployment:
For one thing, the rates of unemployment have actually increased in
Pakistan, Bangladesh and Nepal from 3.1% to 5.4%, 1.2% to 2.5% and 3
to 5% respectively (between 1973-4 to 1996-7 for all). Even in India
and Sri Lanka where this is not so, the quality of employment has
shown a marked decline. The issues of underemployment, casualisation
and immiserisation of employed labour, and educated unemployment,
plague the employment scenario in South Asia. Other empirical evidence
of a decline in the quality of life has also been registered.''
There are three basic ways to make a living:
(1) Work, and accept wages in money or in kind.
(2) Invest in productive capital, and take the profits.
(3) Acquire exclusive rights to a share of the finite resources of a
nation, such as land, natural resources, natural monopolies, statutory
monopolies and other government-created privileges. If your resource
is tradeable, wait for the price to go up because of population
growth, improvements in infrastructure, or an artificial shortage
created by the activities of other people like yourself. Then sell the
resource at the inflated price (or, if the resource is not directly
tradeable, trade on the advantages given by your exclusive right to
Options (1) and (2) create wealth, and the trading of that wealth
creates employment. Option (3) does not create wealth, but allows you
to demand a share of wealth created by others. Option (3) creates
UNEMPLOYMENT by withholding resources needed for the creation of
employment, raising the prices of resources needed for the creation of
employment, withdrawing other people's wealth from circulation,
raising rents of commercial land (thus reducing the capacity of
tenants to employ labour and pay wages), and raising the rents of
residential land (hence increasing the cost of accommodation,
provoking campaigns for higher wages while reducing the demand for
goods and services offered by employers ...).
Indrajit Roy continues: ``Reduction in real wages in India due to an
increase in the Consumer Price Index of 50% (Economic Survey,
Most of above-mentioned effects of Option (3) are inflationary.
Dr Greenspan has repeatedly said that low unemployment causes
inflation by raising wages. I have never heard him acknowledge the
inflationary effects of high economic rents. The elimination of
rent-seeking is one of the very few ways to reduce inflation and
unemployment simultaneously. And the way to eliminate rent-seeking is
to TAX ECONOMIC RENT: tax the values of the above-mentioned resources,
so that speculation in such resources is unprofitable. Revenues from
taxes on economic rent allow the reduction or elimination of taxes on
wages and profits, so that Options (1) and (2) become more attractive.
Now to answer the question: WHY HAS FREE TRADE FAILED TO CREATE FULL
When a country's economy depends on access to certain finite
resources, the price of access to those resources rises to the highest
level that can be sustained without political or economic collapse (or
occasionally beyond ...), maximizing economic rents at the expense of
wages and profits. Hence, in the absence of measures to tax economic
rent, the entire benefit of free trade goes to the cartel of
rent-seekers and does not filter through to workers and capitalists.
Advocates of the taxation of economic rent are almost invariably
free-traders. Regrettably, the converse is not true. The most powerful
advocates of ``free trade'' are rent-seekers of various kinds. But as
long as rent-seeking is tolerated, trade is not really free.
Gavin R. Putland, Brisbane, Australia.