Some economists call unemployment a ‘discipline device’

 Why unions should campaign to increase Newstart

Why is the labour market apparently unable to allow all people to contribute useful labour to their potential, and be rewarded for it? Do we have to have unemployment?

I think that trade unionists, unemployed and equality activists need to understand better what conventional macroeconomics has to say about this, to know what we are really up against.

I am starting with Blanchard and Sheen Macroeconomics, Australasian Edition 4, and accompanying lectures in Macroeconomic Theory 5002 at Sydney University.

What I understand so far from the explanation of the labour market

The labour market is one of three markets, the others are goods (or goods and services) and financial markets. They form the system that produces the output measured in GDP. Macroeconomics attempts to identify “equilibrium” points in the various markets, to understand what central banks and governments can do to stimulate the market behaviour that will produce GDP growth.

Higher GDP is associated with lower unemployment.

The equilibrium position in the labour market is in the level of unemployment related to the level of real wages. It is not equilibrium between the participating labour force and the availability of work, i.e. it is not effectively no unemployment.

The higher the level of real wages the higher the rate of unemployment. I have heard this conventional wisdom expressed by employers as an argument against union campaigns for wage rises because “One person’s wage rise is another person’s job.”

Macroeconomics looks at this from another perspective – not to say that workers should forgo wage rises to save jobs for the unemployed, but to say that unemployment rates should not be allowed to fall too low, so that employers can stave off wage rises, and the damage they cause. A desirable minimum rate of unemployment is absolutely conventional macroeconomics. This rate of unemployment goes under many names including “natural”, “structural”, “equilibrium” and the “Non Accelerating Inflation Rate of Unemployment (NAIRU)”.

More than just wages are implicated as a cause of unemployment. There is a wage setting (WS) relation curve, which describes the relative bargaining power of workers and employers when setting wages, and the corresponding natural rate of unemployment. The price of producing the goods, plus a markup, determines the maximum wage that the employer wants to pay. A more minor factor in making an employer willing to pay a little more is the idea of the “efficiency wage”, that morale and productivity are improved by a higher wage.

Unemployment benefits, minimum wage levels, union activity, and other factors that place a floor under low wages are called the Z factor. These lift what is called the “reservation wage”, the level of pay at which workers are indifferent to whether they are unemployed or not. A higher Z factor, and lower unemployment both make it easier for workers to demand higher wages (which will then cause higher unemployment). The Award system (which prevailed until Australian unions permitted Paul Keating to replace it with enterprise bargaining) is credited by the textbook with having “empowered unions and encouraged their membership.” (p 128)

In a theoretical perfectly competitive labour market (with a zero Z factor), the price of labour could fall low enough that all available labour would be employed. But the Z factor allows potential workers to choose not to work. The lower the Z factor, the more readily employers have access to the amount of labour they want at the price they are willing to pay.

Understanding this macroeconomic theory is like reading a textbook for government policy. The plan to cut Newstart yet again, the intrusive work test, the increase in the retirement age, denying single mothers benefits earlier in the lives of their children – all these policies make the threat of unemployment harsher, and make it harder for unions to defend rights at work.

The labour market should not be a market.


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