Bryan Caplan  

Real Caricature

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For me, one of the funnest parts of teaching undergraduate labor is when I lecture on why "the standard history of labor is wrong." I begin with a quick summary of what I take the standard view to be:

Most history books tell a story something like this:

1. In the days before the minimum wage, unions, etc., life was terrible for workers because employers paid them whatever they felt like paying them.

2. But then government became more progressive, and changed the laws.

3. Life is now better for workers because employers' greed has been tamed.

I am careful to warn my students that this may be a slight exaggeration, but I assure them that many people roughly believe it. Still, after skewering this kind of nonsense, I often vaguely worry if I have descended into caricature.

It turns out that I worry too much. In a neat post, Mankiw confirms that the standard view is no caricature. In fact, some of the most powerful men in the country swear by it:

In today's Washington Post, Sen. Byron Dorgan and Rep. Sherrod Brown write about How Free Trade Hurts. Here is a telling passage:
At the turn of the 20th century, child labor was common; working conditions were often abysmal; there were no enforced workplace health, safety or environmental requirements; no unemployment insurance; and no workers' compensation. Workers were attacked and killed for the sole reason that they wanted to form a union; there was no 40-hour week, minimum wage, job security, overtime pay or virtually any other limit on the exploitation of employees. America was split dramatically between the haves and have-nots. It was a harsh work world for many: nasty, brutish and, too often, short. Worker activism, new laws and court decisions changed all that during the past century.

It's child's play to pick holes in this story. If it were right, then Bangladesh could wipe out poverty just by enforcing U.S. labor laws. Or as Mankiw explains:

I would give most credit to economic growth, which in turn is driven by technological progress, a market system, and a culture of entrepreneurship. As the economy grows, the demand for labor grows, and workers achieve better wages and working conditions.

Economic studies of unions, for example, find that unionized workers earn about 10 to 20 percent more by virtue of collective bargaining. By contrast, real wages and income per person over the past century have increased several hundred percent, thanks to advances in productivity.

The deeper lesson, though, is that you shouldn't accuse someone of caricature just because they're explaining an economic viewpoint that every decent economic scoffs at. It often happens that a "caricature" is as accurate as a photograph.


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The author at Daniel W. Drezner in a related article titled Let's end the year talking about trade writes:
    How to close out 2006? How about a post about trade? [Yeah, because you never write about that!!--ed.]: 1) In the lastest issue of Foreign Affairs, Rawi Abdelal and Adam Segal suggest that the tide has turned for globalization: Has... [Tracked on December 31, 2006 11:44 PM]
COMMENTS (10 to date)
Nacim writes:

You should've known that enough from making us read REAL history books for homework. I didn't have to go further than my sister's high school history textbook to see that myself.

Kaveh Pourvand writes:

If we suppose that employers have monopolistic bargaining power and employ workers at a wage less then their marginal productivity, then could unions be beneficial by negotiating a wage closer to the marginal product?

In this sense, unions could be seen as a workers association that provides collective bargaining services to labourers.

I don't know how empirically valid such a hypothesis would be. However, to the extent it is true, the welfare of employees would need more then GDP growth as Dr Mankiw argues. Union action on the micro level would also be needed.

Steve writes:

"If we suppose that employers have monopolistic bargaining power and employ workers at a wage less then their marginal productivity, then could unions be beneficial by negotiating a wage closer to the marginal product?"

Those conditions obtained in the former Soviet Union. And no, unions did little good.

Dr, Tensor writes:

You've been in the ivory tower too long Caplan. For a second there, I thought you believing that what you wrote about popular belief on unions and labor laws being a caricature was a caricature.

You don't need to go far to find this viewpoint prevalent. It's definitely common "knowledge".

Kaveh Pourvand writes:

Steve,

To the best of my knowledge, in the Soviet Union workers were not allowed to form unions (in more then a symoblic sense) because it was a totally planned economy. No 'union' could negotiate for wages by threatening to strike/restrict supply. So I don't think your example contradicts the hypothesis.

ivan writes:

The defenders of the standard view do have (half of) a point. To spread the benefits of economic growth more fully, to give everyone some "fair" share of the benefits, some kind of labour standards could come in handy.

William Newman writes:

Working 40 hours a week 50 weeks a year at 10 dollars an hour is unremarkably mediocre today, and gives $20,000 per year.

For 1900, real GDP per capita seems to've been a little less than $5000 in 2005 dollars. And if regulations and worker activism and such had succeeded in getting people to work only 40 hours per week, it would probably have been significantly less than that.

Getting from there to anywhere close to here by "worker activism, new laws and court decisions"
seems arithmetically impossible, even if somehow 100% of the entire economic output of the nation had been directed to work compensation and improving workplace conditions.

ivan: Yes, a weaker claim would have been less the perfect self-caricature that so tickled our host. Even a stronger claim than yours,"It was a harsh work world for many: nasty, brutish and, too often, short. By redistributing a share of the severalfold economic growth since then, worker activism, new laws and court decisions changed all that." Then we'd still disagree, but we wouldn't be in hysterics. Alas, though, Dorgan and Brown went with the hard-core ludicrous claim, and so were promoted to laughingstock econoblogosphere celebrityhood.

It's like saying "until early in the 19th century, the river Thames froze over in the winter. Frog flatulence changed all that in the last two centuries: it never freezes today." It's true the Thames froze, it's true it changed over the past two centuries and doesn't freeze now, but no, frog flatulence is not the reason why. And one is not excused from laughingstockhood by "they do have (half of) a point, frog flatulence does create greenhouse gases" when easy calculation from well-known reference numbers show they don't create nearly enough greenhouse gases, so that frog gas can't possibly be the dominant part of the explanation.

William Newman writes:

Working 40 hours a week 50 weeks a year at 10 dollars an hour is unremarkably mediocre today, and gives $20,000 per year.

For 1900, real GDP per capita seems to've been a little less than $5000 in 2005 dollars. And if regulations and worker activism and such had succeeded in getting people to work only 40 hours per week, it would probably have been significantly less than that, since reduced working hours tend to reduce output.

Getting from there to anywhere close to here by "worker activism, new laws and court decisions"
seems arithmetically impossible, even if somehow 100% of the entire economic output of the nation had been directed to work compensation and improving workplace conditions.

ivan: Yes, a weaker claim would have been less the perfect self-caricature that so tickled our host. Even a stronger claim than yours,"It was a harsh work world for many: nasty, brutish and, too often, short. By redistributing a share of the severalfold economic growth since then, worker activism, new laws and court decisions changed all that." Then we'd still disagree, but we wouldn't be in hysterics. Alas, though, Dorgan and Brown went with the hard-core ludicrous claim, and so were promoted to laughingstock econoblogosphere celebrityhood.

It's like saying "until early in the 19th century, the river Thames froze over in the winter. The greenhouse effect of frog flatulence changed all that in the last two centuries: it never freezes today." It's true the Thames froze. It's true things changed over the past two centuries and the Thames doesn't freeze now. But no, frog flatulence is not the reason why. And one is not excused from laughingstockhood by "they do have (half of) a point, frog flatulence does create greenhouse gases" when easy calculation from well-known reference numbers show frogs can't create nearly enough greenhouse gases, so that frog gas can't possibly be the dominant part of the explanation.

William Newman writes:

Yikes, sorry about duplicate-or-near-duplicate post. I lost my connection on an earlier posting attempt and didn't think to check.:-(

David Z writes:

Steve -

Beginning from flawed/inaccurate assumptions is a surefire way to reach untenable conclusions. If we assume that employers have monopoly power over employees, then your conclusion (that Unions can negotiate a wage closer to MPR) follows.

Employers, however, do not have monopoly power over wage earners. Almost without exception, potential employees can choose between a variety of employment options. Even those few suited *only* for one particular kind of labor, there are typically several companies who are vying for that sort of labor. The iron law of wages does not follow, there is no race to the bottom. If an employer wants to hire the best potential employees, he must pay them at (or very near) their MPR. Failing to do so, he will be outbid by his competition. The wage is upper bound, for the most part, by MPR, because an employer who routinely overpays his employees will find himself in quick financial distress.

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