The Bear’s Lair: The battle against cheap labor

For 200 years, leftist political economists and low-wage sweatshops have lobbied governments to put in taxes and regulations that lower wage rates, supposedly to “create jobs.” Such interference with the market, by making labor artificially cheap prevents the “creative destruction” that alone produces productivity gains and better living standards. The policy mix that produces high wages and good living standards is often termed “populist” but it is simply aimed against regulation freaks and monopolistic corporate rent-seekers. In every country, governments should work to raise wages and improve their people’s lives through deregulation and proper economic management.

As I remarked last week, the British prime minister Lord Liverpool noted the benefits of high wages in his 1815 speech introducing the Corn Laws. However, this is a lesson that needs to be re-learned every generation. Large corporations (like textile industry sweatshops in Liverpool’s day) naturally wish to increase their profits as far as possible, and so lobby governments for regulations and market manipulation that lower wage rates and artificially increase their returns. In a political system such as the United States, where political donations from corporations and the ultra-rich have become far more important to the political class than individual voting preferences (which can in any case be manipulated) the result is a system set up to do the bidding of the wage-suppressing multinationals, while ignoring the needs of ordinary voters or the economy as a whole.

In today’s world, high wages have two major economic effects. First, and less important: by increasing purchasing power, they increase demand. This is not simply a matter of encouraging the luxury goods market; automobiles from 1920 on were designed around American tastes because U.S. consumers were the majority of those who could afford them. In interwar Europe and indeed republican China, a Buick was considered a luxury car (the Manchukuo Emperor Pu-Yi owned one) and that high-end perception was enormously helpful to U.S. manufacturers, while British manufacturers, blessed with lower labor costs, were ineffectually competing on volume in the small-car market. If your country’s workers are richest, their tastes, and not those of Chinese, French or Indians, will be most assiduously catered to by the market. Conversely, nobody today among global producers spends their time figuring out the desires of consumers in the progressively impoverished Argentina.

The other more important effect is that high labor costs encourage labor-saving innovation. In Liverpool’s time, that meant switching textile production to mechanized factories, rather than continuing with handcraft methods – which enabled Britain to seize the world’s textile markets from competitors. Today, it can encourage the development of elder care robots, alleviating the need for low-end labor in hospitals and nursing homes – the Japanese have made great strides with this, avoiding the alternative of importing uncouth, hostile immigrants to care for their invalids and grannies. It also encourages the development of AI alternatives to human taxi and truck drivers – a business with great teething troubles, but inevitable eventually. The high-end innovation that produces these developments naturally itself raises tech sector wages and the enthusiasm for STEM degrees – provided immigrants are not imported to fill those roles. The examples are innumerable and indeed unimaginable except by those who imagine them; the point is clear.

Artificial regulations that raise blue-collar wages without changing the condition of the labor market do not work, the most obvious example being much minimum wage legislation. However, in an environment of high immigration, I reject the Whiggish view that minimum-wage legislation simply increases unemployment. If cheap-labor employers can import foreigners to the market, they will set wages far below the level that would be acceptable to domestic workers, thus giving those workers the alternative of becoming sweated-labor or starving. In that case, a minimum wage at a moderate level (the new $20 per hour minimum in California is excessive except in the highest-cost megalopolis locations) protects domestic workers in that industry, preventing them from being undercut by immigrants. That eliminates the incentive for employers to import immigrants, so the overall supply of jobs for domestic workers is not significantly reduced. Only if immigration is tightly controlled does minimum-wage legislation become superfluous and possibly damaging.

Conversely, moderate tariffs can be very helpful for domestic wage levels, since they restrict imports from countries with lower wages. In addition, they yield revenue to the fisc, thus reducing the burden of domestic income and sales taxes which exert an important downward pressure on domestic output and therefore on domestic wages. This point is missed by the free-trade fanatics; governments must be financed somehow, especially the bloated governments for which modern citizens have (foolishly) voted. This was not such a problem in late-19th century Britain; the government’s demands were so limited that even in 1914, with a massive naval rearmament program to pay for, the top rate of income tax was below 12%. In today’s world, free trade is both impossibly expensive and subjects domestic wages to cut-price foreign competition. Worse still, it encourages outsourcing by unscrupulous multinationals who believe that the modern ease of global supply chains should enable them to drive their workers’ wages down to starvation levels in some Third World hellhole, hollowing out domestic production.

President William McKinley understood the importance of tariffs – indeed, he rather overdid them, with his 1890 McKinley Tariff levying tariffs at an average rate of 49% and well above that in many cases. That was thoroughly damaging to global growth, although the main damage was done to the hapless free-trading Britain. From the viewpoint of U.S. living standards however, McKinley failed in one respect: he omitted to restrict immigration, thus filling the cities with sweatshops full of foreign-born labor. Had he passed the 1924 Immigration Act thirty years early, then the nirvana for American workers which that Act produced might also have arrived thirty years early, and McKinley could have run for re-election on the slogan: “Two Surreys in Every Coach-House!”

Immigration is the great suppresser of living standards, as the British and west Europeans have learned to their cost since 2007. From an economic perspective, it does not matter too much whether excessive immigration is legal or illegal, although perhaps the worst form of immigration is the “indentured labor” of workers produced by the U.S. H1B (skilled) and H2B (unskilled) visa programs. By those programs large company employers can recruit workers for a kind of indentured servitude, whose workers are not free to work elsewhere, and therefore work for artificially depressed wages – depressing correspondingly the wage rates for U.S. workers in those fields. To see how much they depress wages, just compare the salaries for junior lawyers and junior computer programmers – the lawyers who write the laws do not allow the H1B scam in their profession.

In this context, President Trump’s new scheme whereby every new foreign recipient of a U.S. degree would have “a green card attached to it” is thoroughly pernicious. There are already far too many low-quality U.S. colleges granting worthless degrees; this would just encourage those malevolent institutions to proliferate further, selling their spurious diplomas to criminal gangs who would import yet more unwanted aliens. The U.S. needs ideally an “immigration pause” for a decade, so that domestic living standards can recover; that is probably impracticable, but Trump’s new idea is potentially yet another substantial step in the diametrically wrong direction.

Overall, the objective of immigration policy should be to reduce the competition from foreign labor in the domestic market. That would make even providers of localized services richer, maximizing the wage premium for the Boston barber over the Bangalore barber, thus maximizing domestic living standards and incentivizing technological innovation (such as AI-enabled robot hairdressers).

Another policy needed to improve U.S. wages is to reduce the outrageous levels of U.S. asset prices. The disgraceful Fed policies of 2010-21 have left a hangover of grossly inflated prices in all asset markets, including stocks, housing and tech equity. That has shut most of the U.S. population out of those markets (and the younger ones out of housing), except to the extent that they can be suckered into buying some thoroughly overpriced rubbish, whether real estate or equity, with a grossly excessive commission for the salesman. Corporate profits have increased excessively as a percentage of GDP and need to decline, to meet the cost of the exploding Federal debt and allow more room for wages to expand. Since taxes need to rise, they must rise primarily on corporations, with loopholes such as accelerated depreciation and tax haven profits exemptions shut down – there should be no tax advantage for offshoring jobs and factories. In addition, closing the tax benefits for charities, notably the tax-deductibility of charitable contributions, would further restore returns in the productive sector and de-fund waste and anti-capitalist malice.

There remains finally the question of the proper approach for governments of poor countries. Generally, much of their population is low-skilled, because of the lack of educational opportunities, but readily trained if the incentives are right. The trick here is for your country’s labor not to be commoditized as the lowest common denominator for the world’s most unpleasant sweatshops. Instead, you should welcome investors who offer opportunities for training and growth, so that local skills can be built up and living standards improved over time – the Indian software industry is one excellent example of this. With improving skills, decent economic and political policies and a discouragement of sweatshops, over time your country, too can become first middle-income and then, if all goes well, high-wage – like Singapore, the highest-wage economy of all.

The economic policies to improve wages and living standards are quite clear, but governments must adopt Liverpool’s approach, not the sweatshop-loving Peel’s to attain them.


A new episode of Tory Stories is now available via YouTube or on the Tory Stories website: Why The Stuart Restoration Gave Us The Industrial Revolution

(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)