The Economics of Unemployment (Routledge Revivals)

J. A. Hobson

• Publisher: Routledge
• Year: 2013
• ISBN:
  9781136498244
• Edition: 1
• Topic: Economia
• Subtopic: Economia del lavoro

First published in 1922, Hobson's study of the depression and resulting unemployment in the aftermath of the First World War is a far-sighted analysis which looks beyond the consequences of the war itself, at the root economic causes of the crisis.

Dealing with issues such as the failure of consumption, trade fluctuations, the balance of spending and saving, and spiralling credit as factors which lay at the root of the depression, Hobson's study is a document of considerable economic, social and historical value, which still has much to teach the modern reader, whether interested layperson or student of economics.

Chapter VI

Wage Reduction as Remedy for Depression

I HAVE argued that the removal of the wage-lag on rising markets and advancing prices would furnish a substantial check upon over-production, congestion of markets and depression. It will occur to some readers that what holds for the up-grade movement should hold for the down-grade, and that if wages are made to rise in order to keep pace with rising prices, so they should fall with falling prices. This demand, indeed, is treated often as an essential condition for the recovery of trade. Let it, however, be clearly understood that the demand for wage-reduction is not confined to a reduction in money-wages equivalent to the reduction in prices. In depressed trade, with general unemployment, business men have considerable support from economists in calling for cuts in real wages as well as money-wages. The acceptance of lower wages by workers, it is contended, will curb the depression and reduce the volume of unemployment, by lowering costs of production and selling prices so as to enable all businesses adopting the policy to obtain a larger market than they could get otherwise.

Take first the case of businesses, or trades, producing for the home market, e.g. the building trades. Lower wages will mean cheaper houses. Cheaper houses will mean a demand for more and larger houses, thus furnishing more employment to capital and labour in the building trades. The acceptance of lower wages will not mean a reduction of money income, or of aggregate demand for commodities, on the part of the whole body of workers in the building trades. For the larger number employed and the fuller employment at the lower wage-rates, will leave this class of workers with as large or even a larger aggregate of purchasing power than they would have had by refusing to take lower rates. Indeed, it is argued, if other workers besides those in the building trades are also accepting lower wages, costs and prices will fall in these other trades, so that workers in the building trades will be able to spend their reduced money incomes more advantageously. In other words, it is suggested that by a general reduction of wages the workers will be at least as well, or better off, than before. They will buy more of one another’s products at lower prices. More workers in each trade will be employed and earning incomes, so that the total purchasing and consuming power will be greater than would be the case if 20 per cent. of them remained unemployed and the other 80 per cent. did short time at high wage-rates.

In other words, wage reduction will mean that capital and labour, which otherwise stand idle because what they could produce could not get sold on terms which would give even a minimum profit to the employer, can now be employed and the product sold so as to yield this minimum profit. A larger total product will be produced and sold. A smaller proportion of this larger product will go to labour, than of the smaller product under the higher wage rate. For, though the capital brought into productive use by the wage-cut may only earn a bare minimum profit, the better placed capital, which it was worth while to employ before the wage-cut, will now be earning a higher rate of profit. But though a smaller proportion of the enlarged product thus goes to the workers, the actual amount they receive as a body will be larger than before the cut, though they will have to do more work to get it.

The distribution of the smaller product before the wage cut was more favourable to labour than to capital, the distribution afterwards returns to the normal position, which is favourable to capital. But since workers suffer more severely from unemployment and low incomes than do capitalists, it may be worth their while to accept a wage-cut which increases their aggregate real income, although it involves more output of labour power and gives capital a larger share of the increased product. For, after all, the stoppage of work and unemployment were caused directly by the inability of some of the capital to earn the necessary minimum of profit, and no remedy could be effective that did not remove this inability and restore the profit-earning power of this idle capital.

This, I think, is the economic case made by capital for wage-reduction as a cure for depression and unemployment in trades working for the home-market.

Before presenting the counter-arguments of labour, it is, however, well to take account of an important qualification of this case for wage reduction. Its validity depends upon what is termed ‘the elasticity of demand’ for labour. Now that demand is elastic if the increased output of goods, which could be produced by employing more workers at lower wages, can readily force an expansion of the market by lowering prices. On this point the instance of housing, in such a depression as the present, is unconvincing. For housing happens to be the one prevailing exception to the rule that, when a depression sets in, the markets are all glutted with goods that cannot get sold. Now, though it be true for every class of goods that there is a price so low as gradually to take off this glut, and that a depression continues until prices have reached and remained at this low level for some time, it does not follow that a fresh output during this process, produced at low wage-rates, will stimulate the pace of this depletion. On the contrary, to produce more goods at lower labour costs will appear to add as much to the glut of supply as it does to the effective demand, so that any immediate gain in volume of employment and rate of consumption may be accompanied by a prolongation of the period of depression.

But the main defence of labour against the capitalist claim for lower wage-rates as a cure for trade depression requires statement under several heads.

First stands the widely accepted belief in ‘the economy of high wages.’ So far as it holds good, it rejects the primary assumption of wage-reduction, viz. that it reduces costs of production, by asserting that such wage reduction will be attended by a more than corresponding fall in efficiency and productivity of labour. But ‘the economy of high wages’ has never been held to be of universal and unlimited application. Its strongest case has been against the definitely ‘sweated’ industries, whose wages have been inadequate to sustain the worker in effective health and physical strength. Relatively high wages and standards of consumption are admittedly necessary, in the physiological sense, to sustain the output of great and continuous muscular or nervous energy in hard and taxing occupations. Nor can conventional elements of class comfort and psychological factors of personal dignity and aspiration be ignored in exploring ‘the economy of high wages.’ But it will be urged with some force that this economy has definite limitations. It will generally be admitted that a sudden or rapid large increase in wage-rates is not normally accompanied at once by increased efficiency and productivity of labour. On the contrary, its early effect is often detrimental. The growing of new wholesome needs and satisfactions in a standard of living is often a slow process. Sudden new increments of income are seldom put to the best uses by any class of recipients. Hence a sudden considerable rise of wage-rates may and often does mean either that fewer days are worked, or that more money is spent in ways detrimental to efficiency, or at any rate in ways not conducive to higher efficiency. In process of time the higher wage-income may be assimilated in a better family standard of living, conducive to better health, higher intelligence, and generally improved efficiency.

But one of the most injurious effects of these trade fluctuations is that they unsettle standards of living and stop these gradual processes of improvement. Under such a dispensation, just as it cannot be assumed that wage-increases beyond the immediate limits of physiological efficiency will at once or quickly or of necessity be represented in higher productive efficiency, so it cannot be assumed that a reduction of these higher wages will be attended by a corresponding fall of efficiency and productivity. So far as immediate costs of production are concerned, there is much evidence to sustain the view that low-wage periods mean low labour-costs and high wage periods high labour-costs in trades where normal wage minima are above any ‘sweating’ level. If this view be correct, the ‘economy of high wages’ cannot be pleaded as a sufficient answer to the claim for wage-reduction, regarded from the standpoint of immediate trade policy.

The resistance of the workers to wage-reductions at such a time must be based upon a longer-sighted view of labour policy. A momentary view of the immediate situation may tempt them to accept a reduction, upon the plea that thus more employment can be found and the actual volume of wages can be raised. But the habitual adoption of this policy means that wage-increases, obtained in times of good trade, cannot be assimilated in a higher normal standard of living and thus cannot contribute to build up a higher standard of personal and economic efficiency for the working-class family. Once accept the principle that wage-rates must follow the fluctuations of prices and profits, instability of wages and of standards of living follow as a necessary consequence. Now this instability of standards is the worst count in labour’s indictment of the ‘capitalist system.’ It is the chief gravamen of the charge that labour is treated as ‘a commodity,’ that is as a non-human factor of production. The demand that labour shall adapt itself in modes of life to industrial fluctuations over which it has very little control, accepting rises and falls of wages to correspond with these fluctuations, robs labour of the primary condition of progress in civilised life.

Yet this appears to be the policy urged by our business men and accepted by many of our economists, on the ground that a refusal on the part of labour defies the inevitable operation of economic laws.

It is just here that I would join issue both with the logic and the social utility of the policy. The laws which regulate prices, and through prices wages, are not inevitable in the sense that they operate by forces wholly external to the will and conduct of the workers. So long as labour in emergencies allows itself to be treated as a commodity in accepting wage reductions, employers will calculate upon such compliance and will make prices which take it into due account. That is to say, the habit of allowing wages to fall with falling prices is itself a cause of falling prices. If employers knew that wage-increases once obtained would be held, they might be slow to concede these increases, but they could not base future contracts upon lower wage-rates to be extorted or cajolled from trade unions hampered by heavy unemployment benefits. In other words, this insistence of labour on retaining a larger share of the product would be itself one important factor in controlling fluctuations of prices and trade. Thus a good deal of the otherwise ‘inevitable’ would be avoided.

Labour’s firm stand for a rising standard of civilised life and the insistent retention of any improvement in that life would modify considerably the magnitude of the fluctuations hitherto made possible by the ‘elasticity’ of wages.

The history of ‘sliding-scales’ in wage agreements testifies to the influence of elasticity of wages in aggravating fluctuations of trade by enabling employers to gamble upon future wage reductions.

This wholesome general reaction upon the volume and regularity of trade follows from the adoption of our general analysis of trade depression. The acceptance of real wage reductions in bad times as inevitable and desirable means acceptance of the prevailing conditions of the distribution of wealth as between capital and labour, which we regard as the root cause of fluctuations and depressions. The refusal of such wage reduction makes for a more equal distribution of wealth, a better balance of production and consumption, and a fuller and more regular use of all factors of production.

The first answer, then, to those who urge that a real wage reduction in bad times will, by lowering costs of production, bring some recovery of trade and an increased aggregate income to the workers, is that this short-range expediency ignores the reaction of this compliant policy upon the distribution of the product which is the root cause of depression and unemployment. It can only win a temporary alleviation by sowing the seeds of future trouble. Under existing conditions a depression can only be worked out by a period of low production and low profits in which the reduced product is distributed favourably to labour, unfavourably to capital, so that the rate of saving is temporarily depressed and the insistence of consumers on retaining as much as possible of its normal rate of consumption gradually depletes the congested stocks which have choked the avenues of commerce and checked production.

The policy of wage reduction, raising the proportion of profits to wages, and reducing the proportion of consumption to production, will only lengthen the process of absorbing the congested stocks, in order that the whole movement may begin again.

Another reason for resisting wage reduction is that the adoption of this way of reducing costs of production has always operated to prevent the adoption of better ways. The assertion that high labour costs would ruin trade has been the stock argument of the industrialists against all the wage-advances, shortenings of hours, and legislation for the protection of employees, during the past hundred years. It has consistently been refuted by facts. High wages and other costs of labour have everywhere operated as incentives for employers to discover, adopt and improve other economies, technical and administrative, which have more than offset the higher cost of labour. The refusal of labour to accept reductions is a psychological condition of these other economies whose social and economic advantages are far greater. To lower costs of production by reducing wages is to take a backward step in civilisation: to achieve the same result by some improvement in machinery or process, some economy of the use of power, by discovering and developing a market for some by-product, by better book-keeping, cost taking, and management, is to take a forward step in civilisation. The former method, by degrading the standards of working-class life, not merely impedes the productivity of labour, but by breeding discontent makes it more difficult to introduce and operate successfully all technical and administrative reforms. The latter method operates immediately to increase the volume of output per unit of capital and labour employed, and harmonises high wages with high profits. My point here is that the better method will only be adopted if the worse is not available. In America it is generally recognised that the high wages obtainable by all skilled and much unskilled labour in industry operated as the potent stimulus to the great economies in mass production, mass-transport, and larger use of machines and mechanical power, which distinguish their industrial system. So long as Germany was a low-wage country of unorganised workers, her industrial development was low and slow. Only in the latter years of last century and the opening years of this did the socialist and trade-union organisation for higher wages and better labour conditions incite the great industrialists and organisers to apply to industry the superior scientific training and other qualities of brain and organisation by which they achieved preeminence in many lines of industry.

Employers clamour in a single breath for wagecutting and for increased productivity. But wagecutting does nothing for the real and lasting increase of productivity. It only serves to increase the product by employing more men at lower rates, reducing somewhat the efficiency per man. If, instead, employers are driven in times of depression to devise technical, administrative and financial economies, they secure real and lasting increases of productivity per unit of capital and labour employed. Labour, therefore, does not, as is sometimes contended, obstruct industrial recovery and progress by its refusal to accept wage reductions. On the contrary, by taking the determined position: “First exhaust all other economies before you touch wages,” it applies a powerful stimulus to the discovery and adoption of every sort of technical and administrative improvement. The experience of Trade Boards shows how the fixing of standard wages in a trade compels the backward businesses to adopt the ways of working which prevail among the best-equipped businesses. The slovenly-minded employer in every trade is prone to assume the permanence of the status quo. He thinks he has proved his case for a wage-cut, as against a wage-rise, by showing that under existing conditions he cannot make a ‘fair’ or any profit. Thus the acceptance by labour of wage reductions as inevitable in bad trade offers a premium on managerial inefficiency and lack of enterprise. It is, moreover, an anti-social policy. For a business made profitable by low wages makes no real progress in productivity, whereas profits secured as the result of improved methods of production involve an increase of wealth and of attendant welfare.

It may, however, be said that labour in this country, as elsewhere, often offers an obstinate resistance to such improvements of technique and administration as are here suggested.

The difficulty on the part of labour arises from those conditions of distribution which, as we have seen, are responsible for restrictions of the market. Labour fears improvements because it fears that they signify displacement of workers and wage-cuts. Some employers in their greed for gain have sought to secure for themselves the profits of both economies—improved economies of production and lower wages. But these fears of improved productivity on the part of labour are scouted by most intelligent leaders. The modern labour policy is to encourage improvements in production and administration and to insist that a due proportion of the gains of these reforms shall come to the wage-earner. This more enlightened attitude is well expressed in the following statement from a document issued in 1919 by the American Federation of Labour:

The question of increased productivity is not a question of putting upon the toilers a more severe strain; it is a question of vast fundamental changes in the management of industry, a question of the elimination of outworn policies; a question of the introduction of the very best in machinery and methods of management.

How enormous are these available economies in the single matter of the use of power has been brought out by several recent specialist Reports, showing the general neglect of employers in great industries like iron and steel to adopt known and proved economies of the generation and use of power. “It seems probable that if all the iron- and steel-works in this country adopted the most efficient methods, they could, on an average, improve their output by something between 50 and 100 per cent.”¹ But the iron and steel trade will not perform this real economy if they can apply the easy, false, and socially injurious economy of wage reduction.

There is, however, a third reason why wage reduction in most industries serving home markets is a bad remedy for trade depression. In an economic order where trusts, combines and other associations for price-control exist, there is no security that wage-reduction will not simply be absorbed in higher profits, without leading to increased production and employment.

Experience of the last two years affords abundant testimony to the power of business combinations in the later stages of manufacture or of distribution to intercept and hold for themselves in higher margins of profit the falls in price of materials and labour in the earlier stages of production. The recent lag in the fall of many retail prices is quite evidently due to this power to divert to profits the economy of low wages and other costs of production. If wage-cuts produced at once corresponding cuts in retail prices, there would at any rate be some security for an immediate expansion of employment and consumption. But with so much for industry if the clutches of strong combinations there is no safeguard for the interest either of the worker or of the consumer.

But, it may be urged, these arguments against wage reductions, especially the last, are only applicable in their full force to trades working for the home market. Now the most urgent demand for wage reductions is in our trades working for the world-market which find themselves undersold everywhere by the cheaper products of low-waged countries, especially Germany. It is just here that the present reality of ‘the limited market’ presses us severely. If the economic world went round as smoothly as theorists imagined, and consumption was ready and able at once to take everything that could be produced, there would be no plausibility in the demand that we must cut our wages, because we have forced German wages down to a level on which she can virtually undersell us i...