Jamie McGregor of McGregor Metal in Springfield OH. openly welcomed the opportunity to employ Haitian refugee immigrants for wages far below what he would pay domestic labor. In that, he is typical of the cheap labor lobby ever since Sir Robert Peel (1750-1830), father and son. The low wage lobby is destroying our societies and their economies; it must at all costs be defeated.
First, a reminder of how the low wage lobby got started (before industrialization, since everything depended on human physical labor, there was little to be gained by depressing labor costs artificially, other than producing a disgruntled and rebellious peasantry, as did pre-Revolution France). In the early days of industrialization, which was first manifest in the very labor-intensive textile sector, there were two potential strategies for success.
One was that of Sir Richard Arkwright (1732-92) which was to modernize equipment and power sources as far as possible with the known technology, then scale up factories so that costs were reduced as far as possible (given poor communications, there were limits to how far you could scale up a factory without killing yourself with transportation costs). Arkwright did this first in 1771 using water power at his Cromford mill, and inventing the water frame and a rotary carding engine, then expanded into several factories to increase market share, while paying his workers relatively well, so that he would get the best workers, with the highest productivity. He also diversified his product line, by lobbying through the local magnate 2nd Earl Gower (1721-1803) to get the dozy “Calico Acts” removed in 1774, thus allowing him to sell printed cotton fabrics, which were more attractive to consumers.
The other approach was that followed by Sir Robert Peel (1750-1830), the father of the prime minister. His own father Robert “Parsley” Peel (1723-95) had competed by having a lot of small factories, with 20-50 workers each and much domestic “outworking” labor, thus improving labor relations, and by selling “parsley” patterned fabrics, which he could do legally after 1774. The son went the other way; he made an immense fortune using large factories with only conventional and cheap technology but with a labor force obtained by indenturing orphans from orphanages as far away as Birmingham and London until they turned 21, thus obtaining a quasi-slave workforce paid well below market rates.
Initially Peel also paid no attention to working conditions either until one factory was condemned by Salford magistrates in 1784, which given the low standards back then (before any of the Factory Acts) means it must have been truly epically squalid! Peel sold out in 1817, to avoid affecting his brilliant son (1788-1850)’s Ministerial career, but his business principles, the opposite of those of Arkwright and Lord Liverpool, were passed on to his son, leading the son to repeal the Corn Laws in 1846, thereby plunging Britain into an increasingly unviable policy of unilateral free trade.
I set out in a recent column the economic arguments against the cheap labor lobby; it is very clear on consideration that policies aiming to reduce labor costs artificially are counterproductive to the overall health of an economy. Today I would like to look at the broader costs of a cheap labor policy to society as a whole.
The labor market is intrinsically one-sided. Having participated in it, mostly on the powerless side, for fifty years, I can confirm that this is so. Socialism is absolutely no cure for this, nor are unions. Neither of those belief systems gives power to workers, they simply substitute bureaucrats and union leaders for employers as the people dictating the terms of one’s employment. As a young and junior merchant banker in a country with a left-socialist government in 1974-76, my late, clever mother used to tease me that if she became a Labour party apparatchik, it might help my promotion prospects; as she wrote:
If your Mommy is a Commie, just give thanks.
You’ll be OK if they nationalize the banks.
So, if she is a Red
Just let her have her head.
– It’s the quickest way of rising from the ranks!
Both she and I knew, however, that the fairly gentle and benign internal workings of Hill Samuel, a relatively small company with some 600 employees, were a much better bet, though I did join the “Staff Consultative Committee” in case the government mandated worker-Directors!
This imbalance becomes even worse if cheap labor policies are encouraged. A flood of immigrants into the country, whether legal or illegal, creates excess competition for jobs and thus depresses the bargaining power and living standards of domestic workers. The social effect of this is only modest for domestic workers with fancy qualifications or a lot of good experience; their living standards are depressed but they still find jobs and live as worthwhile members of society, albeit on a lower living standard than they deserve. But those who are unskilled, or with degrees for which there is little workforce demand, find themselves forced out of the workforce altogether and rendered near-destitute, living on the welfare state. Naturally, such people succumb to depression and despair, and once they have so suffered are vulnerable to drugs, alcoholism, crime, domestic abuse and all the other social pathologies of modern life.
Other policies beyond immigration have a similar effect. Poor enforcement of antitrust protection against monopolies causes excessive merger activity, which reduces the competition in each field to a few oversized behemoths, who have excessive power in the labor market as they do in the market for their products. Even when they do not abuse that power to drive down wages, they use it to enforce conformity, because their employment practices are administered by HR bureaucracies, whose main interest is the aggrandizement of their own fiefdoms, best ensured by inventing a plethora of petty internal rules and compliance requirements, so that any employee who displeases them can be dismissed, and any job applicant who does not fit neatly into a predetermined hole can be rejected.
Beyond employment itself, there are many other social costs that are imposed by allowing the cheap labor lobby to run riot, as it has in most Western counties recently. Three obvious ones are welfare, housing and crime. Excessive introduction of cheap labor drives more people onto welfare, whether domestic workers ousted by the new arrivals or the new arrivals themselves who prove to be unemployable or simply surplus to requirements. Housing costs are driven up by the inrush of excess population, and in a country like Britain, with limited space and insane building regulations, it becomes impossible for the housebuilding market to keep up with demand. This causes house prices to soar beyond the reach of domestic workers and overcrowding to turn decent rental properties into slums. In addition, the influx of surplus population and excessive housing costs makes homelessness a severe problem. Finally, the influx of rootless people with low skills but abundant energy inevitably leads to soaring crime rates.
The costs of all these pathologies are borne by domestic taxpayers and not by the cheap labor employers. In Springfield, for example, Mr. McGregor may be delighted with his 50 additional low-wage workers, the pick of the crop of the 25,000 Haitian immigrants who have been dumped there, but he bears almost none of the costs of the new arrivals, which fall socially on the domestic population and fiscally on the population of Springfield, of Ohio and of the United States as a whole, all of whom will pay higher taxes to absorb the burden of the 24,950 Haitians that Mr. McGregor does not choose. Economists will bleat that the additional workers pay taxes and produce revenue, but these people are not by and large potential entrepreneurs, they are people of modest skill and awkward adjustment to U.S. life, whose sole economic benefit is the wage savings achieved by Mr. McGregor.
Bringing in top quality software engineers is a separate question; even these can flood the market and drive down domestic wage rates if imported in excess, which is why lawyers (protected by “guild” regulations) are better paid than computer scientists. However, succumbing to the vicious machinations of the cheap labor lobby is a substantial net negative both socially and economically, especially when the flood is as great as in the past decade.
Both in the United States and Europe, the principal job of government in the years ahead is to slow and if possible, reverse the flow of low-skill immigrants, legal and illegal, driving the cheap labor lobbyists out of the halls of government. In the United States, the principal job of a Republican administration will be to “Democrat-proof” the immigration system so that it can no longer be subverted every four years. In Britain, fourteen years of Tory feebleness from Cameron to Sunak have proved that even a “Conservative” government is not enough; the wisdom of Enoch Powell must finally be enshrined in legislation and government practice.
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(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.)