Who Shrunk My Pie?

"Protected-class" employees are lawsuits waiting to happen.

As we've noted before, governments always want more money.  There are two ways governments can get more money - raise taxes so they get a bigger piece of the pie, or stimulate economic activity so they get the same percentage of a bigger pie.  Liberals won't admit it, but increasing taxes always shrinks the pie.  They generally don't get any more money that way, but thinking they're "soaking the rich" makes them feel good about themselves even though soaking the rich doesn't give them much money.

Raising taxes shrinks the pie and leads to less government revenue, but governments can also shrink the pie through regulation.  Consider age discrimination.  The law says that I can sue my employer if they don't promote me or lay me off because of my age.  Anybody my age who has a job might get some protection against being fired, but I was an independent consultant when the law passed.  I didn't have a job at the time; I knew I'd never have a real job ever again.  Any employer considering me would worry about my suing him if he didn't promote me fast enough or I didn't like the color of my office or something like that.  Why should someone hire me, a protected person who could sue him, rather than someone, anyone, who'd be less likely to sue?

Making a small class of citizens into a protected species leads to less employment for that group.  For example, in 1989, the New York Times reported that 23.4% of disabled men were working full time.  The writer hoped that the Americans With Disabilities Act would help.  The law was signed in 1990, but a study in Hotchkiss (2003) says:

Before ADA, persons with disabilities were less likely to participate in the labor force or to be employed.  After ADA, the discrepancy increased; however, controlling for labor force participation, the relative employment rates of persons with and without disabilities remained constant. [emphasis added]

Hotchkiss found that "the discrepancy [between employment rates of persons with and without disabilities] increased."  The percentage of disabled people who're employed went down after the government passed laws requiring employers to make "reasonable accommodations" for handicapped people; she had to adjust the figures to claim that at best employment rates for the disabled did not change.

Nobody knows what "reasonable accommodations" means, but there are thousands of starving lawyers who'd love to spend your money trying to figure it out in court.  To an employer, a handicapped applicant is a lawsuit waiting to happen, so they don't hire disabled people as often as they would if the law weren't there.  Keeping people from being hired reduces government revenue.

The law against age discrimination also says that employers can't discriminate against me because of my age when they're hiring people, but it's very hard to prove age discrimination when you don't get the job in the first place.  Making it harder for people to get jobs shrinks the economic pie.  I don't pay taxes on money I don't earn.

Laws can get far sillier than forbidding age discrimination.  Europe has the usual laws against age discrimination, but they also allow mandatory retirement ages.  The International Herald Tribune reported on this glaring inconsistency:

European Union countries can force workers to retire at a mandatory age of 65, the EU's top court said Tuesday in a ruling that analysts said could help reduce unemployment in Europe but could also add to the strain on the Continent's already overburdened pension systems.

Here's a person who wants to work, and continue paying taxes, and the EU says that a company can force him to retire, stop paying taxes, and start collecting a pension?  That's cuckoo.  The rationale is that taking away an older person's job can reduce unemployment:

Some economists argue that a mandatory retirement age frees up jobs for more productive younger members of the workforce, helping to improve economic growth, reduce unemployment and to pay for the demands of an aging population.

That's the old "lump of labor" fallacy that says that since there's only a fixed amount of work to be done, you have to limit the amount of work each person is permitted to do to spread the jobs around.  That was the theory behind the 35-hour work week in France, a policy which has been thoroughly discredited.

When sewing machines were invented, there was a great clamor that seamstresses would be thrown out of work.  Nobody imagined that clothes would get so much cheaper that people would have dozens of outfits, the number of people working in the garment industry would go up, and government would collect more income taxes from garment workers.

The amount of work and the amount of taxes paid always go up when the economy gets more efficient, but government doesn't seem to be able to learn that that.  Economic activity goes down when government regulates the economy, but liberals won't learn that either.

In the US, conservatives try to make regulatory agencies do a "cost-benefit analysis" to see if the benefits of a regulation are greater than the costs.  Liberals who love government regulation for its own sake hate cost benefit analysis.  Most regulations cost appalling amounts of money and would never be passed if people measured the actual costs and benefits.

In this case, unemployment will go down because the older person who's forced out of his job onto a pension isn't counted as unemployed and his replacement will now be employed, but turning a willing taxpayer into a reluctant pensioner is just plain silly.  If the EU really cared about unemployment, they'd dismantle most of their labor regulations.

Making it easier to fire unproductive workers increases efficiency.  Companies are more willing to hire workers if they can get rid of them if the new idea doesn't work out.  This has been proved over and over, but that's one of those "mere facts" which has nothing to do with how governments do things.

Given EU labor laws, we don't have to worry about European competition.  We have to worry about China, which has basically no labor laws at all.

Adding more laborers does mean that, by percentage, each share of the pie decreases.  But as any businessman will tell you - it's better to have a smaller piece of a big pie, than a larger piece of a small one.

Will Offensicht is a staff writer for Scragged.com and an internationally published author by a different name.  Read other Scragged.com articles by Will Offensicht or other articles on Economics.
Reader Comments

The Economists ran a great peice on the fallacy of labor shortage.  This plays into the immigration issue as well.  It turns out that when you kick the illegals out, the jobs "no one else wants" manage to still get done.

November 7, 2007 11:58 AM

"The amount of work and the amount of taxes paid always go up when the economy gets more efficient, but government doesn't seem to be able to learn that that"

AMEN to that

November 7, 2007 1:05 PM

Liberals won't admit it, but increasing taxes always shrinks the pie?  I'm not sure that's true.  I think liberals can see it clearly enough.  They just don't care.  It's ok to shrink the pie becaues that punishes greedy capitalists.

November 7, 2007 4:48 PM
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