The Social Cost of Labor

By Prasch, Robert E. | Journal of Economic Issues, June 2005 | Go to article overview

The Social Cost of Labor


Prasch, Robert E., Journal of Economic Issues


Social Costs and the Economics of Cost Shifting

For a profit-maximizing firm pursuing a reduction in its costs, it is equally "efficient" to (1) develop a process that will economize on the quality or quantity of inputs necessary to produce a given level of output; (2) purchase the same quality and quantity of inputs at a reduced price; or (3) adopt a new process that shifts a portion of the firm's production costs to some other person or entity or the environment.

When economists speak of "technical change," the first of these approaches is almost always implied. The second is, to a degree, covered when the analysis of "factor markets" is covered. The third option, cost shifting, is almost always downplayed or neglected. (1) Despite its neglect by professional economists, cost-conscious firms have been most attentive to the possibilities of cost shifting. It follows that economists' tendency to neglect this variety of cost savings is unwarranted.

As an example, consider a situation in which some unique characteristic of a workplace necessitates the wearing of a specialized garment. Examples may include a protective suit in the case of a hazardous workplace or an idiosyncratic costume that "fits" with the theme of a restaurant or place of entertainment. Now, further suppose that this industry's conventional practice is that changing into and out of these specialized garments takes place on company time. Clearly, if the firm can modify this convention to one in which employees change on their own time, then a savings on labor cost can accrue to the firm. Naturally, employees and employers will disagree on the merits and desirability of such a modification of the work rules. Moreover there is no obvious "resolution" to this quandary other than what follows from the bargaining process. (2) Unless the labor market approximates the specific and largely implausible qualities of "perfect competition," the outcome will be subject to the vicissitudes of relative bargaining power (Prasch 1995).

The problem, as K. William Kapp, James Swaney, and Martin Evers have argued, is that cost shifting is, and must be, endogenous to a competitive, for-profit, market system (Kapp 1971; Swaney and Evers 1989; Swaney 1987). Entrepreneurial firms that are successful in shifting the costs and risks associated with production to consumers, labor, the environment, or the government (through special tax considerations, wage subsidies, etc.), will gain a competitive advantage over their competitors (Prasch 1997, 2002, 2004b). Success in shifting costs and risks to third parties will pressure a firm's competitors to imitate its "innovations" or face the competitive struggle at a marked disadvantage. Absent effective regulation, what results is a competitive process of "destructive competition" (Culbertson 1985).

With labor, the locus of the problem is that to a private firm the cost of hiring labor is a per-unit accounting cost. Today's economists, taking as they almost always do the perspective of the business firm, categorize labor as a "variable cost." Yet from the perspective of society, labor is an overhead cost. This divergence between the firm's and society's perspectives on the cost of labor was once widely understood and discussed in the economics literature. Institutionalists invoked this distinction when they referred to the "social cost" of labor, or the "social overhead cost" of labor (Kapp 1971; Clark 1923). Consider, for example, the following comment by Richard Lester:

   In a market economy only money costs count; human costs, such as
   unemployment through displacement by labor-saving machinery, or
   deformed bodies and stunted minds resulting from child labor, work
   injuries, and occupational diseases, do not affect economic action
   and policies unless they somehow enter money costs. (1947, 42)

Social costs, and the economics of cost shifting, have been lost to economics (environmental pollution represents a unique exception). …

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