Laboring Through Summer, Part 1

The unofficial close to summer is marked by the ritual of Labor Day. Over the course of the next two days, MarketMinder will be taking a look at labor, competition, and how it relates to investing.

Labor Day began in 1882, spearheaded by the Central Labor Union to create a day off for the "working man." For decades, the federal holiday was used for demonstrations and rallying in support of labor rights and unions. (For more on Labor Day and its origins, click here: https://en.wikipedia.org/wiki/Labor_Day.) Today, Labor Day is more about Nascar, barbeques, college football, and students' last gasp of freedom before classes resume.

Now that the US economy is developed with stable financial markets, strong property rights, and a (generally) free labor force, we don't seem to have an urgent use for labor movements and rallies like we used to. Labor unions have receded significantly over recent decades, and the remaining factions mostly control pensions rather than lobby for worker rights.

Don't get us wrong, surely there are still fights to be fought and issues to be resolved tied to social and ethical concerns over labor. But clearly the vast majority of Americans aren't facing the same work issues as they did in 1900. Then, average workers died of all sorts of nasty job-related causes for a pittance; today, the hot button issue is whether employers provide proper maternal/paternal leave for working parents. How did we come so far?

For comparison, it's worth looking back at labor conditions a hundred years ago. Likely the best account (though fictional) was Upton Sinclair's novel The Jungle, which made waves as a scathing social commentary on US labor, and even drew the attention of the president at the time. Click here for a cogent synopsis of the book and its themes: https://en.wikipedia.org/wiki/The_Jungle.

How did we go from a nation with prevalent, abject poverty and perilous working conditions to a vast, educated, and wealthy middle class with poverty rates rapidly declining?

There's no question some basic labor rights laws have contributed to the ascent. But we believe the benign effects of capitalism have created success for labor in far greater magnitude than regulations ever could. To be able to see this, however, we must think in aggregates—see the holistic view of the world and think in terms of single cases.

As in all things economic, there are many factors at play. But we'd like to focus in on two: Free flow of capital and labor, and the principle of competition.

Questions: What kind of economy did we have +100 years ago? (Answer: Agrarian.) How about fifty years ago? (Answer: Industrial.) What is our economy predominantly composed of today? (Answer: we're moving toward becoming a service economy.)

The US labor force has changed and adapted to the global economy with greater agility and aplomb than anywhere else, particularly over such a long time horizon. Was there some dislocation and loss of jobs along the way? Yes. But in sum, the nation has become wealthier. And despite all those adjustments, unemployment sits near historical lows.

The US allows jobs to leave that can be done more efficiently elsewhere, and we (generally) keep our borders open to eager workers from foreign lands. Intuitively, such policies should decimate the US labor force, right? Yet, just the opposite occurred over time. Free trade and open borders led to huge booms in economic growth throughout the class strata.

How could this be? Free societies with stable and strong property rights create grand incentives for individuals to compete, earn, and grow their wealth. Doing so is a boon for the economy. Incentive is the driver of innovation and competition. Today, there is ever-growing demand is for jobs of all kinds in the US. If anything, labor is scarce and we need more people! When capital lacks the freedom to move where it's most efficiently allocated, incentive dies, the labor force cannot adapt, and poverty strikes. The urge to "protect" jobs by creating regulation has, by definition, a deleterious effect on labor.

But free flow of labor and capital is just part of the secret to creating a powerful workforce. Tomorrow, an in-depth look at how the principle of competition can actually create jobs, not destroy them.