Economic Aspects of the Pension Problem
On Whom Does the Incidence Fall?
Whenever a law or labor union pressure burdens the employers with an additional expenditure for the benefit of the employees, people talk of “social gains.” The idea implied is that such benefits confer on the employees a boon beyond the salaries or wages paid to them and that they are receiving a grant which they would have missed in the absence of such a law or such a clause in the contract. It is assumed that the workers are getting something for nothing.
This view is entirely fallacious. What the employer takes into account in considering the employment of additional hands or in discharging a number of those already in his service, is always the value of the services rendered or to be rendered by them. He asks himself: How much does the employment of the man concerned add to the output? Is it reasonable to expect that the expenditure caused by his employment will at least be recovered by the sale of the additional product produced by his employment? If the answer to the second question is in the negative, the employment of the man will cause a loss. As no enterprise can in the long run operate on a loss basis, the man concerned will be discharged or, respectively, will not be hired.
In resorting to this calculation, the employer takes into account not only the individual’s take‑home wages, but all the costs of employing him. If, for example, the government—as is the case in some European countries—collects a percentage of each firm’s total payroll as a tax which the firm is strictly forbidden to deduct from wages paid to the workers, the amount that enters into the calculation is: wages paid out to the worker plus the quota of the tax. If the employer is bound to provide for pensions, the sum entered into the calculation is: wages paid out plus an allowance for the pension, computed according to actuarial methods.
The consequence of this state of affairs is that the incidence of all alleged “social gains” falls upon the wage‑earner. Their effect does not differ from the effect of any kind of raise in wage rates.
In a free labor market, wage rates tend toward a height at which all employers ready to pay these rates can find all the men they need and all the workers ready to work for this rate can find jobs. There prevails a tendency toward full employment. But as soon as the laws or the labor un‑ ions fix rates at a higher level, this tendency disappears. Then workers are discharged and there are job‑seekers who cannot find employment. The reason is that at the artificially raised wage rates only the employment of a smaller number of hands pays. While in an unhampered labor market unemployment is only transitory, it becomes a permanent phenomenon when the governments or the unions succeed in raising wage rates above the potential market level. Even Lord Beveridge, about twenty years ago, admitted that the continuance of a substantial volume of unemployment is in itself the proof that the price asked for labor as wages is too high for the conditions of the market. And Lord Keynes, the inaugurator of the so‑called “full employment policy,” implicitly acknowledged the correctness of this thesis. His main reason for advocating inflation as a means to do away with unemployment was that he believed that gradual and automatic lowering of real wages as a result of rising prices would not be so strongly resisted by labor as any attempt to lower money wage rates.
What prevents the government and the unions from raising wage rates to a steeper height than they actually do is their reluctance to price out of the labor market too great a number of people. What the workers are getting in the shape of pensions payable by the employing corporation reduces the amount of wages that the unions can ask for without increasing unemployment. The unions in asking pensions for which the company has to pay without any contribution on the part of the beneficiaries has made a choice. It has preferred pensions to an increase in take‑home wages. Economically it does not make any difference whether the workers do contribute or do not to the fund out of which the pensions will be paid. It is immaterial for the employer whether the cost of employing workers is raised by an increase in take‑home wages or by the obligation to provide for pensions. For the worker, on the other hand, the pensions are not a free gift on the part of the employer. The pensi
Article from Mises Wire