How Government Regulations Create Lower Wages and Unemployment

By Kel Kelly

The consequences of any regulation that government imposes in the workplace are ultimately borne by workers and/or consumers. The more costs imposed on employers—for example, requiring better workplace health and safety regulations—the lower salary workers receive. As we’ve seen above, the costs cannot come out of profits, or else the companies will go under.

It is a mistake to think that workers need “protective” regulation at all; it is a fallacy to believe that workplaces will not improve without forced regulation. OSHA and EPA regulations came about only in the 1960s and 1970s as workplaces had already reached a state similar to what they are today. In other words, workplaces have been improving for hundreds of years without government force. Employers have a natural incentive to make workplaces safer, healthier, and more comfortable in order to attract laborers. For example, if company A has air conditioning and a safer environment than workplace B, which is uncomfortably hot and less safe, workers will choose workplace A as long as they are paid the same. Companies with less desirable workplaces will have to pay more for labor, but since they can’t easily afford to pay higher salaries, they compete with more satisfactory workplaces.  This is why many workplaces today offer gyms, free food and drinks, entertainment, and other amenities voluntarily, without government force. In India, the outsourcing boom has resulted in a lack of qualified workers, and companies are not only bidding up wages to the point that they are increasing at over 30 percent per year, but they are also competing by offering myriad other benefits such as defined career paths, quicker promotions, more workplace amenities and services (such as transportation to work), more holidays, and flexible work schedules.

But when government tries to force such improvements before they are economically viable, workers will foot the bill with lower salaries. Think of the American textile factories in the early part of last century. They were hot in the summer and cold in the winter.  They had poor lighting and bathrooms (if they had any bathrooms at all). Now suppose the government had forced employers to install central air, which since it was invented only in 1902, was still enormously costly even in, say, 1910. Suppose further that the employers were forced to install nicer, bigger bathrooms with a minimum number of stalls. In addition, imagine they were compelled to put in carpet, more windows, cutting edge technology lighting, and a break room stocked with food. Clearly, the less developed workplaces of those days could not have afforded such luxuries. They would have had to lay off many workers to pay for the additions, or else paid workers much less money. To have paid for improvements out of profits would have resulted in business losses, and thus the entire business would have gone under.

© 2010 by the Ludwig von Mises Institute and published under the Creative Commons Attribution License 3.0. http://creativecommons.org/licenses/by/3.0/