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clerks in the store laughed at him. In short, he was being paid
about what he was worth. It was a long time before anyone would
risk letting him wait on customers.




2
While the employer had the prospect of more experienced job applicants, Woolworth's alterna-
tive was to remain on his father's farm. His brother described their routine of going out at 5:30 in
the morning to milk the cows, barefoot even on cold mornings: "We would stand on the ground
upon which the cows had been lying to get a little warmth into our nearly frozen feet. No wonder
we yearned to get away from the endless drudgery."
Free and Unfree Labor 37

The three months of working for free”from seven in the morn-
ing until nine at night”that Woolworth invested paid off bigger
than a lottery. After he became a paid employee, the knowledge
and experience which he accumulated working in that store even-
tually enabled him to go out into the world to set up his own
store”and, in the decades ahead, ultimately thousands of stores
around the world, which made him one of the most fabulously
wealthy men of his time.3 In later years, he spoke with gratitude of
the man who had hired him”and he made his former employer a
partner in the F. W. Woolworth retail chain. He indeed ended up
paying him for teaching him the business.
In more recent times, minimum wage laws and public disap-
proval of non-paying jobs have eliminated this particular way of
acquiring human capital. However, many people continue to take
lower-paying jobs than they could get elsewhere when they value
the experience available to them in the less remunerative job and
expect to cash in on it later on in their careers. They are thinking
beyond stage one.
Some begin administrative careers as modestly paid officials in
government regulatory agencies, in order to go on to higher-pay-
ing jobs in the industries regulated by those agencies, where their
inside knowledge would be valuable to these businesses in coping
with numerous government rules and regulations. Some people
with Ph.D.s in the sciences may choose to become post-doctoral
fellows at prestigious universities, where they can work with
world-class chemists or physicists, rather than take a teaching post
at a lesser institution where they would receive higher pay than
they get from their fellowship. After they have learned from work-


3
The Woolworth Building in New York, once the tallest building in the world, may well still be
the only skyscraper in the world whose construction was paid for in cash from the personal fortune
of one man, F. W. Woolworth.
38 APPLIED ECONOMICS


ing with top people in their respective fields, their own enhanced
reputations can then make them more marketable at higher-level
institutions at higher pay.
Those who disdain low-paying jobs as "menial" or who refuse to
accept "chump change" for entry-level work are usually not think-
ing beyond stage one. Not only isolated individuals like Paul
Williams or F.W. Woolworth began in this way, so have great
numbers of others who have developed human capital and col-
lected the dividends later. A study of Americans in the top one
percent of wealth-holders found that the average age at which they
began working part-time was fifteen”which suggests that some
may well have been working in violation of child labor laws. De-
spite the assumption of fixed "classes" to which people belong for
life, most Americans in lower income brackets do not stay in those
brackets for more than a few years.
While upward social mobility has been called "the American
Dream," it is by no means confined to Americans”and it is no
mere dream. Studies in Greece, Holland, Britain, Canada, and
New Zealand have found similar patterns. At the other end of the
income scale, when Forbes magazine ran its first list of the 400
richest Americans in 1982, that list included 14 Rockefellers, 23
du Fonts and 11 Hunts. Twenty years later, the list included 3
Rockefellers, one Hunt and no du Fonts.
While such patterns are common in Western industrial nations,
they are not confined to such nations. Even such a caste-ridden so-
ciety as India has had some remarkable rags-to riches stories, espe-
cially after more free markets emerged toward the end of the
twentieth century.4 While rigid caste lines continue to be observed
in rural villages, the cost of doing so in modern, high-tech sectors

4
See, for example, India Unbound by Gurcharand Das, Chapters 13 and 17.
Free and Unfree Labor 39


of the Indian economy would include passing up huge profits that
could be made by employing the talents of scientists, engineers,
inventors, and entrepreneurs who might not have originated in the
highest social levels.
Ironically, the notion of fixed "classes" to which people belong
has acquired widespread influence at a time when increasing evi-
dence from around the world belies that assumption. While it has
become fashionable in many quarters to sneer at the idea of eco-
nomic opportunity and upward mobility”fashion and sneers be-
ing substitutes for knowledge”the evidence keeps piling up that
income mobility is the rule, not the exception, in free market
economies. As Professor Peter Bauer of the London School of
Economics remarked, "British industry is managed, and has been
managed for decades or even centuries by new men, people who
have made their own way, often from humble beginnings." But
apparently such facts have not greatly changed popular percep-
tions. Professor Bauer also noted: "Indeed, it is quite usual to read
accounts in the newspapers of the careers of very rich people who
have started with nothing, side by side with articles complaining
of the rigid class structure in Britain."
Young people who begin by working at McDonald's seldom
spend their careers at McDonald's. Just in the course of a year,
McDonald's has more than a 100 percent turnover rate. What
those who leave take with them is not only such basic experience
as showing up for work regularly, cooperating with others, and
knowing how to conduct themselves in a business environment,
but also a track record that enables them to move on to other and
very different occupations at progressively higher levels in the
years ahead. The experience and the track record from McDon-
ald's are likely to be more valuable in the long run than the modest
paychecks they earned serving hamburgers.
40 APPLIED ECONOMICS


Put differently, whatever reduces opportunities for gainful em-
ployment for people with little or no experience has the effect of
costing both them and the society far more than the lost jobs
which have been dismissed as "menial" or as paying only "chump
change." Nothing is easier than to take a lofty moral position that
when minimum wage laws, for example, result in a reduction of
low-paying jobs, it is nothing to regret, as some politicians and
journalist have done:

People who get up and go to work each day deserve to make enough
money to cover their essential needs. Employers that aren't produc-
tive enough to provide such a basic level of compensation”"chisel-
ers," some detractors have called them”don't belong in an affluent
society.

Having wage rates set by third parties' notions of workers' "es-
sential needs" would be a radical departure from having wages set
by supply and demand”and it is by no means clear how either the
allocation of resources in the economy or the interests of the work-
ers themselves would be better served in this way. These workers
may well feel that their most "essential need" is a job and that de-
stroying both jobs and the employers who provide them solves
none of the workers' problems. The only clear beneficiaries would
be those who acquire such arbitrary powers over their fellow hu-
man beings and are thus able to feel both important and noble
while in fact leaving havoc in their wake.
Obviously, those people who are working for employers whom
third party observers regard as expendable would not be working
for them if there were better alternatives available. How does re-
moving one of the options of people with few options make them
better off? Similar one-stage thinking is also apparent in many ob-
servers who wax indignant over low-wage workers employed in the
Third World by multinational corporations. While the pay of such
Free and Unfree Labor 41


workers is often low by comparison with that of workers in more
affluent industrial societies, so too is their productivity. An inter-
national consulting firm determined that the average labor pro-
ductivity in the modern sectors in India is 15 percent of that in the
United States.
In other words, if you hired an average Indian worker and paid
him one-fifth of what you paid an average American worker, it
would cost you more to get a given amount of work done in India
than in the United States. Paying 20 percent of what an American
worker earns to someone who produces only 15 percent of what
an American worker produces increases your labor costs, even
though you are hiring "cheap labor" and are virtually certain to be
accused of "exploitation."
There are reasons why output per worker is much lower in
some countries than in others, and the reasons need not be a lack
of effort or intelligence on the part of the workers. The amount
and quality of the equipment used by the worker, the level of so-
phistication in the management of the enterprise, and even the
higher shipping costs in countries with poor roads and other in-
adequate infrastructure, all play a role. Management has much to
do with the productivity of labor. Companies in Britain run by
American managements have had more than 50 percent higher
productivity than British companies run by British management.
In Third World countries with poor roads and inefficient rail
lines, the net value of the goods shipped is reduced by the addi-
tional shipping costs that these entail. Poorer countries often also
have higher levels of corruption, including a need to pay numerous
bribes in order to do business without being delayed or harassed
by officials enforcing innumerable regulations and red tape re-
quirements. Since the value of the worker who produces widgets is
based on how much money a widget adds to his employer's rev-
enue, the worker will be worth less when transportation and other
costs are higher.
42 APPLIED ECONOMICS

The widget itself may sell for the same price in the world mar-
ket, whether produced in the Third World or in a modern indus-
trial nation, but the costs of getting the widget from the factory to
the point of sale must be deducted in both cases. When that de-
duction is larger in a country with less efficient transportation and
more corrupt officials, the net value of the widget to the enterprise
producing it is less”and therefore so is the value of the labor that
made it.
Multinational corporations already pay about double the local
wage levels in Third World countries, even though they do not pay
as much as workers receive in more industrialized nations. Insist-
ing that multinational corporations raise their employees' pay
scales in these Third World countries may sound good to those
who do not think beyond stage one. But the consequences of such
higher pay scales being imposed by law or public pressure can be
that it becomes economically preferable for the multinational cor-
poration to discontinue hiring many Third World workers whose
output is worth less than what third parties want them paid. This
in turn means that Third World workers lose not only jobs that
pay more than their local alternatives but also that they lose the
human capital that they could acquire from working in more effi-
cient enterprises.
Contrary to theories of "exploitation," most multinational corpo-
rations focus the bulk of their operations in countries where pay
scales are high, rather than in countries where pay scales are low.
The United States, for example, invests far more in the affluent,
high-wage countries of Europe and Japan than in India or in all of
poverty-stricken sub-Saharan Africa. While those who fear ex-
ploitation of low-wage workers may regard that as a good thing, it
is in fact tragic that so many desperately poor people are denied
both much-needed income and opportunities to increase their hu-
man capital and, with it, their countries' prospects for future pros-
Free and Unfree Labor 43


perity. To the extent that their would-be benefactors succeed in
raising their pay scales without being able to raise their productiv-
ity, the net result is likely to be pricing them out of jobs. As a
noted economist once said: "We cannot make a man worth a given
amount by making it illegal for anyone to offer him less."


Job Security

Another area in which failing to think beyond stage one promotes
policies whose unintended consequences backfire is that of job se-
curity laws and policies imposed by governments or labor unions.
The obvious purpose of such laws is to reduce unemployment but
that is very different from saying that this is their actual effect.
Job security laws and policies restrict an employer's ability to
lay off workers for economic reasons or to fire them for unsatis-
factory work. In India, for example, engineers in the govern-
ment-owned telephone system have been guaranteed lifetime
jobs, even if the phone system is someday privatized. It is much
the same story in Poland, where the sale of state-owned enter-
prises from the Communist era to foreign investors has had pre-
conditions such as a four-year "no layoff" agreement for France
Telecom when it bought a Polish telecommunications firm, and
a ten-year moratorium on layoffs for workers in a Polish power
plant bought by a Belgian company. Germany's job-protection
laws and mandatory benefits to workers have made labor costs in
German industry "the world's highest," according to The Econo-
mist magazine and "arguably the biggest single obstacle to job-
creation."
Although such laws protect workers who already have jobs, nev-
ertheless the increased labor costs created by these laws discourage
the investments needed to create jobs for workers who do not yet
have jobs. These laws make it more profitable to buy labor-saving
44 APPLIED ECONOMICS


machines and to work existing workers overtime when more out-
put is needed, rather than hire additional workers whom it would
be difficult to lay off when output returned to previous levels.
Countries with such job security laws typically do not have lower
unemployment rates but instead higher unemployment rates than
countries without such job protection. It is a classic example of
stage one benefits, followed by losses at later stages.

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