The economist W.H. Hutt, in The Theory of Idle Resources (p. 75f), discusses Joan Robinson’s proposal that specialized labor working in a field for which it is not specialized ought to be called “disguised unemployment”. If the specialized field has wages which are (due to collusion or regulation) above market-rate, unemployment will be merely the most visible effect: others will be pushed unto “inferior occupations [which] must involve the non-utilization of specialization.” However, he argues, there is a third effect, still less visible; namely, that the course of specialization itself is altered, and in the long run grows up around the collusive wage structure. “Thus,” he argues, “working-class women may have become specialized to household duties largely through the exclusiveness of men’s labor organization.”
Trade unionism, the main wellspring of collusive wage rates, has declined significantly in prestige since the book was written in 1939. However, this triplet of waste – unemployment, non-use of specialization, and diversion of specialization – are still with us. There is indeed a fundamental symmetry between wage-collusion and another policy goal which has come more recently into vogue: the expansion and subsidization of higher education.
Both of these policy objects will have broadly similar effects on the shape of the labor market – wage-collusion operating on the demand side, and education subsidies on the supply side. The first and most visible effect – unemployment – is merely a severe case of the second effect, the non-use of specialization (which was precisely Robinson’s point). In both cases, and for both causes, there is a glut of specialists relative to jobs, the resources put into specialization are largely wasted, and the (already lower) wages of unspecialized industries depressed as marginal specialists compete for those jobs. In the case of wage-collusion, fewer people are employed than the market could profitably support in that field, leading to higher wages for the inside group, but unemployment or wasted specialization for marginal candidates. When, on the other hand, higher education is subsidized, more specialized candidates are turned out than the market can support. In this case as well, the marginal candidates are relegated to unemployment or non-specialized jobs. The recent survey claiming barely more than a quarter of college grads have jobs related to their majors illustrates the inevitable effect of the recent frenzy of universal-college initiatives.
But by far the most significant effect of both of these is that dynamic adjustment which mitigates the waste of the first two effects. Specialization is not necessarily itself wasted, but its direction and character are changed to conform to the new situation. In the case of collusive wages, there will be some equilibrium amount of non-specialization and unemployment as people jockey for inclusion and privilege. The higher the wage rate above the market rate, the more such people there will be (and, seen from the other side, the wage rate can only be maintained at a higher level by excluding more people). Thus the high incidence of unemployment and non-specialization will induce many prospective employees to specialize in something else, for on net the higher wage rates enjoyed by insiders will not outweigh the risk of being an outsider. This, in turn, depresses wages also in specialized but competitive industries, especially those most similar to the original.
In the same manner as wage-collusion shapes the direction of specialization in the long run, universalizing college leads to distortions in the shape of available occupations. Because the investment has been subsidized, specialized labor becomes cheaper relative to unspecialized labor. As we get more engineering majors, engineering becomes cheaper to do, allowing it to absorb some – but not all – of the additional majors (the remainder of whom become unemployed or employed in non-specialized fields). Furthermore the additional employees will, on average, be of lower quality than before. Each occupation whose training is subsidized through education will expand at the expense of average quality – and more fundamentally, away from the social optimum.
This is the danger of both trade unionism and higher-education subsidies, like nearly any other intervention. The lives directly made worse (the unemployed and non-users of their specialization) certainly represent significant injustices. But more importantly, the entire structure of the labor market grows up around the intervention such that these injustices cannot be rectified without displacing innumerably more people. Constituencies and interest groups are formed such that the policy becomes a “politically irrevocable measure that will have to be continued, whether it proves a mistake or not” (Hayek 1960, p. 421) – and a mistake it must prove to be as the labor market becomes increasingly rigid.