I have often wondered why many politicians, journalists, members of the clergy, playwrights, novelists, and far too many others hold labor unions in high regard. From an economist’s perspective, they are merely labor cartels that exist mainly to restrict competition in labor markets. Moreover, they have a well-documented history of resorting to violence when they do not get what they want. While they have benefited some workers, they have done so at the expense of other workers and consumers, not capitalists and entrepreneurs.
Yet Congress has seen fit to bestow extraordinary privileges and immunities on labor unions. They are immune to prosecution for committing acts of violence so long as the violence is used in pursuit of “legitimate” union goals. Elimination of competition from nonunion workers is always taken to be a “legitimate” union goal. If a few heads and arms get broken along the way, well, the nonunion workers should have known better. If any other organization commits acts of violence, it is prosecuted. When a union does, it is applauded.
Politicians, of course, may support unions merely because they are a major source of financial and in-kind support in elections; but many politicians, along with others, genuinely think that unions are good for workers and good for the country. Why? There are at least three sources of pro-union sentimentality.
People are often guilty of woolly, sentimental thinking. For example, Section 6 of the Clayton Act proclaims that unions deserve special privileges because “the labor of a human being is not a commodity or article of commerce.” This is unmitigated nonsense. People of course are not commodities or articles of commerce—they are not bought and sold—but labor is, no matter what the politicians say. A person’s labor consists of the useful services he is able to perform. People offer those services for sale, and other people buy (hire) those services in countless labor markets every day. In fact, when people who seek to sell their labor cannot find willing buyers, the same politicians who deny that labor is a commodity rush to subsidize the disappointed sellers, just as they rush to subsidize disappointed sellers of other commodities, such as corn.
Many people seem to subscribe to the following syllogism: Workers have legitimate rights that ought to be defended; unions exist to defend the rights of workers; therefore, whatever unions do in the name of defending those rights must be legitimate. While the first premise is certainly true, the second is almost always false. Even if it were true, the conclusion is a non sequitur. Actions cannot be justified merely on the basis of good intentions.
Unequal Bargaining Power
Perhaps the most important source of pro-union sentimentality is the widespread belief that individual workers have an inherent bargaining-power disadvantage relative to employers, and that labor unions are the only effective way for workers to overcome that disadvantage. Indeed, the National Labor Relations Act (NLRA) asserts that “The inequality of bargaining power between employees who do not possess full freedom of association or actual liberty of contract, and employers who are organized in the corporate or other forms of ownership association” is one of the principal wrongs the Act is intended to redress. But this inherent bargaining-power disadvantage is little more than a myth.
In any market, whether for labor or dead fish, sellers compete with other sellers to strike deals with buyers, and buyers compete with other buyers to strike deals with sellers. Whether a buyer or a seller, a person’s bargaining power depends on the quantity and quality of exchange alternatives he has. In the labor market the buyers are employers and the sellers are workers. In an open labor market, workers compete with other workers to be hired by employers, and employers compete with other employers to hire workers. If a worker has many alternative employment opportunities—if there are many employers eager to hire him—he will have a lot of bargaining power vis-à-vis any one employer. If there is only one employer for whom he could work, he will have little bargaining power vis-à-vis that employer. Similarly, if an employer has many workers who apply for a particular job, he will have a lot of bargaining power vis-à-vis any one worker. If there is only one worker offering to sell labor services to him, he will have very little bargaining power vis-à-vis that worker.
For any given degree of competition among employers to hire, workers will have more bargaining power when there is less competition among workers to be hired. That is what unions are all about. They seek to quash competition among workers to be hired. (They say they want to “take wages out of competition.”) They seek to eliminate hiring alternatives employers otherwise would have. They do so by trying to impose standard union wages and trying to exclude nonunion workers from union-impaired markets. A union that succeeds in doing so in any particular market becomes a monopolist in that market.
Likewise, for any given degree of competition among workers, employers will have more bargaining power when there is less hiring competition among employers. If there is no competition among employers—either because there is only one employer in a particular labor market or because the employers in that market have formed a hiring cartel—workers in that market will have almost no bargaining power. Economists call this situation a monopsony (literally, a single buyer).
In the early and mid-nineteenth century there were many labor markets in which employers had monopsony power. The extent of this power gradually waned over the last third of the century, and in the first half of the twentieth century it all but disappeared. Henry Ford did more to increase the bargaining power of workers in general than any labor union has ever done. He did so by mass producing his early automobiles at low prices, which made them available to ever-increasing numbers of people. Automobiles enlarged the area in which more and more workers could search for jobs. Today, technological progress in transportation and communication has eliminated monopsony power in almost all labor markets.
Evidence to support the claim that monopsony power was waning long before labor unions played any significant role has been compiled by Morgan Reynolds at Texas A&M University. Briefly, over the nineteenth century the trend of real wages and workers’ material circumstances was strongly positive, worker-initiated job-switching increased steadily and substantially, and large firms (ones likely to have any monopsony power that existed) consistently paid increasingly higher wages than small firms.1 All this took place without unions. Workers didn’t need them then, and workers don’t need them now.
A third source of pro-union sentimentality is what has come to be called the purchasing-power fallacy. It is alleged that for an economy to have sufficient aggregate demand to sustain full employment, workers must have high purchasing power.
The purchasing-power fallacy confuses real and nominal wages. Lower wages do not mean lower purchasing power if prices are also lower. It also confuses real and nominal aggregate demand. When unions are able to obtain above-market real wages for the employees they represent, real aggregate demand is reduced. Looking beyond the veil of money, within a system of voluntary exchange the production of one good is a source of demand for other goods. People produce wine, for example, in order to be able to exchange it for things other than wine. The production of wine is a source of the demand for things other than wine. The production of wine gives rise to incomes for all the people involved in producing wine. Workers receive wages and salaries; owners of assets receive interest, dividends, and rents; and entrepreneurs receive profits. These incomes come from the difference between the prices consumers pay for wine and the prices the producers have to pay to suppliers of intermediate goods (goods produced by one firm to be used by other firms as inputs, for example, bottles and corks). Receivers of the incomes use them to purchase goods for consumption. Some portion may be spent on wine, but most is spent on other things. Of course, the production of substitutes for wine—beer, for example—directs some demand away from wine. So the source of the demand for any good is primarily the production of noncompeting goods.
The only way that a union can successfully obtain above-market real wages for workers is by restricting the supply of labor relative to the demand for it. Restricting the supply of labor in wine production reduces the production of wine. Thus the demand for all the noncompeting goods for which the unproduced wine was destined to be exchanged is diminished. Although the labor that is shut out of wine production will eventually be hired in union-free markets to produce other goods, its productivity will be lower in these alternative employments because it will have been inefficiently allocated. (In open markets, resources, including labor, are allocated to where consumers would have allocated them, which is sometimes called their most highly valued use. The unions’ entry restrictions prevent this from happening.)
Similarly, the source of the demand for wine is the production of all the other goods that enable consumers of wine to purchase it. If the production of some of those other goods is also curtailed by union activity, the demand for wine and many other noncompeting goods must decrease. Furthermore, unions usually impose work rules that reduce labor productivity for each quantity of labor hired. From an aggregate perspective, real output is the product of the quantity of labor engaged in production and the average productivity of that labor. Unions reduce both of those factors and therefore reduce the flow of output that is the source of real aggregate demand.
The belief that labor unions have benefited workers in general at the expense of capitalists and entrepreneurs is on a par with the belief that the economic policies of Franklin Roosevelt eliminated the Great Depression. Neither belief can withstand strict scrutiny, but both are widely held. Worse, both lead to unwise public policy. Labor unions are cartels backed by legal compulsion, and until they are stripped of that protection it will be necessary to continue debunking the myths of unionism.