All Commentary
Wednesday, April 1, 1981

Labor Unions Aggravate Inflation by Lowering Wages

Dwight Lee Is Associate Professor of Economics, Center for Study of Public Choice, Virginia Polytechnic Institute and State University.

It is commonly believed that labor unions generate inflation by increasing the wages of workers. This is not the case. Labor union activities do aggravate inflation, but they do it by reducing the real wages received by workers, not by increasing them. An understanding of why this is true requires, first of all, a brief explanation of the cause of inflation.

We are currently experiencing inflation for the same reason that any economy, at any time, has ever experienced inflation: the money supply has been growing more rapidly than the growth in production. Assume, for example, that the production of goods remained the same but the number of dollars we have to spend on these goods doubled. We would all be willing to spend approximately twice as much on each good as before. But this means that the price of goods would also double, as would the general price level. Increase the growth in the money supply and reduce the growth in productivity and inflation will result.

Since monetary growth is subject to much larger changes than productivity growth, it is a rapidly growing money supply that explains most of our inflation. It is the federal government that controls the money supply, so the major blame for inflation can be placed on government activity. Labor unions aggravate inflation however, by engaging in practices which impair economic productivity.

It is only by imposing restrictions on the economy which reduce productivity that a union can provide an economic benefit to its members. In a free and open labor market a worker will be able to receive a wage that reflects his productivity and which is no higher than what comparably skilled workers are receiving elsewhere in the economy. A higher wage would attract additional workers thus driving the wage back down to the competitive level. Of course, this competitive process increases the productivity of the economy by directing workers into those employments where their contribution is greatest. And it is productivity that has increased over time in response to the incentives and direction provided by competitive markets that, at least until recently, made U. S. workers the best paid in the world.

But union leaders cannot attract dues-paying members by getting them a wage rate that they could earn without a union. And the only way unions can provide their members with higher than competitive wages in some occupations is to restrict the competition from nonunion workers. While this may increase union wages in the short run, it does so at the expense of lower wages for other workers. Higher union wages and prices in one sector of the economy are effectively offset by lower wages and prices elsewhere in the economy.

In order to realize this relative wage advantage for its members, organized labor has consistently fought for legislation which reduces, if not eliminates, the opportunity for nonunion workers to secure jobs that would otherwise be available to them. Organized labor’s struggle for the closed shop (only union members can be employed) and their bitter opposition to state right- to-work laws (which eliminate union membership as a requirement for employment) are clear examples of union attempts to protect their workers against competition. Other examples are union efforts to restrict imports and obtain legislation restricting the movement of large employers from the unionized NorthEast to the less unionized Sun Belt states.

Competition Reduced

To the extent that organized labor has been successful in these restrictive activities, the economic competition and mobility that is a major source of increased productivity has been reduced. And strong evidence of the success of unions in protecting their members against productive competition is seen in the featherbedding practices they are able to impose, practices which could never survive open competition. Unions have long inflicted costly featherbedding practices on the railroads, with the requirement that firemen remain on diesel locomotives being a well-known example. The building, theatrical and oceanshipping industries, as well as many others, also suffer from union featherbedding requirements.

A typical example is that of a construction job which required the use of several very small gas-powered generators. Because of union requirements, each generator had to be attended by an operating engineer, an electrician, and a pipefitter. The engineer had to start the engine a few times each day, the electrician pushed wire plugs in the generator’s sockets if they were moved, and the pipefitter was there, “just in case.” Obviously, such practices further the negative effect organized labor has on our economy’s productivity.

It is this impact on productivity that explains why the overall effect of organized labor is to reduce real wages. Productivity is the source of all income, including wages. Real wages depend on the wage earner’s ability to buy goods and services. It cannot be purchased unless it is first produced. Furthermore, for a given rate of monetary growth, the lower our productivity the higher the inflation rate. So unions have an inflationary impact by reducing productivity and thus lowering, not raising, the general level of real wages.

Market Efficiency Hampered

The best way to increase productivity, improve the living standard of all workers, and help retard inflation is to allow competition in free and open markets. Unfortunately we can expect little support in this direction from organized labor. Union leaders cannot tolerate the efficiency of competitive markets because what they have to offer their members comes from their ability to reduce the free market opportunities of others.

The very existence of organized labor depends on its ability to use its political influence to sabotage the efficiency of the free enterprise system. If allowed to operate freely, the market process would simply circumvent union efforts to impose inefficiencies on the economy. This would leave union leaders with little to justify their healthy incomes, but also with little ability to undermine productivity, aggravate inflation and thereby reduce, in the long run, the real incomes of us all, union and nonunion workers alike.

  • Dwight R. Lee is the O’Neil Professor of Global Markets and Freedom in the Cox School of Business at Southern Methodist University.