I was talking tonight to my mother about reality shows when I happened to mention how unfortunate it was for the writer's union that they went on strike at the same time as the public was first developing a taste for reality shows like survivor1. Of course, thanks to the government's strongly pro-union bias, and the fact that the entertainment media exist mainly in union friendly states such as California and New York, the writers did not suffer too badly, and, in the end, managed to extort above market wages from their employers, but thanks to the strike, they did hasten the growth of reality television, which reduced the total demand for their particular skills, meaning, in reality, they may have, overall, suffered a net loss by forcing higher wages, but in return receiving fewer total hours of work.
At the time I was talking, I didn't think of this self-defeating possibility, but I did mention in passing that the writers managed to feather their own nests, but (speaking as an embittered would-be writer) at the expense of making it harder for others to enter the market. Of course, that is hardly a novel discovery. Many writers have pointed out that the unions serve primarily as a barrier to entry by possible competitors. In fact, I mentioned it myself in "Exploited Labor", "Capital Investment", "Fairness and the Free Market" and "The Harm of Closed Shops and Collective Bargaining". However, for some reason it stuck with me this time, and the more I thought about it, the more I realized that the entire union structure is based upon one layer feeding upon the next level down, bettering itself by making the next larger group suffer. Unlike the free market, which relies upon beneficial exchange ("In Praise of Contracts", "Planning For Imperfection", "Greed Versus Evil "), unions are zero-sum games, assuming a fixed pool of opportunities, and basing all interactions upon one group harming another to gain the advantage. ("How the Government Corrupts Relationships")
And so, though the principles have been understood for some time, and explained endlessly, I feel it is worth returning to the unions one more time, as, despite all the analysis that has come before, I think I have one novel contribution to make, the depiction of union organization, and by extension all government intervention, as a form of cannibalism.
Let us look at the most basic purpose of unions, the elevation of wages. In the minds of union supporters, this will be accomplished by just reducing profits, reducing the wages of management or otherwise taking it from "the fact cats", but that is a mistaken belief.
First of all, the "owners" of most companies are not a few plutocrats in top hats who resemble the Monopoly mascot. Most "owners" are the small stock holders, be they investors, 401K/403b holders, insurance companies, pension plans or others. In short, the same "little guys" the unions claim to support. So, taking the profit from these owners does not harm the "big guys", but small investors. However, that is a moral2, not a practical objection. The practical objection is that a stock must return a certain percentage of value, or else risk dropping in value, which will prevent the company form issuing future stock, obtaining loans with stock as collateral, and cause a host of other problems. So, though the unions think the "owners" can just "take less profit", reducing the profit on public companies can cause serious harm that will effect employees as well.
Nor can money be taken from other "owners". Investors, even in companies which are not publicly traded, expect a certain return, or future capital will not be forthcoming. In addition, many investors, be they bond holders or venture capitalists, have contracts fixing returns, so there is simply no way to reduce the amount paid. As the stockholders and other private investors must be paid largely the same amount, either due to contractual obligations, or the need to maintain a reasonable return to ensure future sources of capital, there is simply no way to squeeze money out of "the fat cats" to pay for increased union wages.
So, from whence does it come?
Another suggestion is to reduce the amount paid to management. Much is made of CEOs of bankrupt firms being paid tens of millions, but that is a red herring. First, I have discussed the fact that such pay may be fully justified. Perhaps a less competent manager would make the losses much worse. If paying $10 million for a CEO avoids $100 million in losses, then he is worth it, even if the company is still running at a loss. ("A New Look At Intervention", "A Really Foolish Idea", "Greed", "Greed Part 2", "A Little More On CEO Salaries", "Another Bad Idea", "What Is Fair? or, How Game Theory Leads Us Astray", "Envy Kills", "Envy And Analogy", "He's Bad So He Must Be Wrong") Likewise, despite the slanders of workers, CEOs do earn their money. After all, if anyone could dot he job of a successful CEO, then why would GE not hire one of them for $100,000 rather than pay $10 million for the one they have? The answer is, despite the populist nonsense that sees CEOs doing nothing, they perform many useful functions and earn the company many times their salaries, otherwise they would not be drawing those wages3.
It is true that as costs rise, sometimes businesses try to economize by reducing overhead, including management positions, but for a well run business, such changes usually represent a net loss. After all, if a manager is not earning money for the firm, then cutting him should have happened already. And if he is earning money, then cutting him will represent a loss, not a gain. Though, in a cash crisis, it may be preferable to accept the loss of future revenue to avoid the ongoing salary expense4.
In reality, the increase in wages is paid for by reducing the total amount of labor used. This has a number of consequences, as we shall discuss shortly, but the one which concerns us here is the reduction in total output. When wages rise, employees who produce less than the minimum wage for their position will no longer be employable, and so the firm will try to eliminate them. If the union rules prevent them from reducing the staff, then they will economize by reducing the total number of hours, as it will reduce the amount of loss on those inefficient workers5. Or, in the worst case scenario, when union rules mandate a certain number of hours and a fixed group of workers, then the firm may end up either closing plants or shutting down subdivisions of the company, if that provides the only means to reduce costs. Whatever the solution, the result is the same, when wage costs increase, output decreases and prices rise.
Which means, though it is rarely examined by economists, the first group harmed by unionization is not someone involved with the business explicitly, but instead are the customers6. ("Jobs, Jobs, Jobs, and More Jobs", ""Fair Trade"", "Clarifying a Reality of Capitalism", "Production and Consumption")Well, that is if the product sin question are either solely produced by unions, or some form of government intervention protects the unions, as otherwise the increase in prices and reduction of output will result in nothing but the eventual bankrupting of the unionized firms7. But assuming a closed market without adequate substitutes, the customers are confronted with increased prices and reduced supply, leading them to both purchase less of the good in question, as well as less of other goods, leading to a net loss of total consumer satisfaction. In short, the union gains its increased wages first by taking from the consumers as a whole. That large scale cannibalization of the entire economy is the first step in what I see as the union food chain, the union as a whole feeds upon consumers as a whole.
The second group, a bit smaller, is the first that I see explicitly considered by economists. Those are job seekers. As I explained in "Professional Education", "Education And Testing" and "Licensing", all professional groups, and that includes unions, keep prices high by limiting competition and placing barriers upon entry into the workplace8. Unions workers as a whole cannot charge above market wages if employers can go to the pool of workers and hire replacements. That is the motivation behind "closed shops", workplaces where employees must be union members. ("The Harm of Closed Shops and Collective Bargaining") If an employer can hire non-union labor, then union negotiations do nothing but price union labor out of the market. But once they exclude non-union labor, and place barriers to joining the union, such as long apprenticeships, then they can charge well above market prices. However, to do so, they need to harm the job seekers who are not part of the union. In other words, unions, while claiming to help "labor", end up harming a lot of "labor" by making it harder, or impossible, for non-union labor to obtain work. That is the second step in the union food chain, union labor feeds on non-union labor.(cf "Bad Economics Part 14")
That last paragraph mentioned in passing the next step, the way that the system favors existing members over new hires. New hired often have to go through absurdly lengthy apprenticeships, during which time they are paid well below market for similar work. The union normally does this because it requires absurd numbers of apprentices be employed in order to justify unnecessary positions to "supervise" or "train" them. In other words, apprentices are underpaid so enough can be employed to create featherbedding oversight positions. Not all unions do this, but many of the skilled professions do9. They justify the low pay and absurdly long apprenticeships as necessary for "training" and claim the low wages are made up by the training provided, but that rarely proves to be true. Non-union jobs often provide free training with better wages and shorter apprenticeships. However, long apprenticeships do keep the apprentices off the market for a longer time, driving up wages for the rest of the union, while boosting union numbers, dues and political clout. And that is the third step of the union food chain, existing members feed on apprentices.
But that is just an example of one of the greater principles of unions, that is the advantage of seniority. As unions deny any value to merit, and base promotions, pay increases, transfers and any other benefits (other than union offices, which somehow fall outside this system) on seniority alone, the union tends to favor those with the most seniority, and penalize those with less. Just as the apprentices are harmed to benefit the higher ups, those with less seniority tend to get their hours reduced to allow those with more seniority to continue drawing their high wages for full shifts. Were wages set to market, both groups could work full shifts for somewhat lower pay, but instead those with seniority earn much more than they should, while those with less seniority either don't work, or work only a few hours. Which is the main rule of union food chain, those with seniority feed on those without.
And then comes our final rule, the one group which stands outside of the seniority system, union officers. Those elected to union office, they continue to receive their wages, in the form of union dues, regardless of how well or poorly the laborers do. Whatever the condition of the workers, it seems the union officers continue to live pretty well, continue to find money for lobbyists and political contributions, and all the perks their offices provide. And that is the final step in the union food chain, the union officers feed on the union itself.
Now, some would argue I am unfair, that all systems work this way, that I am characterizing unions as brutal cannibalism, feeding on one another, while the free market is just the same. But I would argue that is not true. Despite all the use of "competition" as an analogy in the free market, in reality the free market is not about competing with one another, and instead about providing services to others. Money comes from increasing satisfaction, not from defeating others.
On the other hand, the union system, by enshrining an arbitrary system of values (seniority), and enforcing an above market wage which prevents any sort of growth or improvement which would benefit everyone, makes itself a zero sum game, which encourages competition. In fact, as I have argued in many posts on bureaucracy ("Bureaucratic Management and Self-Policing", "The Inevitability of Bureaucratic Management in Government Enterprises", "Bureaucracy and Arbitrary Power", "Fear Driven Enterprises", "Killing the Railroads", "Adaptability and Government", "Inflexibility and Bureaucracy", "Bureaucratic Management", "The Bureaucratic Mind", "Bureaucracy Revisited", "The Wrong Solution to Bureaucracy"), this is a problem in all systems not driven by profit. Without a reliable means to determine success or failure, or measure contributions, the system either degenerates into simple time serving, or else becomes ensnared in brutal office politics. And the union system of each tier feeding on the one below is perhaps the best example of that system in practice.
I mention all of this, not to criticize unions, at least not entirely for that purpose, but instead to point out that such a system is not limited to unions, but also to any system where government intervention grows too great, where intervention has created a zero-sum situation and individuals are left competing not to bring the greatest benefit to others, but to grab the most they can from their coworkers. ("How the Government Corrupts Relationships", "The Fifth Wheel","A New Look At Intervention") And so I would ask those who support ever more government involvement, is this truly how you want the entire economy to operate? Is this the system you wish to see becoming the model for all of our economic activities? Does this sound like a system designed to create wealth? To promote growth? Does it sound like a system which will improve our lot in life? Or doe sit sound like a system designed to produce increasing poverty while causing ever more strife between individuals?
If it is the latter, then how can one in good conscience suggest that more government is the solution to our economic woes?
1. Actually, our discussion started because I was surprised at the number of American Idol-like shows that had appeared and was speculating about whether the format has started to wear out (eg So You Think You can Dance, The Voice, Platinum Hits, and all the others, including even Top Chef, Master Chef, The Apprentice and the many other variations on the contest theme.) While discussing this I mentioned the similar "game show revival" which had followed the success of "Who Wants to be a Millionaire", and the explosion of reality shows following "Survivor", both trends which burned out under the weight of a surplus of imitators. It isn't important for this discussion, but the tendency to obsessively copy a successful format, as well as an inability to tell when it is exhausted are interesting aspects of the modern entertainment industry (and similar to the "exploitation cinema" era of Italian film during the 1970's and 1980's) which may be worth looking into in the future.
2. When I say it is "moral", I mean from the perspective of the usual semi-Marxist theory under which unions operate. Based on their simplistic "Robin Hood" ethics, taking from retirees and pension recipients is less acceptable than taking from management and rich investors. In my mind, theft is theft, so stealing from rich or poor is equally objectionable. Theft is theft to me, the wealth of the victim or the amount taken is irrelevant, all theft shows a lack of concern for the rights of others and is equally wrong. (Of course, for purposes of legal punishment, I accept degrees of punishment based on size of theft, but that does not mean I think small thefts are "less wrong". See "A Rational Approach to Punishment".)
3. Of course, companies can make errors and pay too much, just as do employers of regular labor, owners of sports clubs, and men getting married. But, as in all those cases, the companies also rid themselves of those managers as soon as financially possible. (Termination clauses may make it cheaper to keep some, just as in the analogies to sports clubs or marriages.) However, since no one starts out as a CEO, usually by the time one has reached the level where he would be considered for multi-million dollar jobs, he has proved his competence. So it is quite unlikely someone fully incompetent will end up filling a seat at that level. He may eventually prove to be worth less than he is paid, but not by such a huge degree as some critics postulate. The "Being There" model of the accidental manager who bumbles into a position of power without any corresponding skill is a socialist pipe dream, far removed from reality. (If anything, this model better describes government positions assigned by patronage or seniority, or filled by popular election. Those are much more likely to promote the incompetent than the competitive world of business, where cost accounting ensures one must sink or swim based on his output alone. See "Bureaucratic Management and Self-Policing", "Fear Driven Enterprises", "Killing the Railroads", "Adaptability and Government", "Inflexibility and Bureaucracy" and "Bureaucratic Management".)
4. Certain types of academics have a poor grasp of business realities and see such situations as "proof" of the flaws of the free market. In reality, they simply show that decisions may sometimes be more complicated than academics accept. For instance, many times it makes sense to keep a business running, even at a loss, as shutting it down would incur greater losses. Similarly, sometimes needs of the moment require one to make decisions which one would not make if he looked only at the long term impacts. But this is simply the nature of any complex system. The free market is not unique in this regard, even if many try to use these complexities to impugn it. ("Cutting "Costs"", "Misunderstanding Profits", "Again?", "Government Efficiency", "Two Examples of "Inefficiency" in Capitalism", "Post Hoc, Ergo Propter Hoc")
5. This works in two ways. First, reducing total hours tends to reduce the number of hours during which inefficient workers will be employed, reducing the total loss. Second, worker efficiency (after a certain "warm up" period) tends to decline over time, so inefficient employees are less inefficient at the start of their shift than the end, and so reducing hours removes the least efficient hours of the most inefficient workers.
6. I have seen many economists mention the reduced output under unions, but rarely have they explicitly considered the harm done to consumers by this reduction.
7. The auto industry is the best example of this. The domestic industry is unionized, while the foreign imports are subject to tariffs and quotas which protect the unionized industries from full competition. Were it otherwise,t he increased costs would eventually drive the unionized businesses from the market.
8. I discussed this mostly in terms of licensing of professions, but it applies to simple union labor as well. When anyone can limit the number of others providing the same service or good he does, he can charge more, it doe snot matter if this is a good or a service or simple labor, nor does it matter if the labor is skilled or unskilled. Barriers to entry increase the wages of those on the inside.
9. Those unions which lack an apprenticeship program tend to simply hire fewer workers, or else they designate certain undesirable positions as having a much lower pay grade, and shunt new employees there, creating de facto apprentices, without having to explicitly call them such. (I recall the sweepers in a warehouse where I once worked drew pay much lower than the checkers and other teamster employees. Despite that, it was still quite difficult to get a position even as a sweeper, as the union was strict about keeping the number of employees low to keep wages high.)
I intended to go into more detail on the way unions create zero sum games, how it parallels the state's intervention in the economy, and why such situations are inevitable with intervention, but I realized I had done so in all the posts I cited above. So, rather than waste a lot of time repeating myself, I would suggest those interested in more details read the posts to which I refer.
By the way, when I discuss (in footnote #1) the way we milk a trend far beyond its natural life span, I am well aware this is nothing new. I can point, for example, to the way Universal Studios drove their monster movies into the ground during the 30's and 40's, ending with a series of "Abbott and Costello Meet the..." films. So a lack of originality is nothing new. However, it is interesting to look at the times when recycling, reusing and generally ripping off ideas is prevalent versus the times when original films tend to predominate, and to ask what causes one trend or the other. But, as I said above, that is a topic for another time.
In retrospect, having finished this post, it may be beneficial to reexamine the whole question of the free market versus intervention in terms of zero-sum versus growth situations. I know it is something I have covered several times, but it seems I never put the topics together in a single place, or when I do I rely on links and citations of previous essays to do the heavy lifting. Perhaps in the next few days (when I am done the vacation I am supposedly taking now) I can write a more general essay on just that topic and explain how intervention creates this zero sum atmosphere, which leads to real competition and discord, as opposed to the metaphorical competition of the growth-oriented free market system.
Originally published in Random Notes on 2011/06/02.