Friday, August 7, 2015

The Harm of Closed Shops and Collective Bargaining

NOTE: I was working on a new essay when I realized none of my old works on unions had been reproduced here. Thus I am copying over these essays from my archive of "Random Notes".

I really shouldn't have to write this essay. There is simply no way, knowing as much as we do about the consequences of government intervention, that I should have to explain how unions harm the economy and even their own workers. For that matter, it should have never been an issue. As far back as Adam Smith the principles existed to debunk union claims. For that matter, anyone who has ever belonged to a unions should know the truth. It may not be clear in good times, but in bad times, when only the members with the most seniority are working, when the rest of the union is getting less work than people in non-unionized industries, and, worst of all, during the recovery, when the rest of the economy is booming, and the union is still lagging behind, it should be clear the union is part of the problem, not the solution. And yet, clear as it should be, many, including man who call themselves conservative, support unions. Oh, conservatives may deplore union politics, but many still have a few token good words for the unions of old, or for union workers, completely ignoring the reality that unions are a form of collective suicide, destroying the industries which support them, suffocating their less experienced workers, excluding those just entering the job market, and eventually sacrificing even the most experienced workers to keep the union bosses afloat a little longer. In the end, unions benefit no one. They may give a few a temporary boost, but at a tremendous cost, and even those who benefit in the short term will eventually suffer the same fate.

Let us start with the basics. Employers will only pay what labor is worth. At least in the long term. To do otherwise is to invite bankruptcy. That being the case, wages are set by the productivity of workers. An employer simply cannot pay $10 per hour to a workers whose efforts produce only $8 an hour, at least not in the long term. He might, in the short term, carry such a worker for many reasons, to appease a union, to wait until he is trained, to see if he improves, even because he is his nephew, but over the long term, any business which employs workers on such terms will suffer losses and eventually fail. That is simple mathematics. If your costs exceed your income, you will go bankrupt.

Of course wages are generally not set worker by worker, at least not in large industrialized firms. There may be some flexibility, workers may have several gradations of pay, but in general, workers are paid more or less the same wage, or a fairly narrow range of wages. That being the case, the formula changes slightly. Rather than paying each worker what he is worth, the pay for a position is set by a few more complicated considerations. Instead of paying each worker what he adds, the employer looks at the cost of a number of workers, and their output and figures out what wage optimizes profits. That is, he basically looks at a supply and demand chart for labor and sees where the two lines cross. Except that it is not that simple. If the employer sticks with such an approach, he will obviously end up upsetting his most productive workers, who will be paid much less than they are worth, and who are easy targets to be picked up by higher paying employers. So, the employer is left either creating two (or more) different grades of employee, or else raising wages slightly, taking fewer workers and lower profits in order to avoid the loss of his best workers. 

Actually, there are even more possible solutions, from setting each wage individually (and accepting the administrative costs that entails) to accepting that uniform wages will result in a mediocre grade of employees. (By which I do not mean to imply incompetence, simply that a uniform wage will tend to discourage long term employment of the most promising staff, keeping the general quality of workers equal to the level of the least skilled.) But that is not important for our discussion here, what matters is the principle that employers simply cannot pay more than a worker is worth if he wishes to remain in business.

The other side of this argument is that employers can't pay much less than a worker is worth. We discussed this a little in the preceding paragraph, and even more in many previous posts ("Exploited Labor", "Capital Investment",  "Fairness and the Free Market", "Planning For Imperfection", "Greed Versus Evil ") Since it has been covered at such great length elsewhere, I won't go into it in detail, but the basic argument is quite simple. If an employer pays an employee less than he is worth, there is the potential for another employer to profit by offering him more, and then pocketing the difference between his real worth and the new salary. Obviously, if the difference is small, it would be too much trouble to search out such employees for such a tiny profit, and thus wages may run a small amount lower than employees' objective worth, but not much. Especially as employers realize this difference in salaries makes their hold on their employees tenuous, and, as worker turnover represents a cost, in finding new staff, hiring, training, lost productivity and the rest, they will tend to raise the salary themselves in order to avoid losing workers.

How does all of this relate to unions?

Unions exist for two basic purposes, to raise wages above market rates, and to preserve jobs which otherwise would be lost. They do perform some additional tasks, such as pressing demands regarding working conditions, but as those effectively amount to increasing the cost of labor, we will roll them into the first function, increasing wages. In fact, everything a union does can effectively be considered an elevation of wages, as saving jobs amounts to nothing more than paying someone who would otherwise be drawing a salary of $0 per hour.

So, how are unions harmful?

The simplest way to illustrate this is to look at some other product, other than wages and ask what the effect would be on the public if its price were elevated. (This would also be a good argument against import quotas, subsidies for inefficient small businesses and farm price supports, but I already dealt with them in "Bad Economics Part 6", "Small Business Fetish" and "Protectionism Right and Left" as well as elsewhere.) Let us suppose the government were to decree steel would be sold for twice what it currently cost. What would happen?

The simple answer is that everything made of steel would instantly become more expensive, even goods already made, as sellers would need to anticipate the replacement cost rising. But that would not be all, as any item made using a process involving steel, such as objects made using steel machinery, would also rise, as, again, the replacement cost of those machines would suddenly be much higher. Moving from production to consumption, we would see consumers spending a larger part of their income on steel-related goods. Those goods which they could not do without would suddenly become a much larger percentage of their budget, which would result in them spending less money on other less essential purchases. In addition, any nonessential steel goods will be purchased in smaller quantities.

As a consequence of all this, consumers will see their money buying less and less, and the population as a whole will become less affluent. In addition, as demand drops, the number of those employed in steel-related industries, and even those employed in unrelated industries seeing a decline in sales, will either see less pay or fewer hours, with some losing their jobs completely

In short, the consequence of raising the price of one good to an unjustified level is to impoverish the whole nation, to weaken the economy and to reduce employment.

So why do we fail to see that the same is true when that product is labor?

Which brings us to the principle problem of unions, the elevation of wages above market price. The clearest effect of this is to raise the cost of any goods produced by union labor, and also, to a lesser degree, any goods produced using union products. Second, and as noticeable, is the drop in demand for labor in union industries. Barring "featherbedding" policies keeping untenable labor employed, union shops tend to employ fewer workers after unionization than before, for the same reason minimum wage increases unemployment. If wages are set too high, then shops can only employ those whose productivity makes that wage feasible.

Of course unions dislike that reality and tend to introduce policies to keep those who would be let go on the payroll. The specifics of the policy are not important, what matters is that doing so simply introduces another problem, bankruptcy. If a company is forced to keep labor at a wage higher than their productivity, that company will lose money (in most cases), and will eventually suffer bankruptcy. And that is the reason I argued that even the apparent beneficiaries of union policies, those enjoying higher wages, those with seniority and union bosses, still suffer in the end. Yes, for a time they may profit, but eventually they will push too far and bankrupt the industry, and then they, like everyone they kept from a job, will have no income, and, in the weakened economy they helped create, will also have less likelihood of finding one than had they left the economy in its natural state.

There is one other possibility, one rarely seen, but still a possibility, and that is a situation where the union elevates wages, and forces the employer to keep untenable workers, but does so only to such a degree that the employer's profits are impaired, but he does not suffer losses. This may have been the case for some specific firms in the auto and steel industries, at least under some contracts, but, in general, the path to bankruptcy is far more likely. Still, if unions can reach this equilibrium state, they may imagine they have achieved the best possible outcome, transferring profits from the bosses and owners to the workers. But they are not considering the big picture*. When a company cannot show profits comparable to other industries, it cannot find investors. As a result, it cannot expand, it cannot even find funds to carry it over down times, or to deal with sudden emergencies. At best, it stagnates, at worst it fails at the first downturn. Not only does their vaunted seizure of profits harm "the bosses", in the end it harms the workers too.

And that is the problem with all union laws, they end up harming workers more than they harm "bosses". They close entry level jobs, they penalize newcomers, they eliminate jobs, they slow growth, removing opportunities for mobility. And worst of all, by enshrining seniority as the sole measure of worth they both penalize the ambitious and productive, and provide no incentive to exceed the bare minimum. And, though it often passes unnoticed, by raising the cost of goods, they also harm workers in their role of consumer, as they increase the cost of goods those workers buy. ("Jobs, Jobs, Jobs, and More Jobs", ""Fair Trade"", "Clarifying a Reality of Capitalism", "Production and Consumption")

It is tempting to go on, but I think the point should be clear by now, unions simply cannot do what they claim to do, and when they do manage to change conditions, the long term result is always negative. Going on and on with example after example would serve to do nothing but take up space. So instead, allow em to close by answering the question "So what should we do?"

The answer is not to eliminate unions, or regulate them, not even their political activities which trouble so many. The answer is simply to remove the special privileges we grant to unions. I have no objection to unions continuing, but with only the same rights as we grant to the Rotary or a book club. That is, they can persist as private organizations, but the state will not force employers to deal with them nor will workers be forced to join.

If this simple plan is followed, I would predict unions will largely vanish in a short time. Perhaps, in a few highly specialized fields, where qualified workers are few in number, they would maintain a union and manage to use it to drive up wages, but even then it would likely do no better than individuals could on their own, it would simply be a convenience. In other fields, unions would become more of a hindrance than benefit to workers, costing them money and limiting their choices while providing little benefit. Without the ability of collective bargaining and closed shops, unions would have little to offer. But, for the rest of us, those of us who consume union made goods, and those of us who seek employment, the benefit would be significant, as costs would fall and job opportunities rise.

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* We will ignore that many "owners" are small time investors, pension holders, those with 401K or 403B plans, those with whole life insurance and others who are hardly "fat cats". In fact, thanks to their pension plans, many union workers may be the very "bosses" they decry.

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POSTSCRIPT

It was not worth discussing here, but another negative aspect of unions is that unions seniority rules tend to cause businesses to operate in a manner closely resembling bureaucratic organizations. Rather than go into that topic here, I would refer readers to my many posts on bureaucracy and non-governmental organizations which adopt quasi-bureaucratic organization. ("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", "In Praise of Contracts",  "Bureaucratic Management", "The Bureaucratic Mind", "Bureaucracy Revisited") I would also like to mention my previous brief essay on unions. ("Time For Unions To Go The Way of the Dinosaurs")


Originally published in Random Notes on  2011/03/07.

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