Monday, September 03, 2007

The Economics of Labor Unions

Labor unions have been in decline for some time. Their membership has declined drastically, and they are increasingly seen as anachronistic by American workers. Economic analysis can help to illuminate the economic effects of labor unions, which in turn can help to evaluate them as social institutions.


Some critics of unions go so far as to imply that they have no place at all in the free market. But this need not be the case. In the free market, workers and employers are free to negotiate arrangements in which they exchange labor for money, i. e. jobs. The end result is not arbitrary; there is economic reality underlying it.

However, it is possible for people to make bad deals. Workers may not agree to as good a deal as they could get because they are not good at negotiating. Thus a worker could potentially benefit by hiring someone else to do his negotiating for him. It is common for actors and athletes to hire agents to do just this.

It is also possible for a group of workers to band together to jointly negotiate a contract that will cover all of them. There is nothing inherently wrong with 'collective bargaining'. Unions may also provide other services to their members, such as unemployment insurance or insurance against lawsuits.

Even in the free market, it is questionable how useful a union would be. Employees who get a good offer from their employer are free to seek a better job elsewhere. Another employer who sees an employee being paid significantly less than his labor is worth may try to hire him away to make a profit himself. Thus an employer has good reason to pay his employees what their labor is worth.

Further, any outside agent knows much less about a job than the employee does. It is questionable whether it is really more efficient to jointly negotiate a contract for disparate jobs. Even when jobs are theoretically the same, workers' performance may be vary different, meriting different salaries.


This theory of unions in a free market contrasts sharply with their actual effects in the real world. That is because the existence of unions is distorted by government regulations. These regulations constitute special privileges that benefit union leaders while hurting businesses, consumers, other workers, and sometimes even the union members.

The most important such regulation is the requirement that workers join a union or pay dues if they work at a given employer. This forces workers to join who otherwise would not and boosts union membership levels and funds. This government-protected monopoly eliminates competition, and hence reduces the benefit of the union to the workers and increases prices (dues), as any monopoly must. Ironically, many people who attack business monopolies readily support labor monopolies.

Such regulations are typically defended by appeal to the collective action problem. That is, it is said that unions benefit all workers regardless whether they are members, so all workers must pay. It is said that there must be solidarity to raise wages. But this is a fallacy, as wages are determined by market forces, not labor activism.

It is an open question whether a given union benefits workers. It may simply be ineffective, or it may make a worse deal than some or all workers could make on their own. Or, it may drive too hard a bargain and weaken or bankrupt the employer, costing jobs. It may advocate bad laws that hurt workers and consumers. But workers are forced to pay regardless.

Government also regulates the establishment of unions. They are established by majority vote of a given population of workers. Government requires employers to provide contact information to union organizers and prohibits the employer from lobbying against unionization. Given that unions are monopolies and are almost never disestablished, there is a lot of money riding on such a vote. Not surprisingly, intimidation and coercion are all too common in such elections. Unions have recently lobbied Congress to eliminate secret ballots in such elections so as to make coercion easier. This is another example of a union benefiting itself at the expense of its members.

Another government regulation is the prohibition on firing striking workers. Of course, workers who are not under contract are perfectly free to refuse to work. But in a free market, the employer would be free to fire them and hire replacements. The union is in competition with other workers who are willing to work for less than the union wants.

However, laws prevent firing the strikers. Replacements are often harassed or threaten by the union. This constricts the available labor supply and hence can increase union wages. This may benefit the union, but it hurts the general public. It particularly hurts the other workers who are denied jobs.

We have so far dealt with unions of private workers. But there are also unions of government workers, and this case requires separate analysis. Unlike in the free market, government employees are funded by taxpayers, whether they want to or not. Higher salaries can be passed on to the taxpayers. Government negotiators have much less incentive to drive a hard bargain because they are not spending their own money. While business unions are often eliminated by market forces, government is a monopoly that can't be driven out of business. Thus the percentage of unionization is much higher in government than business.


Monopoly unions have a guaranteed stream of revenue. Hence it is not surprising that this money is often misused. Union leaders can spend this money on themselves rather than on helping their members. In fact, union corruption is much more frequent than business corruption. Interestingly, Democrats in Congress have recently voted to cut the part of the government prosecuting union abuses.

The privilege of unions makes them appealing targets for takeover by outside forces. Thus there has been a long string of cases of organized crime controlling unions for its own benefit. In addition to access to union dues, racketeers can use the threat of strikes to extort payoffs from business owners. This obviously doesn't benefit the workers.

Unions are also important bases of political power. During the heyday of communism, many unions in America and elsewhere were controlled, whether openly or secretly, by communists. They advocated their own agenda, whether the workers agreed with it or not.


In addition to negotiation, unions engage in political activities. Unions use members' dues for political purposes whether they agree with it or not. Union leaders are free to pursue their own agendas. About 40 percent of American union members vote Republican, but unions contribute almost no money to Republicans.

Some union activities relate directly to labor laws. Thus unions advocate regulations such as those discussed above. Such regulations may or may not benefit union members, but they definitely benefit union leaders at the expense of the general population.

One major cause for unions is minimum wage laws. Unions are the primary advocates for such laws. But it is a fact of basic economics that such laws reduce the demand for labor and hence destroy jobs. Do unions not realize this? Actually, there is good reason to think that they know exactly what they are doing.

Unions compete with non-union workers for jobs. Banning wages below a certain level drives some of them out of work and hence reduces the labor supply. This increases wages for union members. This explains why unions advocate a minimum wage just high enough to drive low-skilled workers out of jobs, but not high enough to hurt union members.

Other union political activities have no connection to labor at all. Some unions take positions on everything from social issues to foreign policy. Many unions are run by liberals who promote their own agendas. For example, see the resolutions passed by the National Education Association.


Unions have promoted, and often believed, many economic myths.

Unions promote a mythology in which workers were living in destitution, exploited by vicious robber barons, until labor unions organized and, with some help from the government, made it possible for workers to earn a decent living. This story simply isn't true, and it rests on a basic economic fallacy.

The fallacy is that prices are set by businesses and that the only way to change them is organizational or political pressure. But prices are determined by market forces. Employers cannot pay more than labor is worth. They compete for labor, and so bid it up to its market value.

Unions take credit for rising wages, shorter work weeks, and better working conditions. But the real reason for these developments is higher labor productivity, which means labor is worth more, which means that it is paid more. The main reason for higher productivity is new technologies, which come about through investment. With higher productivity, people can afford to work less and demand better working conditions. Union claims are belied by the fact that many professions are well paid with virtually no unionization.

Another myth, more common in the past, is that machines and technology damage the economy by putting people out of work. Automation may indeed hurt particular workers, but it helps the economy as a whole. Machines make it possible to produce more with the same amount of labor.

Unions are major advocates of protectionism. Trade restrictions may benefit particular workers, but they hurt the economy as a whole. Unions blame trade for job losses, but the real culprit is government regulations, including but not limited to labor regulations.


When evaluating unions, it is important to separate the different players involved. Unions may benefit their members by hurting other workers. They may benefit some members while hurting other members. They may benefit their leadership while hurting their membership.

The union movement has declined in the private sector through a sort of 'natural selection'. Unions have made their employers less efficient, and over time unionized employers have lost out to non-unionized employers, at home and abroad.

The union movement today is a product of government regulations. Whatever benefit unions provide would be maximized in the free market. People should be free to join, not join, or join more than one. Unions should have to compete for business.

Once again, the free market is best for workers, consumers, and taxpayers.

1 comment: said...

Put a lot of thought and work into this... nice job.