10.04. Labor Unions

0:004. Labor unions a. Restrictionist pricing of labor It might be asserted that labor unions, in exacting higher wage rates on the free market, are achieving identifiable monopoly prices. For here, two identifiable contrasting situations exist. a. where individuals sell their labor themselves, and b. where they are members of labor unions which bargain on their labor for them. Furthermore, it is clear that while cartels, to be successful, must be economically more efficient in serving the consumer, no such justification can be found for unions, since it is always the individual laborer who works, and since efficiency in organization comes from management hired for the task, forming unions never improves the productivity of an individual's work.

1:03It is true that a union provides an identifiable situation, however it is not true that a union wage rate could ever be called a monopoly price, for the characteristic of the monopolist is It is precisely that he monopolizes a factor or commodity. To obtain a monopoly price, he sells only part of his supply and withholds selling the other part, because selling a lower quantity raises the price on an inelastic demand. It is the unique characteristic of labor in a free society, however, that it cannot be monopolized. Each individual is a self-owner and cannot be owned by another individual or group. Therefore, in the labor field, no one man or group can own the total supply and withhold part of it from the market. Each man owns himself. Let us call the total supply of a monopolist's Product P When he withholds W units in order to obtain a monopoly for P-W, the increased revenue he obtains from P-W must more than compensate him for the loss of revenue he suffers from

2:26not selling W. A monopolist's action is always limited by loss of revenue from the and the Withheld Supply. But in the case of labor unions, this limitation does not apply. Since each man owns himself, the withheld suppliers are different people from the ones getting the increased income. If a union, in one way or another, achieves a higher price than its members could command and by individual sales, its action is not checked by the loss of revenue suffered by the withheld laborers. If a union achieves a higher wage, some laborers are earning a higher price, while others are excluded from the market and lose the revenue they would have obtained.

3:18Such a higher price, wage, is called a restrictionist price. A restrictionist price by any sensible criterion is worse than a monopoly price. Since the restrictionist union does not have to worry about the laborers who are excluded and suffers no revenue loss from such exclusion, restrictionist action is not curbed by the elasticity of the demand for labor, for unions need only maximize the net income of the working Banking Members, or indeed of the Union bureaucracy itself. A restrictionist rather than a monopoly price can be achieved because the number of laborers is so important in relation to the possible variation in hours of work by an individual laborer that the latter can be ignored here.

4:14If, however, the total labor supply is limited originally to a few people, then an imposed higher wage rate will cut down the number of hours purchased from the workers who remain working, perhaps so much as to render a restrictionist price unprofitable to them. In such a case, it would be more appropriate to speak of a monopoly price. How May a Union Achieve a Restrictionist Price? What unions do, in fact, is to insist upon a certain wage rate as a minimum, below which they will not work in that industry. The union has thus achieved a restrictionist wage rate, but a sacrifice has been made.

5:02Specifically, there are now fewer workers hired. What happens to them? These discharged workers are the main losers in this procedure. Since the union represents the remaining workers, it does not have to concern itself, as the monopolist would, with the fate of these workers. At best, they must shift, being a non-specific factor, they can do so, to some other, non-unionized industry. The trouble is, however, that the workers are less suited to the new industry. Their having been in the now unionized industry implies that their DMVP in that industry was higher than in the industry to which they must shift.

5:48Consequently, their wage rate is now lower. Moreover, their entry into the other industry depresses the wage rates of the workers already there. Consequently, at best, a union can achieve a higher restrictionist wage rate for its in the economy, production efforts in the economy are also distorted, but in addition, the wider the scope of union activity and restrictionism in the economy, the more difficult it will be for workers to shift their locations and occupations to find non-unionized havens Unions in which to work, and more and more the tendency will be for the displaced workers to remain permanently or quasi-permanently unemployed, eager to work but unable to find non-restricted opportunities for employment.

6:50The greater the scope of unionism, the more a permanent mass of unemployment will tend to develop. Humans try as hard as they can to plug all the loopholes of non-unionism, to close all the escape hatches where the dispossessed workmen can find jobs. This is termed ending the unfair competition of non-union low-wage labor. A universal union control and restrictionism would mean permanent mass unemployment, growing ever greater in proportion to the degree that the Union exacted its restrictions. It is a common myth that only the old-style craft unions, which deliberately restrict their occupational group to highly skilled trades with relatively few numbers, can restrict the supply of labor.

7:46They often maintain stringent standards of membership and numerous devices to cut down from the Supply of Labor Entering the Trade. This direct restriction of supply doubtless makes it easier to obtain higher wage rates for the remaining workers. But it is highly misleading to believe that the newer style industrial unions do not restrict supply. The fact that they welcome as many members in an industry as possible cloaks their restrictionist policy. The crucial point is that the unions insist on a minimum wage rate higher than what would be achieved for the given labor factor without the union. By doing so, they necessarily cut the number of men whom the employer can hire.

8:36Ergo, the consequence of their policy is to restrict the supply of labor, while at the In fact, the consequences of industrial unionism are more devastating than those of craft unionism, for the craft unions, being small in scope, displace and lower the wages of only a few workers, the industrial unions, larger and more inclusive, There is another reason why an openly restrictionist union will cause less unemployment than a more liberal one, for the union which restricts its membership serves open warning on workers hoping to enter the industry that they are barred from joining the union.

9:41As a result, they will swiftly look elsewhere, where jobs can be found. Suppose the union is democratic, however, and open to all. An open union does not have the one virtue of the closed union, rapid repulsion of the displaced workers from the unionized industry. Instead, it attracts even more workers into the industry, thus aggravating and swelling Following the Amount of Unemployment With market signals distorted, it will take a much longer time for workers to realize that no jobs are available in the industry. The larger the scope of open unions in the economy, and the greater the differential between their restrictionist wage rates and the market wage rates, the more dangerous will the unemployment problem become.

10:36The unemployment and the mis-employment of labor caused by restrictionist wage rates need not always be directly visible. Thus, an industry might be particularly profitable and prosperous either as a result of a rise in consumer demand for the product or from a cost-lowering innovation in the productive process. In the absence of unions, the industry would expand and hire more workers in response to to the New Market Conditions, but if a union imposes a restrictionist wage rate, it may not cause the unemployment of any current workers in the industry. It may instead simply prevent the industry from expanding in response to the requirements of consumer demand and the conditions of the market.

11:26Here, in short, the union destroys potential jobs in the making and imposes a misallocation Union of Production by Preventing Expansion It is true that without the union, the industry will bid up wage rates in the process of expansion. But if unions impose a higher wage rate at the beginning, the expansion will not occur. Some opponents of unionism go to the extreme of maintaining that unions can never be free Free Market Phenomena and are always monopolistic or coercive institutions. Although this might be true in actual practice, it is not necessarily true.

12:12It is very possible that labor unions might arise on the free market and even gain restrictionist wage rates. How can unions achieve restrictionist wage rates on the free market? The answer can be found by considering the displaced workers. The key problem is, why do the workers let themselves be displaced by the union's minimum? Since they were willing to work for less before, why do they now meekly agree to being fired and looking for a poorer paying job? Why do some remain content to continue in a quasi-permanent pocket of unemployment in in an industry, waiting to be hired at the excessively high rate.

12:58The only answer in the absence of coercion is that they have adopted, on a commandingly high place on their value scales, the goal of not undercutting union wage rates. Unions naturally are most anxious to persuade workers, both union and non-union, as well as well as the general public to believe strongly in the sinfulness of undercutting union wage rates. This is shown most clearly in those situations where union members refuse to continue working for a firm at a wage rate below a certain minimum or on other terms of employment. This situation is known as a strike. The most curious thing about a strike is that the unions have been able to spread the belief The natural answer of the employer, of course, is to turn somewhere else, and to hire laborers who are willing to work on the terms offered.

14:08Yet unions have been remarkably successful in spreading the idea through society that To the extent, then, that non-union workers feel ashamed or guilty about strike-breaking, or other forms of undercutting union-proclaimed wage scales, the displaced or unemployed workers agree to their own fate. These workers, in effect, are being displaced to poorer and less satisfying jobs voluntarily and remain unemployed for long stretches of time, voluntarily. It is voluntary because that is the consequence of their voluntary acceptance of the mystique of not crossing the picket line or of not being a strikebreaker.

15:02The economist qua economist can have no quarrel with a man who voluntarily comes to the conclusion that it is more important to preserve union solidarity than to have a good job. But there is one thing an economist can do. He can point out to the worker the consequences of his voluntary decision. There are undoubtedly countless numbers of workers who do not realize that their refusal to Cross a Picket Line, their sticking to the union may result in their losing their jobs and remaining unemployed. They do not realize this because to do so requires knowledge of a chain of praxeological reasoning such as we have been following here.

15:51The consumer who purchases directly enjoyable services does not have to be enlightened by economists. He needs no lengthy chain of reasoning to know that his clothing or car or food is enjoyable or serviceable. He can see each perform its service before his eyes. Similarly, the capitalist entrepreneur does not need the economist to tell him what acts will be profitable or unprofitable. He can see and test them by means of his profits or losses. But for a grasp of the consequences of acts of governmental intervention in the market, or of union activity, knowledge of praxeology is requisite.

16:38Economics cannot itself decide on ethical judgments. But in order for anyone to make ethical judgments rationally, he must know the consequences of his various alternative courses of action. In questions of government intervention or union action, economics supplies the knowledge of these consequences. Knowledge of economics is therefore necessary, though not sufficient, for making a rational ethical judgment in these fields. As for unions, the consequences of their activity, when discovered, for example, displacement will be considered unfortunate by most people, therefore it is certain that when knowledge of these consequences becomes widespread, far fewer people will be pro-union or hostile to non-union competitors.

17:35Such conclusions will be reinforced when people learn of another consequence of trade union activity, that a restrictionist wage raises costs of production for the firms in the industry. This means that the marginal firms in the industry, the ones whose entrepreneurs earn only a bare rent, will be driven out of business, for their costs have risen above their most profitable price on the market, The price that had already been attained, their ejection from the market and the general rise of average costs in the industry signify a general fall in productivity and output, and hence a loss to the consumers.

18:20Displacement and unemployment, of course, also impair the general standard of living of the consumers. Unions have had other important economic consequences. Unions are not producing organizations. They do not work for capitalists to improve production. Rather, they attempt to persuade workers that they can better their lot at the expense of the employer. Consequently, they invariably attempt, as much as possible, to establish work rules that hinder management's directives. These work rules amount to preventing management from arranging workers and equipment as it sees fit. In other words, instead of agreeing to submit to the work orders of management in exchange for his pay, the worker now sets up not only minimum wages, but also work rules, without which he refuses to work.

19:20The effect of these rules is to lower the marginal productivity of all union workers. The lowering of marginal value product schedules has a twofold result. One, it itself establishes a restrictionist wage scale with its various consequences, for the marginal value product has fallen while the union insists that the wage rate remain the same. 2. Consumers lose by a general lowering of productivity and living standards. Restrictive work rules, therefore, also lower output. All this is perfectly consistent with a society of individual sovereignty, however, provided always that no force is employed by the Union.

20:11To advocate coercive abolition of these work rules would imply literal enslavement of the of the Workers to the Dictates of Catallactic Consumers, but once again it is certain that knowledge of these various consequences of union activity would greatly weaken the voluntary adherence of many workers and others to the mystique of unionism. We can deal here only with the directly catallactic consequences of labor unionism. Some also has other consequences, which many might consider even more deplorable. Prominent is the fusing of the able and the incompetent into one group. Seniority rules, for example, are invariable favorites of unions.

20:59They set restrictively high wages for less able workers, and also lower the productivity of all. But they also reduce the wages of the more able workers, those who must be chained to the stultifying march of seniority for their jobs and promotions. Seniority also decreases the mobility of workers and creates a kind of industrial serfdom by establishing vested rights in jobs according to the length of time the employees have worked. Unions therefore are theoretically compatible with the existence of a purely free market. In actual fact, however, it is evident to any competent observer that unions acquire almost all their power through the wielding of force, specifically force against strike breakers and against the property of employers.

21:56An implicit license to unions to commit violence against strike breakers is practically universal. These commonly either remain neutral when strikebreakers are molested, or else blame the strikebreakers for provoking the attacks upon them. Certainly few pretend that the institution of mass picketing by unions is simply a method of advertising the fact of a strike to anyone passing by. These matters, however, are empirical, rather than theoretical questions. Theoretically we may say that it is possible to have unions on a free market, although empirically we may question how great their scope would be. Analytically we can also say that when unions are permitted to resort to violence, the state or other enforcing agency has implicitly delegated this power to the unions.

22:53The unions, then, have become private states. We have in this section investigated the consequences of unions achieving restrictionist prices. This is not to imply, however, that unions always achieve such prices in collective bargaining. Indeed, because unions do not own workers and therefore do not sell their labor, the collective bargaining of unions is an artificial replacement for the smooth workings of individual and Social Bargaining on the labor market, whereas wage rates on the non-union labor market will always tend toward equilibrium in a smooth and harmonious manner, its replacement by collective bargaining leaves the negotiators with little or no rudder, with little guidance on what the proper wage rates would be.

23:47Even with both sides trying to find the market rate, neither of the parties to the bargain could be sure that a given wage agreement is too high, too low, or approximately correct. Almost invariably, furthermore, the Union is not trying to discover the market rate, but to impose various arbitrary principles of wage determination, such as keeping up with the cost of living, a living wage, the going rate for comparable labor in other firms or industries, an annual average productivity increase, fair differentials, etc. B. Some Arguments for Unions, a Critique 1. Indeterminacy A favorite reply of union advocates to the above analysis is this, Oh, that is all very well, but you are overlooking the indeterminacy of wage rates.

24:52Wage rates are determined by marginal productivity in a zone rather than at a point, and within that zone unions have an opportunity to bargain collectively for increased wages without the admittedly unpleasant effects of unemployment or displacement of workers to poorer jobs. It is curious that many writers move smoothly through rigorous price analysis until they come to wage rates, when suddenly they lay heavy stress on indeterminacy, the huge zones within which the price makes no difference, etc. In the first place, the scope of indeterminacy is very small in the modern world.

25:39We have seen that in a two-person barter situation, there is likely to be a large zone of indeterminacy between the buyer's maximum demand price and the seller's minimum supply price for a quantity of a good. Within this zone, we can only leave the determination of the price to bargaining. However, it is precisely the characteristic of an advanced monetary economy that these zones are ever and ever narrowed and lose their importance. The zone is only between the marginal pairs of buyers and sellers, and this zone is constantly dwindling as the number of people and alternatives in the market increase.

26:28Building civilization, therefore, is always narrowing the importance of indeterminacies. Secondly, there is no reason whatever why a zone of indeterminacy should be more important for the labor market than for the market for the price of any other good. Thirdly, suppose that there is a zone of indeterminacy for a labor market and let us assume that no union is present. This means that there is a certain zone, the length of which can be said to equal a zone of the discounted marginal value product of the factor. This parenthetically is far less likely than the existence of a zone for a consumer's good, since in the former case there is a specific amount, a DMVP, to be estimated.

27:22But the maximum of the supposed zone is the highest point at which the wage equals the DMVP. Now competition among employers will tend to raise factor prices to precisely that height at which profits will be wiped out. In other words, wages will tend to be raised to the maximum of any zone of the DMVP. Rather than wages being habitually at the bottom of a zone, presenting unions with a golden opportunity to raise wages to the top, the truth is quite the reverse. Assuming the highly unlikely case that any zone exists at all, wages will tend to be at the top, so that the only remaining indeterminacy is downward.

28:152. Monopsony and Oligopsony It is often alleged that the buyers of labor, the employers, have some sort of monopoly and earn a monopoly gain, and that therefore there is room for unions to raise wage rates without injuring other laborers. However, such a monopsony for the purchase of labor would have to encompass all the entrepreneurs in the society. If it did not, then labor, a non-specific factor, could move into other firms and other industries. And we have seen that one big cartel cannot exist on the market. Therefore, a monopsony cannot exist.

29:07The problem of oligopsony, a few buyers of labor, is a pseudo problem. As long as there is no monopsony, competing employers will tend to drive up wage rates until they equal their DMVPs. The number of competitors is irrelevant. This depends on the concrete data of the market. Market. Later, we shall see the fallacy of the idea of monopolistic or imperfect competition, of which this is an example. Briefly, the case of oligopsiny rests on a distinction between the case of pure or perfect competition, in which there is an allegedly infinitely elastic supply of labor, and the The Supposedly Less Elastic Supply of the Imperfect Oligopsinie Actually, since people do not move en masse and all at once, the supply is never infinitely elastic, and the distinction has no relevance.

30:12There is only free competition, and no other dichotomies, such as between pure competition and oligopsinie, can be established. The truth is that labor, or any other factor, tends to get its DMVP on the market. 3. Greater Efficiency and the Ricardo Effect One common pro-union argument is that unions benefit the economy through forcing higher wages on the employers. At these higher wages, the workers will become more efficient, and their marginal productivity will rise as a result. If this were true, however, no unions would be needed. Employers, ever eager for greater profits, would see this, and pay higher wages now to reap the benefits of the allegedly higher productivity in the future. As a matter of fact, employers often train workers, paying higher wages than their present marginal product justifies in in order to reap the benefits of their increased productivity in later years.

31:27A more sophisticated variant of this thesis was advanced by Ricardo and has been revived by Hayek. This doctrine holds that union-induced higher wage rates encourage employers to substitute machinery for labor. This added machinery increases the capital per worker and raises the marginal productivity of Labor, thereby paying for the higher wage rates. The fallacy here is that only increased saving can make more capital available. Capital investment is limited by saving. Union wage increases do not increase the total supply of capital available. Therefore there can be no general rise in labor productivity.

32:17Instead the potential supply of capital is shifted, not increased, from other industries to those industries with higher wage rates, and it is shifted to industries where it would have been less profitable under non-union conditions. The fact that an induced higher wage rate shifts capital to the industry does not indicate Economic Progress, but rather an attempt, never fully successful, to offset an economic retrogression, a higher cost in the manufacture of the product. Hence, the shift is uneconomic. A related thesis is that higher wage rates will spur employers to invent new technological methods to make labor more efficient.

33:09Here again, however, the supply of capital goods is limited by the savings available, and there is almost always a sheaf of technological opportunities awaiting more capital anyway. Furthermore, the spur of competition and the desire of the producer to keep and increase his custom is enough of an incentive to increase productivity in his firm without the added Burden of Unionism.