Why Do We Need Unions?
There is one group of workers who have signed a consent decree with the federal government, agreeing to never form a union. Do you know who they are? Answer below the fold.
The economics of unions is quite simple. Like medieval guilds, the goal of a modern union is to monopolize the supply of labor to a market. (See David Henderson here.) With that power, the union can then limit the labor supply and secure above-market wages. Why do unions push for higher wages and benefits even when they cause layoffs? Because trading off smaller output for higher prices is what all monopolies do.
It is sometimes thought that unions are needed to offset the superior bargaining power of employers. But this is bad economics. Do you need to band with other consumers in order to bargain better with Wal-mart? Of course not. Wal-mart’s prices are low not because of your bargaining power, but because it has competitors. Similarly, competition among employers is what keeps wages high in the labor market.
It is sometimes argued that unions are needed to lift people out of poverty. This is even worse economics. Above-market wages for unionized workers are possible only if less fortunate workers can be kept out of the market. Moreover, like the members of medieval guilds, the vast majority of unionized workers today have above-average incomes. They are squarely in the top half of the income distribution, not the bottom half. Unionized professional athletes are downright rich. Poor people almost never form successful labor unions.
Here is a song by Pete Seeger and Arlo Guthrie via Ezra Klein. I’ve added a different caption.
Who gains and who loses from union activity? The natural inclination is to think that if wages are above-market, employer profits must be lower. But this is more bad economics. By restricting the supply of labor to a market, the union at the same time limits industry output. With less output available, consumers will have to pay higher market-clearing prices. The workers’ higher wages are paid out of the pockets of consumers, not employers.
Ultimately, though, consumers only have so much income to spend. If they spend more on products produced by union labor, they will spend less on products produced by nonunion labor. In a sense, higher wages for unionized labor are made possible by lower wages for other workers.
Who are the people left out of the union? Historically, they are blacks, women and other minorities. Either they are denied admission to the union or they are the last to be called to the job site. Racial and gender discrimination by unions has been far worse than any case I’ve ever heard about involving employers. But I’ve never heard of a civil rights case brought against a union. (Are they exempt from the civil rights law?)
How is it possible to monopolize the supply of labor? In a free labor market, it isn’t. Workers who aren’t in the union (scabs) will offer their services for lower wages than the union is demanding. Employers will be more than willing to hire them. The only way to prevent this is through force — either by the government or by the union itself. This is why the history of American union movement has been marked by so much violence. In a very real sense, there is no such thing as a peaceful picket line. The only purpose of a picket line is to intimidate.
Why are so many people sympathetic with labor unions? I think for most it is a lack of understanding of basic economics. The more puzzling question is: why are so many economists sympathetic with unions? I can’t think of any economic argument for government sanctioning, much less promoting, the arbitrary creation of labor monopolies. And the original critic of the guild system was the father of economics, Adam Smith. Yet Paul Krugman and Ezra Klein and many other economists are distinctly pro-union.
When I was a student at Columbia, Kelvin Lancaster proudly announced to our price theory class that he would never cross a picket line. He wasn’t talking about a union picket line. He was talking about a bunch of students protesting the Vietnam War. I was tempted to test his resolve by organizing a student picket line outside his condo. Would he really spend the night on the sidewalk? Ah…., but he was on my dissertation committee. So I thought better of it.
I learned an important lesson about my colleagues, however. You can be brilliant in economic theory and, at the same time, be totally lacking in common sense.
Oh, and the group that has agreed never to be a union or act like a union? It’s doctors. The consent decree was signed by the American Medical Association (AMA).
As I described in Regulation of Medical Care, from its very first meeting, about 160 years ago, the AMA single-mindedly set out to restrict entry into the profession and discourage price and quality competition among doctors. From early 20th century occupational licensing barriers it moved to control the output of medical schools and then helped make the regulation of hospitals and insurance companies serve its interest as well. From beginning to end there was never any question about its motive: more income for physicians.
Yet in doing these things, the AMA acted no differently than the auto workers, the teamsters and the longshoremen. It’s hard to think of any rational reason to be against these activities when doctors are the actors, but favor them for everybody else.
I had never heard the point made about how unions aren’t necessary because the supply of competitors drives up prices for high-demand jobs. This is an interesting observation.
I have talked to many conservative people who all seem to think unions once held an important role in society protecting the rights of workers from abusive employers (generally described as 1880s to 1920s); but that unions no longer have a role now that there are more laws protecting workers. Purportedly, railroads abused people; mines killed people and factories expected people to work 12 hours a day six days a week for pennies an hour. I’ve always tried to explain that mines, railroads and factories could only employ workers if the pay and working conditions were near the average for the region. Thus, if workers were willing to work they must have not been abused in comparison to other workers. Maybe, life was just very difficult back then. Forcing factories, mines and railroads to create 40-hour work weeks, and raise wages might have improved the lives of the few in the unions. But it hurt those potential workers shutout of the unions – and those workers who would have had a job if there had been a labor market free of price fixing.
Excellent post, John, and thanks for quoting me. Three things:
1. Ezra Klein is not an economist.
2. Great story about Lancaster.
3. Devon misstated one fact. People in risky jobs, even back then, earned a wage premium. They were paid more than the average. Adam Smith pointed this out even earlier in The Wealth of Nations.
How I summarized back in November.
http://bit.ly/hGZkJE
The specifics of public sector unions add to these points.
Thanks for another great blog today!
-Ray
Wisconsin Gov. Scott Walker recently stated, “If we’re going to ask our state and local workers who are doing a great job to pay a little bit more, to sacrifice, to help to balance this budget, we should also give them the flexibility saying that for those members, for those workers, who don’t want to be a part of the union, if you don’t want that deduction each month out of the paycheck, they should be able to get that $500, $600 or in some cases, $1,000 back that they can apply for their health care and their pension contribution”
Wouldn’t the individual see more benefit from contributing to their own retirement instead of a union? For instance an extra 1,000 dollars a year in a 401 K with 9.71% interest vs paying union dues.
Also, isn’t it counterintuitive that unions would prefer layoffs instead of freezes or reductions?
Great post. Monopolies are conspiracies against the public.
@ David henderson
Thanks for the catch.
Perhaps the most effective unions today after the unions for bureacrats are the doctor and dentist unions.
Answer to your question: No. We don’t need unions.
Wait a minute John — as to your colleagues, isn’t economics the “science of common sense?”
Whatever the circumstances, it is not acceptable for a group of people to “gang up” on an individual with the intent of doing harm. Probably everyone would agree as applied to “physical” harm. But what about “financial” harm? We have laws that prevent firms from exercising monopoly power and charging prices that are well above the real costs or value of production. But what if a group of workers conspires (usually with the help of government) to overcharge for their services at the expense of the larger public? The UAW successfully used market power to raise their compensation above levels that the “market” was paying. In simple terms, they “taxed” individual purchasers of cars, extracting as much as $1,500 per car just for healthcare in addition to their higher wages, making it possible for union members to live better, but, dollar for dollar, buyers of cars to have less. This pretty much destroyed the domestic auto industry, and the steel industry suffered much the same fate. Only involuntary taxpayer bailouts saved GM (stock value gone, bondholders whacked, $40 billion of earnings of the new company now tax free, taxpayers paying $750 for each Volt GM sell, a $60 billion bailout for GM and GMAC in bankruptcy) and its future survival as a competitor is still in doubt.
Only about 7% of the private workforce is unionized today, but their ability to “tax” union members through union dues and make political contributions gives them top priority in the Whitehouse today. Public sector unions represent about a third of public sector workers. Here, we are held hostage by threats to not pick up our garbage or teach our children. Politicians, not facing a bottom line performance measure like GM or the steel companies but worried about re-election, give in to demands to keep voters from being unhappy. But, over time, this has produced a generally over-paid and over-benefited public sector workforce (compared to market wages). Their generous compensation can only be supported by reducing the welfare of citizens through higher and higher levels of taxation. The “employers” (taxpayers through their elected officials) have slowly lost their ability to determine the terms of employment offers. The unions now determine working hours, hiring criteria, the quantity of “output” to be produced per day, the number of sick and vacation and holiday days, how their performance will be evaluated etc. No longer can the employer make an “offer” for a job with requirements that fit the needs of the public institution. The workers themselves now determine these things through the exercise of union power.
Bottom line, union members get higher compensation than the market would pay, but dollar for dollar, that higher compensation comes out of the pockets of taxpayers and customers, leaving them worse off. These are not “high paying jobs” that reflect the value produced by the workers but instead reflect the power of the organized group to impose “pain and suffering” on unorganized individuals in society. The prices companies can charge are disciplined by competition as is the wage I can earn offering my services in the marketplace. Unions seem to be exempt from this, granted the power to tax individuals to support the lifestyle to which they feel they are entitled.
John,
Thank you for such a relevant topic–and one that links to healthcare as much as any other service our government intends to manage. This union issue will surely come to a head over the next couple of years. (The Economist dedicated a cover to it a couple weeks ago.) If we’re really serious about reducing government spending, we have to be just as serious about eliminating the artificial labor costs created by unions. Just as we calculated UAW costs in terms of $1,500 / car, might we calculate the inflated cost of gov’t labor in terms of taxes? What’s it cost all of us per household?
@# Jerry
I’ve always thought of economics as basically common sense. I think all good economists think of it that way.
@ Alex
It’s not counterintuitive if you see the union as a monopoly. What monopolists do is restrict supply and reap higher than market prices. Think of the people who are laid off as like the scabs on the outside of the union. The union was not formed for their benefit.
John,
In your very appropriate and insightful blog today one of your comments brought to mind something in our healthcare mess that IMO has long evaded thoughtful scrutiny. While it is fresh on my mind I want to bring it to your attention. You said,
“It is sometimes thought that unions are needed to offset the superior bargaining power of employers. But this is bad economics. Do you need to band with other consumers in order to bargain better with Wal-mart? Of course not. Wal-mart’s prices are low not because of your bargaining power, but because it has competitors. Similarly, competition among employers is what keeps wages high in the labor market.”
If you will substitute “medical patients” for ” consumers” and “medical facilities and practitioners” for ” Wal-mart”, you can make the analogy that our system of medical provider contracting (PPOs and carrier contracts) is similarly misapplied from the economic standpoint. In reality the near monopoly of the major carriers (Blue Cross, Aetna and United Healthcare) as they dominate the reimbursement process to medical providers supports the growth of entry barrier access of other carriers in the healthcare insurance markets. Consequently there is now little real competition (in dollars or ideas) in the health insurance industry.
It seems to me that if an insurance company that can control both the supply and the demand of a service it is financing, it cannot possibly be enhancing the best economic outcomes. How can an industry be competitive if a United Healthcare is allowed to “buy up” competition, force the medical providers to sign a contract (lest no patients will be sent to them), and sweep whatever meager (insurance) competition is left away by being one of the only options that has “contracts” with 90% of the medical providers. It sounds like a perpetual profitability machine with the end user as the ultimate loser.
I realize that all this is multi-complicated by Medicare/Medicaid cost shifting, but wouldn’t it be helpful to apply a bit of anti-trust logic to this market strangling near monopoly in the commercial health insurance industry? I wonder if you could give this some thought and comment.
Thanks
Like most economic theories, it depends. If the employers have what is effectively monopoly power over workers, the workers need to be able to equalize bargaining power. Monopoly power does exist at the outset of hiring, but during employment. When a worker has invested many years on his part of the bargain, he needs some way to protect his part of the deal. While in theory, he could sue in court (if your conservative friends will allow him), you must confess it would be impracticable. Thus, he is better off organizing with others to protect what he has earned.
Economics may be common sense. But, common sense to one one may not result in the same answer as another
I remember a popular Tennessee Ernie Ford song that went something like “load 16 tons and what do you get? Another day older and deeper in debt. St. Peter don’t you call me ’cause I can’t go, I owe my soul to the company store.” Hence, unions. Protections for workers forced so deep into debt by their employers who didn’t pay them enough to live on, so extended them credit at company-owned stores that they could never pay off. Kind of sounds like medical bills. Did unions derail us? You bet they did. Has the AMA done the same thing? Absolutely. I’ll bet both had good intentions at the outset, but hey, we all know where that road leads to, right? John, you are such a smart guy. I never get tired of reading your blog. You know who I really like? My chiropractor. Know why? He teaches me how to solve my own problems, and puts the responsibility for my health squarely in my own hands. I hope to see all medicine follow this trend, and I’m really hoping for the death of Obamacare. I’m unemployed right now and have no health insurance, but I keep checking insurance websites because I’m noticing something interesting: Private insurance is actually ALMOST affordable. That’s a really good sign. John you’re a good man. God Bless.
@ Jon
That’s why some labor contracts are not employment at will. College professors are an example. Their contracts are typically 9 to 12 months long. You can also have termination agreements written into the contract. That’s what marriage pre-nupts are all about. You don’t need a union for any of this, however.
@Jennie
Thanks for the kind words.
John, it appears to me that medical doctors are doing the same athing as unions. Keep supply lowl Keep lines long-(time waiting–I just got done taking my wife to see her general practioner for her appointment at 9:15 a.m. (made at 8:07 a.m. by the way). We waited over 45 minutes past the scheduled time. I don’t believe that there is another professional or business person who could do what doctors do and still stay in business
Did health reform 2010 do anything about affordability and accessibility or training more doctors? NO! Yes we have fantastic doctors and technology here in the USA and in Montana. However with AHC of 2010 through 2016, our challenges are becoming more burdensome and expensive.
Make it a great day!
Pete Pettersen
John –
This is one of your best essays ever. There is no justification for unions post Sherman-Act. Anti-trust is anti-trust.
I appreciate your having the guts to take on the AMA. The docs unionized outright in Germany, and it’s a mess over there.
Reagan crushed the flight controller’s union. Freedom lovers need to follow his lead, stand firm, and crush the Wisconsin public employee unions and all public employee unions, but I’m afraid we’re in the distinct minority. You see, when pressed with the tough decisions that the freedom movement eventually requires, most folks really don’t want freedom for everyone. What they really want – and this is the kryptonite of the Democratic party – is the right to control others, to make us behave like they think we should. That is why we have 175,000 pages of regulations in the CFR.
Yes, you may publish as a comment, but the primary purpose of most of my e-mails is just to commend you on your excellent analysis and writing.
Blake Woodard
One bit of history. John L. Lewis organized the miners. When asked why he did so — he said he knew (but at the time couldn’t prove) that mining wasn’t good for people (we know it now as black lung disease). He wanted to get the miners out of the mines. He felt that if he drove up the wages, it would create economic incentives for mine owners to mechanize.
Nothing like embracing a program that is tilted toward reward without earning it
Dr. Bob Kramer
John-
This is one of your best essays ever. There is no justification for unions post Sherman-Act. Anti-trust is anti-trust.
I appreciate your having the guts to take on the AMA. The docs unionized outright in Germany, and it’s a mess over there.
Reagan crushed the flight controller’s union. Freedom lovers need to follow his lead, stand firm, and crush the Wisconsin public employee unions and all public employee unions, but I’m afraid we’re in the distinct minority. You see, when pressed with the tough decisions that the freedom movement eventually requires, most folks really don’t want freedom for everyone. What they really want – and this is the kryptonite of the Democratic party – is the right to control others, to make us behave like they think we should. That is why we have 175,000 pages of regulations in the CFR.
-Blake Woodard
John,
It seems as though you are an advocate in the zero sum game of political fundraising.
After the Supreme Court opened the funding of our elections to domestic and foreign corporations under “Citizens United” it seems as though now the republican game plan is moving to defund the democratic electoral revenue stream of union donations. The Union in Madison agreed to the financial conditions the Governor laid out so there is NO reason to attempt to end collective bargaining unless you want to disrupt the revenue stream used against you in election after election.
It is rather easy to do. First give business a 140 million tax break. Then go on TV and say the sky is falling. We’re broke, and we are 140 million in the red all due to union wages and retirement. The only thing to worry about is the backlash when the rubes discover they have been had.
from my knowledge which i am not politically savvy but the unions need to go .. how could a person not go to work for whatever reason and still have a job?? talking about the place where my daughter worked at, a fellow employee who taking 2 maybe 3 days a week off work and still had a job!! AND WHY??? UNION!!! UNION!!! UNION!!!dang it give that job to someone who WANTS to work everyday! just sayin …………….
http://www.uswa6787.org/contract/index.htm
This link changed my prospective in regards to Unions.
http://www.uswa6787.org/contract/index.htm
This link takes you to the actual Union Contract, the wages, the holidays paid, the rates of wages, the incentives, the bonus pays, the extra pay, these Steel Industry worker get a generous lifestyle. No doubt their kicking about the issues:
If they were to have to work for $10 an hours with minimal benefits.. like most of us have always accepted … they probably would never work at all. Spoiled bunch they are, selfish – that sense of ‘entitlement’ has got to be taken off the plate… its ridiculous that they get so much.. We work hard.
But nobody pays us a bunch of goodie benefits. We have to perform on a merit basis to even keep our 10 dollar hr. job. Wow.. the Steel Industry has a heck of an arrogant demeanor about themselves.
Ok. I am done. It sure was interesting to read about what they actually get in those contracts / Bargining / Contractual goodies contracts !! No wonder they are whining about the chance to make the future, they dont want anyone to take their candy away from their sweet lifestyles !!
http://www.uswa6787.org/contract/index.htm
what a load of Sanctimonious load of one sided crap,
the ability to negotiate from a strength position is not the sole right of the business leaders. The right to make a profit and to profit from leverage is not just the domain of banking institutes.Unions shareholders expect good Roi on their investment and to protect their bottom line.Unions are business and need to be proactive to ensure their market-share. If it means some other business go to the wall then thats is the free market at work.
Bring it on and stop crying foul – Toughen up
what a load of Sanctimonious load of one sided crap,
the ability to negotiate from a strength position is not the sole right of the business leaders. The right to make a profit and to profit from leverage is not just the domain of banking institutes.Unions shareholders expect good Roi on their investment and to protect their bottom line.Unions are business and need to be proactive to ensure their market-share. If it means some other business go to the wall then thats is the free market at work.
Bring it on and stop crying foul – Toughen up or ship out
I FEEL THEIR PAIN,HAPPY DAYS ARE OVER,GETTING BIG
RAISES DOING NOTHING MORE,JUST SHOW UP.NOW TIMES
HAVE CHANGED,GOVERNMENT HAS SCREWED UP THE ECONOMY
BIG TIME,GREED EVERYWHERE,BOTTOM FEEDERS THAT TAKE
DUES FROM THE SAP SUCKERS THAT GET NOTHING IN RETURN
BUT HOT AIR.UNIONS ARE NOT NEEDED TO PLAY POLITICS
AND BUY WEAK POLITICIANS. OHIO LOVES KASICH HE HAS
IT RIGHT
See these links for why we still need unions:
http://independentlook.wordpress.com/2011/04/22/do-we-still-need-unions/
http://independentlook.wordpress.com/2011/03/15/how-much-is-a-teacher-worth/
@JohnDoDo
Really? Steelworkers have it sweet? Really? What’s sweet about it? The 50k plus benefits? Or is it the hot, odorous plant? Or maybe the constant stress of the potential dismemberment? Or is it the monotonous, repetitive work? I’ve never stepped foot in a steel plant, but it would take a whole lot more than 50k plus benefits to get me in one for a day let alone for a 30+ year career. Sweet deal, really?
thanks for your share guys