It is naught, it is naught, saith the buyer: but when he is gone his way, then he boasteth (Proverbs 20:14).
Once again, Hazlitt returned to the issue of government price fixing. In Chapters 13, 15, 16, and 18 price fixing was in the form of price floors. It is in this chapter, too.
This may not be seen initially as a case of government price-fixing. By the end of this chapter, I hope you will see that it is entirely a case of government price fixing. It is one more example of a price floor.
One set of owners possess money: business owners. They may also possess capital equipment, which includes land and buildings. They possess business plans. These plans involve hiring human laborers.
Another set of owners possess the ability to deliver labor services. These people are eligible to rent out these services.
A third set of owners will decide at some point whether to purchase goods and services that have been produced by a combination of business capital and labor services. They will determine retroactively which sellers prosper and which do not.
All participants possess the legal right to bid.
The window is a product of a society's moral, legal, and cultural traditions and institutions. It is known as the free market. Those with money to spend work out arrangements with people who want to sell goods to buyers, i.e., spenders of money.
In this system, people who hire workers seek to locate people who rent out these services at some price. Economic exchange always depends on an agreed-upon price. Buyers compete against buyers. Sellers compete against sellers. Only in the final stage of the hiring process does face-to-face bargaining take place: would-be employer vs. would-be employee. The prospective employer does not know how little money the prospective employee will accept, and the prospective employee does not know how much money the prospective employer will pay. In this zone of ignorance, there may be negotiating. But probably not. Time is not a free resource. Employers usually make this offer: "Take it or leave it. I am too busy to negotiate."
The employer acts as an economic agent of future customers. He will give them an opportunity to buy the output of his production process. The employer also acts as an economic agent of his employees. In order to earn money, employees must sell their services to customers. The employees do not know how to market their services directly to customers, but the employer believes that he does. So confident is the employer that he is willing to pay money to the employees to perform certain tasks, irrespective of the near-term decisions of customers. The business pays these employees until the lack of customers makes it evident to the employer that he has misjudged customer demand. Only then will he fire some or all of his employees.
The wage is a signal to other workers and other employers regarding the prevailing conditions of supply and demand. If this wage is a market-clearing wage, there will be no rival workers offering to work for a lower wage for the same job, and there will be no rival employers offering to pay more.
A union organizer comes before workers and makes this argument. "You are being exploited by your employer. He is able to exploit you because you are just one person. Your employer is rich. He does not have to worry about feeding his family. You are not rich. You are living paycheck to paycheck. You are in a weak position as a solitary employee. But if you gather together with other employees, you can challenge this exploitation. You can bargain collectively. Your employer cannot afford to fire all of you at once. You will then get paid what you are really worth."
This may sound plausible. The workers individually do not have any clout. The employer can fire any individual. He can replace the fired individual. The replacement is willing to accept the job. This seems unfair.
Why is it unfair? Two people come to an agreement: the employer and the replacement worker. The replacement worker has a right to bid. Workers compete against workers. Employers compete against employers. Why is this immoral? Why is this unfair? But the union organizer says that it is unfair.
If the government does not interfere, the union organizer can test his theory of wage formation in the marketplace. He can persuade workers to threaten to quit. Maybe the employer will cave in. Or maybe not. He may decide to replace all of the strikers. This is what Ronald Reagan did in 1981 when the Air Traffic Controllers union (PATCO) went on strike. He gave them a deadline. If they refused to return to work, he said he would replace all of them. Most of them refused. He replaced all of them on that day. No planes crashed. The union had overplayed its hand. Members thought Reagan was bluffing. They were wrong. No other government union ever tried this again.
The simpler the job, and the more numerous the number of unemployed workers who can do this job, the easier it is for the employer to break the strike.
Union organizers know this. So do union members. So, unions pressure the government to force employers to negotiate "in good faith" with union members if half of the workers, plus one person, vote to be represented by the union. This began in 1935 in the Untied States. The government passed the Wagner Act. It set up the National Labor Relations Board to enforce the new rules. The government threatened any employer with violence -- fines -- if he did not allow the union to recruit members. If they won the election, it became illegal for the employer to replace striking workers.
Thus, unions that gain a 50% plus one vote operate in a judicial system in which there are government-enforced price floors on wages. Non-union members may bid for jobs, but it is illegal for employers to accept these bids. They must join the union. They must pay union dues. They may not be paid a wage below that which the union, through government coercion, has imposed on the employer.
Price floors create gluts. When the new wage rates are imposed by the government through union negotiation, these wages attract potential workers. The union cannot allow them into the union. There would be too many members for the business to employ at the above-market wages secured by government coercion. In short, supply and demand are thwarted, but not at zero cost.
These workers are surplus workers at the above-market wages. The labor markets do not clear at these above-market wages. There is greater supply of labor than demand for labor at the above-market prices.
The workers who cannot get into the union cannot get access to these high-paying jobs. So, they must look elsewhere for employment. Who will hire them? The answer is clear: employers whose employees have not yet voted 50% plus one vote to be represented by a union. So, now there are extra unemployed workers to employ. If the competing employer had been allowed to offer jobs to these workers, they would have gotten jobs. They would be available to hire only at a wage higher than the competitor's. But these workers cannot get these plum jobs. So, they compete against each other for jobs at the non-unionized business. This employer now has an ideal situation. He can offer lower wages to these unemployed workers. They have no known alternatives. If they had better offers, they would accept them.
So, the result of higher wages paid by employers who pay above-market wages is lower wages for non-union members in non-union businesses. Wages are higher for union members, but they are lower for non-union members.
What if the unions organize these non-union members? They will be able to get higher wages if they get 50% plus one vote. Then the newly unionized company will not be able to hire as many workers at the higher price. The same process will repeat until the unions have no more companies that can afford higher wages. Then marginal companies will start going bankrupt. There will be more workers seeking jobs.
Unemployment will rise among the ranks of workers who are the victims of union membership discrimination. Wages will fall in the non-unionized sectors. The success of some union members to obtain higher wages will be paid for by the failure of non-union members to obtain employment at the previous low wage of the industry. Wages will fall.
The non-union companies will now offer lower prices to customers. They can hire cheaper workers. Either their profits increase (higher profit margins) or else their market share does (lower prices). These firms increase at the expense of unionized firms.
Customers who would have profited from the productivity of unemployed workers will not benefit.
The government may pass laws to support unemployed workers. Taxpayers will fund these expenditures.
In nations in which the government supports union policies, the result has been widespread unemployment among those groups that have been blocked by unions from becoming members. In some nations, younger workers have suffered huge rates of unemployment -- rates approaching 50%. In other nations, racial groups have had higher unemployment.
Employers have been unable to fire workers and replace them. This has led to reduced labor output and lower customer satisfaction.
Inside a nation, some local jurisdictions have laws prohibiting union shops, meaning businesses that are closed to non-members. In the United States, these "right to work" states attract businesses that want freedom of contract. Some established businesses move to these states. In other cases, older businesses remain in states that do allow union shops, but new business formation is higher in the "right to work" states. Higher business profit margins exist in these states. In the United States, the auto industry has shifted from Michigan to the Southeast as a result of these local laws.
Union restrictions on access to jobs have also led to offshoring: businesses set up plants in nations without strong unions. The firms then import the goods that are produced by their branches located overseas.
Imports from abroad increase. Foreign manufacturers are able to produce goods by paying workers less than what unionized firms can pay. They sell these goods at prices below those offered by unionized firms. This leads to calls by unions to restrict imports, thereby reducing customer choice.
As populations become more educated, workers move into management and clerical positions that are not unionized. Manufacturing moves offshore. Union membership as a percentage of the labor force declines. In the United States, union membership peaked in 1953 at about 35%. It has fallen to about 10% as imports have increased and education levels have risen.
Unions have the ability to increase wages only when the government forces businesses to bargain with them collectively. Union members benefit from high wages, but these higher wages are paid for by workers who cannot get into the successful unions, and who must then seek employment on worse terms than were available prior to the success of the unions in extracting above-market wages for their members. This effect on employment benefits employers whose companies have not been unionized. The state's coercion of certain employers acts as a subsidy to non-unionized companies. Wages fall in these companies.
Thus, as a result of economic analysis, we can say for certain that unions raise wages only when the state enforces collective bargaining. Wage rates in some companies are higher as a result, but wages in most companies are lower as a direct consequence of the government's wage floors, which are enforced selectively.
Sadly, Hazlitt refused to affirm this from start to finish in this chapter. This is by far the worst chapter in Hazlitt's book. He refused to make this the central principle of this chapter: union wage rates as one more example of government-imposed price floors. He began the chapter with this:
The power of labor unions to raise wages over the long run and for the whole working population has been enormously exaggerated. This exaggeration is mainly the result of failure to recognize that wages are basically determined by labor productivity.
The power of unions to raise rates has not been merely exaggerated; it does not exist at all without government coercion. Unions cannot possibly raise wages in general. Their ability to do this in any economic sector is based exclusively on government coercion: price floors. All price floors have the same result: gluts of the protected commodity, which means unemployed resources. He should have begun with an analysis of union wage rates as government-imposed price floors. He should have ended with this.
It gets worse.
All this does not mean that unions can serve no useful or legitimate function. The central function they can serve is to assure that all of their members get the true market value of their services.
How? Are unions the source of accurate information on wage rates throughout the economy? What is the evidence for this? Do they inform workers of higher wages in other industries? In round numbers, never. The greatest social and legal arrangement for the transmission of accurate information in man's history is the free market's price system. Unions are no more to be trusted to inform their members of accurate pricing of wages than government-created cartels of producers are to be trusted to inform their members of accurate pricing of commodities. Both the union and the cartel are the creations of government restrictions on entry.
It gets worse. It gets much worse.
But in recent years, as their power has grown, and as much misdirected public sympathy has led to a tolerance or endorsement of antisocial practices, unions have gone beyond their legitimate goals. It was a gain, not only to health and welfare, but even in the long run to production, to reduce a seventy-hour week to a sixty-hour week. It was a gain to health and leisure to reduce a sixty-hour week to a forty-eight hour week. It was a gain to leisure, but not necessarily to production and income, to reduce a forty-eight-hour week to a forty-four-hour week.
Unions had exactly zero to do with these gains, if we are to believe Hazlitt's economic analysis. The thesis of this chapter is that wages are raised -- i.e., hours are reduced, but at the same pay -- only by investment.
Thus we are driven to the conclusion that unions, though they may for a time be able to secure an increase in money wages for their members, partly at the expense of employers and more at the expense of nonunionized workers, do not, in the long run and for the whole body of workers, increase real wages at all.
If we believe Hazlitt's analysis of productivity and wages, and also his arguments on the cartel nature of unions, there is no evidence that unions raise wages for the whole body of workers in the short run, either.
The belief that they do so rests on a series of delusions. One of these is the fallacy of post hoc ergo propter hoc, which sees the enormous rise in wages in the last half century, due principally to the growth of capital investment and to scientific and technological advance, and ascribes it to the unions because the unions were also growing during this period.
Conclusion: only through increases of labor productivity can wages rise. This raises the central analytical issue: unions have had nothing to do with increased investment and technological innovation. This leads us to a conclusion: unions have had nothing to do with increased labor productivity. Therefore, they have not raised wages in general for workers. They have raised wages for their members only in businesses that have been unionized. They have achieved this only at the expense of lower wages for nonunion workers, who are forced to accept jobs that they would not have accepted, had the government not made competitive bids from rival workers illegal for businesses to accept.
Hazlitt began the chapter with an assertion of the fixed relationship between rising wages and rising labor productivity, but he failed to defend this line of reasoning from start to finish. If he had, he would never have referred to any earlier "legitimate function" of labor unions in reducing labor hours and making more healthy workplaces.
So, Hazlitt's statement about the "legitimate function" of unions is nonsensical, assuming that his discussion of labor productivity and wages is correct. I assure you, it is correct.
Conclusion: Hazlitt was squishy on unions.
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