Chapter 42: Labor Unions
Update: 1/10/20
Christian Economics: Teacher's Edition
“For the kingdom of heaven is like a master of a house who went out early in the morning to hire laborers for his vineyard. After agreeing with the laborers for a denarius a day, he sent them into his vineyard. And going out about the third hour he saw others standing idle in the marketplace, and to them he said, ‘You go into the vineyard too, and whatever is right I will give you.’ So they went. Going out again about the sixth hour and the ninth hour, he did the same. And about the eleventh hour he went out and found others standing. And he said to them, ‘Why do you stand here idle all day?’ They said to him, ‘Because no one has hired us.’ He said to them, ‘You go into the vineyard too.’ And when evening came, the owner of the vineyard said to his foreman, ‘Call the laborers and pay them their wages, beginning with the last, up to the first.’ And when those hired about the eleventh hour came, each of them received a denarius. Now when those hired first came, they thought they would receive more, but each of them also received a denarius. And on receiving it they grumbled at the master of the house, saying, ‘These last worked only one hour, and you have made them equal to us who have borne the burden of the day and the scorching heat.’ But he replied to one of them, ‘Friend, I am doing you no wrong. Did you not agree with me for a denarius? Take what belongs to you and go. I choose to give to this last worker as I give to you. Am I not allowed to do what I choose with what belongs to me? Or do you begrudge my generosity?’” (Matthew 20:1–15).
In Chapter 40, I analyzed this passage in terms of the disgruntled workers who resented being paid only one denarius for a full day’s work, when others were paid a denarius for less than a day’s work.
At this point, the disgruntled workers join together. “Let us threaten never to work for him again. He will not be able to harvest his crop.” They do this. They tell him that he cannot hire them cheaply ever again. But then they discover two things. First, he can hire others who are willing to work for a wage that he is willing to pay, a wage lower than the one they demand. Second, he does not want to hire complainers. What employer does? They must now find someone else to hire them. But there is no one else. If there were, they would not have worked for him in the first place. He is in no way harmed. They cannot find work.They get another idea. “Let us go to the town council. Let us persuade the members to pass a law mandating higher hourly wages for all workers. Let us recommend one denarius per hour. We will tell the council that this is a living wage. A lower wage is not. Let us call it a minimum wage. Then he will have to pay us. He will not be able to hire people who will work for less. We will get high-paying jobs.”
The council does this. It violates the property rights of the employer and the other workers. It says, in effect, “you do not have the right to do what you want with what you own.” It violates the judicial and moral principle of Jesus’ parable.
In this chapter, I assume that the disgruntled workers adopt a different strategy. They still adopt this tactic:
At this point, the disgruntled workers join together. “Let us threaten never to work for him again. He will not be able to harvest his crop.” They do this. They tell him that he cannot hire them cheaply ever again. But then they discover two things. First, he can hire others who are willing to work for a wage that he is willing to pay, a wage lower than the one they demand. Second, he does not want to hire complainers. What employer does? They must now find someone else to hire them. But there is no one else. If there were, they would not have worked for him in the first place. He is in no way harmed. They cannot find work.
But instead of calling for a minimum wage law, they call for a law mandating employers to bargain with the workers who all quit their jobs at one time. If they do not persuade politicians to pass such a law, there will be no way other than violence to keep other workers from accepting offers from employers to work at lower wages than the disgruntled workers want.
These disgruntled workers set up an organization they call a labor union. Then they begin to meet one-on-one with workers. They tell the story of the union. It fights for fair dealing from the employer. They encourage workers to join. But members of the union face a problem. The employer can announce the following: “I want to offer jobs to lots of people. I cannot afford to do this at high wages. But I know that there are unemployed people who want to work at the wage I am ready to pay. If you men quit, I will offer jobs to different workers.” The union members know there are replacement workers available at this wage. Their threat to quit is not much of a threat. They know this. The employer knows this. Unemployed local workers know this.
It is worse than this. Other local employers get together and make an agreement not to hire members of the union. They also agree to fire any worker who recruits others to join a union. Anyone identifying himself as a member of a union will be immediately fired. This employers’ agreement is entirely voluntary. It is based on this principle: “Am I not allowed to do what I choose with what belongs to me?”
The union members know that they can easily be replaced. They understand the power of the auction to set wages.
So, they go to politicians and call for a law mandating the following:
1. Any worker has the right to apply to join a union.The politicians pass this law. They set up an agency to enforce these rules. At this point, union members confront the employer and demand higher wages, better working conditions, several weeks of paid vacations a year, health insurance (tax-free), a pension program, and a shorter work week. If he refuses, the union votes to go on strike. If the proposal receives 50 percent plus one vote, union members go on strike. Any members who refuse are expelled from the union. By law, they become unemployable in this company.
2. It is illegal for any employer to fire union members only for their membership.
3. It is illegal for employers to collude regarding wages and employment rules.
4. When 50% plus one employee employed by a business vote by secret ballot to be represented by a union, the employer must bargain with this union.
5. If he refuses to meet the union’s demands, the union may go on strike.
6. It is illegal for an employer to hire non-union members to replace strikers.
7. The employer must bargain in good faith with union leaders.
The employer can no longer sell his company’s services. It has no workers. It may go bankrupt. It is a war of attrition between the union and the employer. Who will run out of money first: union members or the company’s owners and managers?
The union will establish minimum wages for workers in a firm. If the employer capitulates, workers will receive above-market wages, plus benefits. The union’s level of wages will be far above any minimum wage passed by the state.
Wages are no longer set this way: employers vs. employers, workers vs. workers. Non-union workers are now legally excluded from competition for jobs offered by unionized companies. Employers are not allowed to collude on the topic of how high wages should be.
He is a buyer of labor. There are two types of buyers: unionized and nonunionized. One is discussed in articles and textbooks written by non-economists. The other is not.
A unionized employer of labor must decide how to pay for the more expensive employees. He can announce increases in prices for his business’ output. But customers need not pay. They can buy from non-unionized companies. They can buy cheaper imported goods. They can buy a substitute product. Finally, they can do without the product.
If he is in manufacturing, he can set up a company in a foreign nation with no labor unions in his sector of the market. He can manufacture goods there and import them. Alternatively, he can move the company to another state or province that does not have laws protecting unions. He can close the facility in the pro-union region.
He can shut down the company and retire.
Then there is the other buyer. I call him the unseen buyer. His workers are not yet unionized. Maybe he is in a region where there are no pro-union laws. He is now in a position to compete against unionized companies. He has lower costs of production. He can price his products below the competition’s. The pro-union laws serve as state subsidies to his company.
In the United States, no more than a third of the work force was ever unionized, and that was in 1953. The percentage has continued to decline. Total membership is in the 11% range. In the private sector, union membership is below 7%. In the United Kingdom, union membership is about one-quarter. In the private sector, it is 14%. In France, membership is around 8%. The private sector is 5%. But unions represent all employees in firms with more than 50 employees. Germany is 18%. Only the Scandinavian countries and Belgium have union membership above 50%. Outside of Japan, there are almost no unions in Asia.
Sellers of labor services come in two kinds, paralleling buyers of labor services: union and nonunion. Consider the union member. He benefits from being protected from direct competition for his job. He is not threatened by non-union workers who are willing to bid less. They will accept a lower wage. The employer is not allowed legally to accept such offers. He must deal with the union. The union member enjoys above-market wages, fringe benefits, and better working conditions.
The nonunion member would like to be paid above-market wages, fringe benefits, and better working conditions. He finds that when he applies for jobs in nonunion companies, he is asked to join the union. But he may also find that he is not allowed into the union. The union has a limited number of jobs available to its members. It does not let everyone in who applies after the companies in this sector of the economy have hired all the union members they can afford. Unions keep wages for their members above market by limiting membership. Wages are high because nonunionized workers are not legally allowed to compete against unionized workers in any company protected by laws establishing a union monopoly. Such companies have declined in number.
Sellers of labor who are not union members face a job market filled with workers who lost their jobs in unionized companies. Had their companies not been unionized, they would not have lost their jobs. But when the price of unionized labor services went above the market price, those companies took defensive steps to cut costs by relocating their operations to nonunionized regions. They fired some of their workers.
There is a glut of nonunion workers. A glut occurs whenever prices are set by law above the market price. The market price is the factor-clearing price: no buyers still wanting to buy, and no sellers willing to sell. So, marginal nonunion workers who seek jobs are forced to accept job offers that would not have accepted before the government passed the pro-union legislation.
A pencil manufacturer relies on workers to perform basic tasks. Some of his employees may decide that they want higher wages. They face competition from workers outside the company who are ready to offer their services if wages rise. How can the presently employed workers get raises? Only if their productivity rises. But nothing has changed in their output.
The pencil industry is mature. The any increase in the output of pencil workers is limited by the lack of capital investment. There is little investment because there seem to be no opportunities for profit due to technological innovation. The main savings in production costs must therefore come from lower wages. This is why the number of American pencil manufactures fell from 11 in 1993 to four in 2016. Most pencils are imported. China is the major source of imported pencils.
There are no labor unions in China. Workers understand that they are competing against foreign employees who work for far lower wages. This is why there are no labor unions in the American pencil industry. American workers know that their employers are just barely profitable. If workers did organize a strike, their employers would probably go out of business. The workers would lose their jobs. Their jobs are at risk even without a strike. They are unwilling to risk the loss of their jobs by striking.
What if all American pencil manufactures went out of business next year? No one in the general public would notice. There would still be a plentiful supply of low-price pencils imported from China.
What is true of the pencil industry applies to other industries. What has happened to the pencil industry in the United States has happened to all industries in which innovation lags and old production methods are dominant. Foreign nations with lower labor costs are replacing domestic workers. Workers compete against all other workers, no matter where they are employed. Employers compete against employers, no matter where the rivals are located. Employers whose workers are members of unions who have succeeded in securing above-market wages and benefits steadily go out of business or else they move manufacturing to foreign nations with lower labor costs. Workers in these industries know this. They cannot do anything about it. They cling to their high-income jobs. They stop threatening to strike. The fact that the government allows them to strike is economically irrelevant.
The pencil industry is a good model for traditional manufacturing. What employers and employees face in this industry is what employers and employees face in most manufacturing industries that are not technology-driven: foreign competition from low-wage nations. This is good for consumers.
Unions claim that they are agencies that favor workers. They say they represent labor. This is one of the most successful propaganda efforts in Western history. Unions represent a fraction of the workers in any nation. Unions can extract above-market wages for a minority of workers. It is economically impossible for unions to gain above-market wages for all workers. The only way for some workers to receive above-market wages is for other workers to receive below-market wages. The market wage is the labor-clearing wage: no employer is willing to pay more, and no worker is willing to accept less. Whenever the state raises wages for union members by granting union members immunity from market competition, it inescapably also raises profits for nonunionized enterprises that can now pay less than before to workers but not suffer a shortage of labor. When it comes to the politics of labor unions, the left hand giveth, and the right hand taketh away. The politicians position themselves as pro-labor when in fact they are anti-labor. They produce conditions that will increase unemployment by raising the price of labor, which is the largest component of the cost of production in most industries.
The labor union movement is legitimate as long as its members do not call for government coercion to support their threats to strike against employers. But as soon as unions call on the state to require employers to deal with a union rather than hiring and firing workers individually, unions become immoral. They call for the state to coerce employers. They ask the state to threaten employers with badges and guns for firing union members and hiring nonunion members at lower wages.
What most voters do not understand is that this coercion by the state damages nonunion workers. Nonunion workers pay for the benefits gained by members of unions that have successful in forcing employers to hire only union members. These nonunion workers cannot gain the benefits that are gained by unionized workers, who are a minority of the labor force. They must seek less desirable jobs.
Their necessity of working in second-choice jobs is an indirect government subsidy to employers of nonunion employers. They now have a larger pool of talent to recruit from. They can now afford to employ better workers than they would have been able to afford in a world without labor unions that are backed up by state compulsion. They steadily replace less efficient workers with more efficient workers at the same wages. Politicians and union officials never admit that what they have done by interfering with the free market in labor has hurt far more workers than they have benefitted: nonunion workers.
Decade by decade, union movement shrinks in the private sector. International competition has undermined the ability of unions to strike against employers who are paying market wages. This is because consumers can buy high-quality, low-price products from manufacturers in foreign nations. Transportation costs keep falling due to technological progress.
With the advent of small 3-D printing devices in manufacturing, the last remnants of the labor union movement will fade away in the non-government sectors of the economy. Manufacturing will become smaller, more decentralized, and local. It will be impossible for unions to organize workers in tens of thousands of small, specialized, and efficient companies.
The free market in labor has steadily overcome the coercion-based labor union movement. The movement did not last long as an economic force: from about 1930 to 1950. It was always a minority movement. Most workers never joined a labor union. At the movement’s peak, its rhetoric always had wider acceptance among intellectuals and urban politicians than it did among workers. This was good for liberty. It was therefore also good for consumers.
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