The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups. -Henry Hazlitt, Economics in One Lesson, 1946

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Monday, September 28, 2009

EIOL Do Unions Really Raise Wages?

Economics in One Lesson by Henry Hazlitt

Do Unions Really Raise Wages?

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. I t is for this reason, for example, that wages in the United States were incomparably higher than wages in England and Germany all during the decades when the "labor movement" in the latter two countries was far more advanced.

In spite of the overwhelming evidence that labor productivity is the fundamental determinant of wages, the conclusion is usually forgotten or derided by labor union leaders and by that large group of economic writers who seek a reputation as "liberals" by parroting them. But this conclusion does not rest on the assumption, as they suppose, that employers are uniformly kind and generous men eager to do what is right. It rests on the very different assumption that the individual employer is eager to in- crease his own profits to the maximum. If people are willing to work for less than they are really worth to him, why should he not take the fullest advantage of this? Why should he not prefer, for example, to make $1 a week out of a workman rather than see some other employer make $2 a week out of him? And as long as this situation exists, there will be a tendency for employers to bid workers up to their full economic worth.

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.

For the competition of workers for jobs, and of employers for workers, does not work perfectly. Neither individual workers nor individual employers are likely to be fully informed concerning the conditions of the labor market. An individual worker, without the help of a union or a knowledge of "union rates,"' may not know the true market value of his services to an employer. And he is, individually, in a much weaker bargaining position. Mistakes of judgment are far more costly to him than to an employer. If an employer mistakenly refuses to hire a man from whose services he might have profited, he merely loses the net profit he might have made from employing that one man; and be may employ a hundred or a thousand men. But if a worker mistakenly refuses a job in the belief that he can easily get another that will pay him more, the error may cost him dear. His whole means of livelihood is involved. Not only may he fail promptly to find another job offering more; he may fail for a time to find another job offering remotely as much. And time may be the essence of his problem, because he and his family must eat. So he may be tempted to take a wage that he knows to be below his "real worth" rather than face these risks. When an employer's workers deal with him as a body, however, and set a known "standard wage" for a given class of work, they may help to equalize bargaining power and the risks involved in mistakes.

But it is easy, as experience has proved, for unions, particularly with the help of one-aided labor legislation which puts compulsions solely on employers, to go be- yond their legitimate functions, to act irresponsibly, and to embrace short-sighted and anti-social policies. They do this, for example, whenever they seek to fix the wages of their members above their real market worth. Such an attempt always brings about unemployment. The arrangement can be made to stick, in fact, only by some form of intimidation or coercion.

One device consists in restricting the membership of the union on some other basis than that of proved competence or skill. This restriction may take many forms: it may consist in charging new workers excessive initiation fees; in arbitrary membership qualifications; in discrimination, open or concealed, on grounds of religion, race or sex; in some absolute limitation on the number of members, or in exclusion, by force if necessary, not only of the products of non-union labor, hut of the products even . of affiliated unions in other states or cities.

The most obvious case in which intimidation and force are used to put or keep the wages of a particular union above the real market worth of its members' services is that of a strike. A peaceful strike is possible. To the ex- tent that it remains peaceful, it is a legitimate labor weapon, even though it is one that should be used rarely: and as a last resort. If his workers as a body withhold their labor, they may bring a stubborn employer, who has been underpaying them, to his senses. He may find that h e , is unable to replace these workers by workers equally good who are willing to accept the wage that the former have now rejected. But the moment workers have to use , intimidation or violence to enforce their demands-the moment they use pickets to prevent any of the old workers from continuing at their jobs, or to prevent the employer from hiring new permanent workers to take their places-their case becomes questionable. For their pickets are really being used, not primarily against the employer, but against other workers. These other workers are willing to take the jobs that the old employees have vacated, and at the wages that the old employees now reject. The fact proves that the other alternatives open to the new workers are not as good as those that the old employees have refused. If, therefore, the old employees succeed by force in preventing new workers from taking their place, they prevent these new workers from choosing the best alternative open to them, and force them to take something worse. The strikers are therefore insisting on a position of privilege, and are using force to maintain this privileged position against other workers.

If the foregoing analysis is correct, the indiscriminate hatred of the "strikebreaker" is not justified. If the strike- breakers consist merely of professional thugs who them- selves threaten violence, or who cannot in fact do the work, or if they are being paid a temporarily higher rate solely for the purpose of making a pretense of carrying on until the old workers are frightened back to work at the old rates, the hatred may be warranted. But if they are in fact merely men and women who are looking for permanent jobs and willing to accept them at the old rate, then they are workers who would be shoved into worse jobs than these in order to enable the striking workers to enjoy better ones. And this superior position for the old employees could continue to he maintained, in fact, only by the ever-present threat of force.

Emotional economics has given birth to theories that calm examination cannot justify. One of these is the idea that labor is being "underpaid" generally. This would be analogous to the notion that in a free market prices in general are chronically too low. Another curious but persistent notion is that the interests of a nation's workers are identical with each other, and that an increase in wages for one union in some obscure way helps all other workers. Not only is there no truth in this idea; the truth is that, if a particular union by coercion is able to enforce for its own members a wage substantially above the real market worth of their services, it will hurt all other workers as it hurts other members of the community.

In order to see more clearly how this occurs, let us imagine a community in which the facts are enormously simplified arithmetically. Suppose the community consisted of just half a dozen groups of workers, and that these groups were originally equal to each other in their total wages and the market value of their product.

Let us say that these six groups of workers consist of (1) farm hands, (2) retail store workers, ( 3 ) workers in the clothing trades, (4) coal miners, (5) building workers, and (6) railway employees. Their wage rates, deter- mined without any element of coercion, are not necessarily equal; but whatever they are, let us assign to each of them an original index number of 100 as a base. Now let us suppose that each group forms a national union and is able to enforce its demands in proportion not merely to its economic productivity but to its political power and strategic position. Suppose the result is that the farm hands are unable to raise their wages at all, that the retail store workers are able to get an increase of 10 per cent, the clothing workers of 20 per cent, the coal miners of 30 per cent, the building trades of 40 per cent, and the railroad employees of 50 per cent.

On the assumptions we have made, this will mean that there has been an average increase in wages of 25 per cent. Now suppose, again for the sake of arithmetical simplicity, that the price of the product that each group of workers makes rises by the same percentage as the in- crease in that group's wages. (For several reasons, including the fact that labor costs do not represent all costs, the price will not quite do that-certainly not in any short period. But the figures will none the less serve to illustrate the basic principle involved.)

We shall then have a situation in which the cost of living has risen by an average of 25 per cent. The farm hands, though they have had no reduction in their money wages, will be considerably worse off in terms of what they can buy. The retail store workers, even though they have got an increase in money wages of 10 per cent, will be worse off than before the race began. Even the workers in the clothing trades, with a money-wage increase of 20 per cent, will be at a disadvantage compared with their previous position. The coal miners, with a money- wage increase of 30 per cent, will have made in purchasing power only a slight gain. The building and railroad workers will of course have made a gain, but one much smaller in actuality than in appearance.

But even such calculations rest on the assumption that the forced increase in wages has brought about no unemployment. This is likely to be true only if the increase in wages has been accompanied by an equivalent increase in money and bank credit; and even then it is improbable that such distortions in wage rates can be brought about without creating pockets of unemployment, particularly in the trades in which wages have advanced the most. If this corresponding monetary inflation does not occur, the forced wage advances will bring about widespread un- employment.

The unemployment need not necessarily be greatest, in percentage terms, among the unions whose wages have been advanced the most; for unemployment will be shifted and distributed in relation to the relative elasticity of the demand for different kinds of labor and in relation to the "joint" nature of the demand for many kinds of labor. Yet when all these allowances have been made, even the groups whose wages have been advanced the most will probably he found, when their unemployed are aver- aged with their employed members, to he worse off than before. And in terms of welfare, of course, the loss suffered will be much greater than the loss in merely arithmetical terms, because the psychological losses of those who are unemployed will greatly outweigh the psychological gains of those with a slightly higher income in terms of purchasing power.

Nor can the situation be rectified by providing unemployment relief. Such relief, in the first place, is paid for in large part, directly or indirectly, out of the wages of those who work. It therefore reduces these wages. "Adequate" relief payments, moreover, as we have already seen, create unemployment. They do so in several ways. When strong labor unions in the past made it their function to provide for their own unemployed members, they thought twice before demanding a wage that would cause heavy unemployment. But where there is a relief system under which the general taxpayer is forced to provide for the unemployment caused by excessive wage rates, this - restraint on excessive union demands is removed. More- over, as we have already noted, "adequate" relief will cause some men not to seek work at all, and will cause others to consider that they are in effect being asked to work not for the wage offered, but only for the difference between that wage and the relief payment. And heavy un- employment means that fewer goods are produced, that the nation is poorer, and that there is less for everybody.

The apostles of salvation by unionism sometimes at tempt another answer to the problem I have just presented. It may be true, they will admit, that the members of strong unions today exploit, among others, the non- unionized workers; but the remedy is simple: unionize everybody. The remedy, however, is not quite that simple. In the first place, in spite of the enormous political encouragements (one might in some cases say compulsions) to unionization under the Wagner Act and other laws, it is not an accident that only about a fourth of this nation's gainfully employed workers are unionized. The conditions propitious to unionization are much more special than generally recognized. But even if universal unionization could he achieved, the unions could not possibly he equally powerful, any more than they are today. Some groups of workers are in a far better strategic position than others, either because of greater numbers, of the more essential nature of the product they make, of the greater dependence on their industry of other industries, or of their greater ability to use coercive methods. But suppose this were not so? Suppose, in spite of the self- contradictoriness of the assumption, that all workers by coercive methods could raise their wages by an equal percentage? Nobody would be any better off. in the long run, than if wages had not been raised at all.

This leads us to the heart of the question. It is usually assumed that an increase in wages is gained at the expense of the profits of employers. This may of course happen for short periods or in special circumstances. If wages are forced up in a particular firm, in such competition with others that it cannot raise its prices, the increase will come out of its profits. This is much less likely to happen, however, if the wage increase takes place throughout a whole industry. The industry will in most cases increase its prices and pass the wage increase along to consumers. As these are likely to consist for the most part of workers, they will simply have their real wages reduced by having to pay more for a particular product. It is true that as a result of the increased prices, sales of that industry's products may fall off, so that volume of profits in the industry will be reduced; but employment and total payrolls in the industry are likely to be reduced by a corresponding amount.

It is possible, no doubt, to conceive of a case in which the profits in a whole industry are reduced without any corresponding reduction in employment-a case, in other words, in which an increase in wage rates means a corresponding increase in payrolls, and in which the whole cost comes out of the industry's profits without throwing any firm out of business. Such a result is not likely, but it is conceivable.

Suppose we take an industry like that of the railroads, for example, which cannot always pass increased wages along to the public in the form of higher rates, because government regulation will not permit it. (Actually the great rise of railway wage rates has been accompanied by the most drastic consequences to railway employment. The number of workers on the Class I American railroads reached its peak in 1920 at 1,685,000, with their average wages at 66 cents an hour; it had fallen to 959,000 in 1931, with their average wages at 67 cents an hour; and it had fallen further to 699,000 in 1938 with average wages at 74 cents an hour. But we can for the sake of argument overlook actualities for the moment and talk as if we were discussing a hypothetical case.)

It is at least possible for unions to make their gains in the short run at the expense of employers and investors. The investors once had liquid funds. But they have put them, say, into the railroad business. They have turned them into rails and roadbeds, freight cars and locomotives. Once their capital might have been turned into any) of a thousand forms, but today it is trapped, so to speak. in one particular form. The railway unions may force them to accept smaller returns on this capital already invested. It will pay the investors to continue running the railroad if they can earn anything at all above operating expenses, even if it is only one-tenth of 1 per cent oil their investment.

But there is an inevitable corollary of this. If the money that they have invested in railroads now yields less than money they can invest in other lines, the investors will not put a cent more into railroads. They may replace a few of the things that wear out first, to protect the small yield on their remaining capital; but in the long run they will not even bother to replace items that fall into obsolescence or decay. If capital invested at home pays them less than that invested abroad, they will invest abroad. If they cannot find sufficient return anywhere to compensate them for their risk, they will cease to invest at all.

Thus the exploitation of capital by labor can at best be merely temporary. It will quickly come to an end. It will come to an end, actually, not so much in the way indicated in our hypothetical illustration, as by the forcing of marginal firms out of business entirely, the growth of unemployment, and the forced readjustment of wages and profits to the point where the prospect of normal (abnormal) profits leads to a resumption of employment and production. But in the meanwhile, as a result of the exploitation, unemployment and reduced production will have made everybody poorer. Even though labor for a time will have a greater relative share of the national income, the national income will fall absolutely; so that labor's relative gains in these short periods may mean a Pyrrhic victory: they may mean that labor, too, is getting a lower total amount in terms of real purchasing power.

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 non-unionized workers, do not, in the long run and f o r the whole body of workers, increase real wages at all.

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. But the error most responsible for the delusion is that of considering merely what a rise of wages brought about by union demands means in the short run for the particular workers who retain their jobs, while failing to trace the effects of this advance on employment, production and the living costs of all workers, including those who forced the increase.

One may go further than this conclusion, and raise the question whether unions have not, in the long run and for the whole body of workers, actually prevented real wages from rising to the extent to which they otherwise might have risen. They base certainly been a force working to hold down or to reduce wages if their effect, on net balance, has been to reduce labor productivity; and we may ask whether it has not been so.

With regard to productivity there is something to be said for union policies, it is true, on the credit side. In some trades they have insisted on standards to increase the level of skill and competence. And in their early history they did much to protect the health of their members. Where labor was plentiful, individual employers often stood to gain by speeding up workers and working them long hours in spite of ultimate ill effects upon their health, because they could easily be replaced with others. And sometimes ignorant or shortsighted employers would even reduce their own profits by overworking their employees. In all these cases the unions, by demanding decent standards, often increased the health and broader welfare of their members at the same time as they increased their real wages.

But in recent years, as their power has grown, and as much misdirected public sympathy has led to a tolerance or endorsement of anti-social 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, hut not necessarily to production and income, to reduce a forty-eight-hour week to a forty-four-hour week. The value to health and leisure of reducing the working week to forty hours is much less, the reduction in output and income more clear. But the unions now talk, and often enforce, thirty-five and thirty-hour weeks, and deny that these can or should reduce output or income.

But it is not only in reducing scheduled working hours that union policy has worked against productivity. That, in fact, is one of the least harmful ways in which it has done so; for the compensating gain, at least, has been clear. But many unions have insisted on rigid subdivisions of labor which have raised production costs and led t o expensive and ridiculous "jurisdictional" disputes. They have opposed payment on the basis of output or efficiency, and insisted on the same hourly rates for all their members regardless of differences in productivity. They have insisted on promotion for seniority rather than for merit. They have initiated deliberate slowdowns under the pre- tense of fighting "speed-ups." They have denounced, insisted upon the dismissal of, and sometimes cruelly beat- en, men who turned out more work than their fellows. They have opposed the introduction or improvement of machinery. They have insisted on make-work rules to re- quire more people or more time to perform a given task. They have even insisted, with the threat of ruining employers, on the hiring of people who are not needed at all.

Most of these policies have been followed under the assumption that there is just a fixed amount of work to be done, a definite "job fund" which has to he spread over as many people and hours as possible so as not to use it up too soon. This assumption is utterly false. There is actually no limit to the amount of work to be done. Work creates work. What A produces constitutes the demand for what B produces.

But because this false assumption exists, and because the policies of unions are based on it, their net effect has been to reduce productivity below what it would other- wise have been. Their net effect, therefore, in the long run and for all groups of workers, has been to reduce real wages-that is, wages in terms of the goods they will buy-below the level to which they would otherwise a risen. The real cause for the tremendous increase in real wages in the last half century (especially in America) has been, to repeat, the accumulation of capital and the enormous technological advance made possible by it.

Reduction of the rate of increase in real wages is not, of course, a consequence inherent in the nature of unions. It has been the result of shortsighted policies. There is still time to change them.