Well, it’s the topic of the day with the automotive bailout and all such going on, so I figured it would be a good next stop in this post series. What is a labor union(or just union) exactly? It’s the cartelization of part of a labor market for the means of collective bargaining power. It’s an attempt to create a labor monopoly of sorts, so as to set wages and other labor costs to a point amenable to it’s constituants. So, the first question to ask is: if real monopolys and cartels are bad for the market, why isn’t the monopolization of labor bad for the market? Answer: It is. In fact, it’s worse. There are numerous issues with unions, but the over-arching problem is that they artificially elevate labor cost above free market prices, thus causing unemployment. They do this through “negotionation” (Wink Wink).
Here, I want you to listen to what Ludwig Von Mises (one of the greatest economists that has ever lived) said of labour unions back in 1959:
Unfortunately, we have now, in almost all countries all over the world, a second power that is in a position to exercise force: the labor unions. The labor unions determine wages and then strike to enforce them in the same way in which the government might decree a minimum wage rate. I will not discuss the union question now; I shall deal with it later. I only want to establish that it is the union policy to raise wage rates above the level they would have on an unhampered market. As a result a considerable part of the potential labor force can be employed only by people or industries that are prepared to suffer losses. And, since businesses are not able to keep on suffering losses, they close their doors and people become unemployed. The setting of wage rates above the level they would have on the unhampered market always results in the unemployment of a considerable part of the potential labor force.
Does that sound familiar to anyone? Perhaps if GM, Ford and Chrysler’s executives had read Von Mises years ago they wouldn’t have gotten themselves in this mess. They are currently paying full pensions and health insurance to [link 800,000 former/retired]http://minnesota.publicradio.org/display/web/2008/12/03/auto_unions/?refid=0[/link] employees. Yes, you read that right. The big three are paying over a quarter of a million people not to work. I’ve never even been in the same room with an economics degree, but I can tell you that is unsustainable. It’s not rocket science. A worker’s wage is an assessment of his or her productivity. Therefore if you produce $1000 of value per week, you will get some percentage of that value back in the form of a wage. So let’s say your employer decides to pay you $800 per week and take the 20% profit on your labor to cover other expenses and reinvest in the company. This is an equitable arrangement between both parties.
So, now let’s say you join up with your fellow employees and decide to unionize in order to improve your lot. Well, the first thing you do at the bargaining table is to ask for increased wages. You’d like to make $900 per week instead of $800, and you’d also like to have a pension for every employee (let’s say there are 100 employees), equal to 70% of current average salary and salary indexing to cover cost of living increases. If these demands aren’t met, you threaten to strike. Eventually your employer gives in and agrees when he realizes the local government is always going to take the union’s side. The employer figures it won’t be too bad since he can just raise prices a modest amount to cover the additional payroll expenses from the risen wages and there are no retired employees so he’ll worry about that later.
Fast forward 20 years, and now pretend you are the business owner. The company has grown from 100 to 350 employees. It now has 75 employees in the pension system at a cost of $2400 per week (70% of current average salary, plus healthcare) which adds $180,000 to your payroll and produces nothing in return. That $180,000 has to be paid for from somewhere. You can’t just wish it into existence. What do you do then? You can’t spread the cost out to the other employees by reducing their wages because you are obligated by the union to pay on a scale. You can’t raise the price of your product because that would put you at a severe disadvantage in your particular market. Well, the only other option is to lay off some employees to cover the cost or reduce the amount of money that you use for R&D and capital improvements.
You can see what’s going on here. This problem is just going to compound itself as the years wear on. The amount of growth needed to stay ahead of the curve on your obligation to retiree’s is unrealistic. Eventually the business will have to close down or file bankruptcy when it gets overtaken by it’s inability to pay. So you can see. This is one way that labour unions always lead to higher unemployment as Von Mises said. There are other issues that Conservatives reject unionism on. I’ll bring those up in the next post.