Wednesday, April 23, 2014

Labor Unions Are Anti-Labor

Many Americans, perhaps a substantial majority, still believe that, irrespective of any problems they may have caused, labor unions are fundamentally an institution that exists in the vital self-interests of wage earners. Indeed, that it is labor unions that stand between the average wage earner and a life of subsistence wages, exhausting hours of work, and horrific working conditions.
Nevertheless, labor unions (and the public at large) have a profoundly flawed understanding of how real wages and the general standard of living are increased. For the individual, the simplest, most direct and obvious method for improving his standard of living is to go out and earn more money. People observe this behavior of individuals and assume that it is also feasible for labor unions to raise the standard of living of wage earners throughout the economic system simply by increasing the money that wage earners are paid.
This is an enormous error.
The goal of earning higher money wages is perfectly rational and socially beneficial when pursued by individuals. But it is contrary to purpose, highly destructive, and downright antisocial when pursued by labor unions.
When pursued by an individual, the goal of earning more money almost always requires that he increase the supply of goods or services that he produces. This increase in the supply of goods or services not only serves to increase the money earned by this particular individual but, at the same time, it also serves to increase the overall supply of goods and services in the economic system. This, in turn, serves, however slightly in most cases, to reduce the prices paid by the buyers of the goods or services whose supply has been increased. (There are numerous cases in which the increase in supply accompanying the earning of more money is quite substantial, as when productive geniuses revolutionize entire industries. In these cases, however, the individuals concerned will almost certainly not be wage earners but businessmen and capitalists, and the increased money incomes in question will be profits, not wages.)
What is crucial to realize is that the reduction in prices that results from additional production and supply serves to raise the real wages of all those wage earners throughout the economic system who are buyers of the goods or services concerned. Real wages are the goods and services that wage earners are able to buy with the money they earn. They are always the reflection of the relationship between money wages on the one side and the prices of goods and services on the other. Increases in production and supply raise real wages by virtue of reducing prices and thus enabling any given amount of money wages to buy more. In this way, they correspondingly raise the wage earner’s standard of living.
Labor unions and the general public almost totally ignore the essential role played by falling prices in achieving rising real wages. They see only the rise in money wages as worthy of consideration. Indeed, in our environment of chronic inflation, prices that actually do fall are relatively rare.
Nevertheless, the only thing that can explain a rise in real wages throughout the economic system is a fall in prices relative to wages. And the only thing that achieves this is an increase in production per worker. More production per worker—a higher productivity of labor—serves to increase the supply of goods and services produced relative to the supply of labor that produces them. In this way, it reduces prices relative to wages and thereby raises real wages and the general standard of living.
What raises money wages throughout the economic system is not what is responsible for the rise in real wages. That is essentially just the increase in the quantity of money and resulting increase in the overall volume of spending in the economic system. In the absence of a rising productivity of labor, the increase in money and spending would operate to raise prices by as much or more than it raised wages. This outcome is prevented only by the fact that at the same time that the quantity of money and volume of spending are increasing, the output per worker is also increasing, with the result that prices rise by less than wages. A fall in prices is still present in the form of prices being lower than they would have been had only an increase in the quantity of money and volume of spending been operative.
With relatively minor exceptions, real wages throughout the economic system simply do not rise from the side of higher money wages. Essentially, they rise only from the side of a greater supply of goods and services relative to the supply of labor and thus from prices being lower relative to wages. The truth is that the means by which the standard of living of the individual wage earner and the individual businessman and capitalist is increased, and the means by which that of the average wage earner in the economic system is increased, are very different. For the individual, it is the earning of more money. For the average wage earner in the economic system, it is the payment of lower prices.
What this discussion shows is that the increase in money wages that labor unions seek is not at all the source of rising real wages and that the source of rising real wages is in fact a rising productivity of labor, which always operates from the side of falling prices, not rising money wages. The plain fact is that in their concentration on increasing money wages, labor unions demonstrate that they are utterly ignorant of the process by which real wages and the standard of living are increased. Indeed, their efforts to raise money wages are profoundly opposed to the goal of raising real wages and the standard of living.
When the unions seek to raise the standard of living of their members by means of raising their money wages, their policy inevitably reduces to the attempt to make the labor of their members artificially scarce. That is their only means of raising the wages of their members. The unions do not have much actual power over the demand for labor. But they often achieve considerable power over the supply of labor. And their actual technique for raising wages is to make the supply of labor, at least in the particular industry or occupation that a given union is concerned with, as scarce as possible.
 Thus, whenever they can, unions attempt to gain con­trol over entry into the labor market. They seek to impose apprenticeship programs, or to have licensing require­ments imposed by the government. Such measures are for the purpose of holding down the supply of labor in the field and thereby enabling those fortunate enough to be admitted to it, to earn higher incomes. Even when the unions do not succeed in directly reducing the supply of labor, the imposition of their above-market wage demands still has the effect of reducing the number of jobs offered in the field and thus the supply of labor in the field that is able to find work.
If the unions were confined to just one or a small number of industries, and did not have the power to determine wage rates in the rest of the economic system, their achievement of higher wages in particular indus­tries would not cause unemployment in the economic system as a whole. The workers displaced from the unionized industries would be able to find work—at lower wages—in the nonunion industries. The effect of unions in these circumstances would be the creation of an artificial inequality of wages—higher wages in the unionized fields, based on an artificially imposed scar­city of labor in those fields, accompanied by correspond­ingly lower wages in the nonunion fields, based on an artificially imposed oversupply of labor in those fields.
The artificial wage increases imposed by the labor unions result in unemployment when above-market wages are imposed throughout the economic sys­tem. This situation exists when it is possible for unions to be formed easily. If, as in the present-day United States, all that is required is for a majority of workers in an establishment to decide that they wish to be represented by a union, then the wages imposed by the unions will be effective even in the nonunion fields.
Employers in the nonunion fields will feel compelled to offer their workers wages comparable to what the union workers are receiving—indeed, possi­bly even still higher wages—in order to ensure that they do not unionize. The nonunion employers will be likely to believe that if they do not pay wages comparable to union wages, then they will be faced with a union and, as a result, not only union wages, but also the loss of major management prerogatives concerning the efficiency of production, and thus experience an even greater increase in costs than is incurred merely by matching union wages.
In this case, artificially high wages create unemployment in virtually every line of work, and leave no avenue open for workers displaced from any one branch of production to find work in another, save by displacing still other workers, who then cannot find work. Even if the wage increases caused by the unions are not universal, they will still certainly result in unemployment if they take place alongside the existence of minimum-wage laws and public welfare assistance. Widespread wage increases closing large numbers of workers out of numerous occupations put extreme pres­sure on the wage rates of whatever areas of the economic system may still remain open. These limited areas could absorb the overflow of workers from other lines at low enough wage rates. But minimum-wage laws prevent wage rates in these remaining lines from going low enough to absorb these workers. So too does the exis­tence of public welfare assistance, inasmuch as people are not willing to work at such low wages if they can obtain a comparable or higher income without working.
In these ways, labor unions cause unemployment—and unnecessarily low wages for those who work in whatever lines may remain open to free competition. Indeed, they cause unnecessarily low wage rates even for workers in unionized fields insofar as there are workers in some unionized fields who have been closed out of employment at higher wages in other unionized fields (for example, unionized auto workers who might have worked at higher pay as electricians or plumbers had they not been excluded by unions in those fields).
From the perspective of most of those lucky enough to keep their jobs, the most serious consequence of the unions is the holding down or outright reduction of the productivity of labor. With few exceptions, the labor unions openly combat the rise in the productivity of labor. They do so virtually as a matter of principle. They oppose the introduction of labor-saving machinery on the grounds that it causes unemployment. They oppose competition among workers. As Henry Hazlitt pointed out, they force employers to tolerate feather­bedding practices, such as the classic requirement that firemen, whose function was to shovel coal on steam locomotives, be retained on diesel locomotives. They impose make­work schemes, such as requiring that pipe delivered to construction sites with screw thread already on it, have its ends cut off and new screw thread cut on the site. They impose narrow work classifications, and require that specialists be employed at a day’s pay to perform work that others could easily do—for example, requiring the employment of a plasterer to repair the incidental dam­age done to a wall by an electrician, which the electrician himself could easily repair. (See Henry Hazlitt, Economics In One Lesson, chaps. VII and VIII.)
To anyone who understands the role of the productivity of labor in raising real wages, it should be obvious that the unions’ policy of combatting the rise in the productivity of labor renders them in fact a leading enemy of the rise in real wages. However radical this conclusion may seem, however much at odds it is with the prevailing view of the unions as the leading source of the rise in real wages over the last hundred and fifty years or more, the fact is that in combatting the rise in the productivity of labor, the unions actively combat the rise in real wages!
The unions are almost certainly unaware of this fact. That is because all that they see and are concerned with is the money wages of their members. They do not care at all about the destructive effect of their actions on the prices of the goods or services their members help to produce and thus on the real wages of all those workers throughout the economic system who are buyers of those goods and services.
In this, their behavior is profoundly antisocial. It is, of course, also antisocial in its indifference to the destruction of employment opportunities in the unionized fields and the consequent reduction of wages in the lines into which the workers displaced by the policy of above-market wages must crowd.
In sum, far from being responsible for improvements in the standard of living of the average worker, labor unions operate in more or less total ignorance of what actually raises the average worker’s standard of living. In consequence of their ignorance, they are responsible for artificial inequalities in wage rates, for unemployment, and for holding down real wages and the av­erage worker’s standard of living. All of these destructive, antisocial consequences derive from the fact that while individuals increase the money they earn through increasing production and the overall supply of goods and services, thereby reducing prices and raising real wages throughout the economic system, labor unions increase the money paid to their members by exactly the opposite means. They reduce the supply and productivity of labor and so reduce the supply and raise the prices of the goods and services their members help to produce, thereby reducing real wages throughout the economic system.

This article is an adaptation and abridgement of material that appears on pages 655 to 658 of the author’s book Capitalism.
Copyright © 2014 by George Reisman. George Reisman, Ph.D. is Pepperdine University Professor Emeritus of Economics and the author of Capitalism: A Treatise on Economics (Ottawa, Illinois: Jameson Books, 1996). See his author's page for additional titles by him.  His website is and his blog is  Follow him on Twitter.