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
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 Amazon.com author's page for additional
titles by him. His website is www.capitalism.net and his blog is georgereismansblog.blogspot.com. Follow him
on Twitter.
