The Effects Of Labor Unions

04.03.2010

Tino Sanandaji has an interesting post, where he points out that the share of national income (or total factor costs) going to labor is roughly the same in countries where labor unions are strong and in countries where unions are weak. So unions do not seem to redistribute from capital to labor, as their retoric would have you believe.

Does this mean that union actions have no effect? No, it doesn’t mean that. Sanandaji correctly mentions one effect, namely to redistribute between different workers, but he doesn’t elaborate upon this except to hint that the redistribution occurs when other workers face higher prices. That is true as far as it goes, but incomplete, which is why I will elaborate on the subject.

To understand the effects of unions, imagine a  situation where we go from very strong unions, to powerless unions, and that at the same time no minimum wages or similar government regulations existed (the analysis around unions here can be applied to minimum wages as well). Would some employers then lower wages for some workers and/or replace their current workers with other workers willing to work for less? They almost certainly would in cases where they didn’t believe this would have a significant negative effect on productivity and where there would still be workers available that would be willing to work for them. This means initially that profits would increase and labor income would drop. But how can this be squared with the above finding that unions do not redistribute between capital and labor?

Simply because the story doesn’t end there. If profitability were particularly high in some sector than this would attract increased investments from other firms, helping to bid up wages and push down prices until the excess profitability was removed. Or alternatively, the capitalist may find that while profits are up now, the cheap labor means that profits could be increased further by expanding volumes by lowering prices, something which would mean that more workers would be hired and consumer purchasing power would be increased. However in this case, while the absolute level of profits would increase due to higher volumes, lower profit margins would decrease profit margins and the relative share of income going to capital.

We can now see that one effect of the disappearance of union power would be to increase real output and reduce unemployment. This of course implies that union power results in lower real output and higher unemployment.

But if union power results in no increase in relative income for labor and a decrease in the absolute level of income (especially if you also take into account the cost of strikes and other union activities), why would anyone want to unionize?

Well, in many cases unionization is as irrational as it seems at this point. But usually unionization is driven by a desire to increase relative income for unionized workers compared to other workers. In the case below where union power disappeared, even though average income is up, income for the weakest workers would likely go down, even after taking lower prices into account.

Note that this improvement in relative income for some will have to apply to all workers in unionized sectors, even for workers who aren’t union members. There has been many cases where unions have fought hard to raise wages at companies where not a single worker is member of the union. This was for example the case with the case of Latvian construction company Laval that had gained a  contract to build a school in Stockholm suburb Vaxholm in 2004 using Latvian workers that were paid Latvian wages. Even though none of the workers were members of the Swedish construction worker union Byggnads, Byggnads still insisted that everyone should receive the same pay as Swedish construction workers. And when Laval refused to agree to this, Byggnads in collaboration with other unions, blockaded the project, making it impossible for Laval to finish the job.

Why did Byggnads do this? Because they altruistically cared about the Latvian workers? Hardly, especially given the „go home” chant Byggnads activists shouted to the Latvian workers. Instead, the reason why Byggnads and other unions insists that even workers who aren’t members of their unions should receive the same pay is because they fear on good grounds that if other workers receive a lower pay than companies will hire them instead, and that companies that continue to hire union members will be out-competed.

One example of what happens when not all workers in one sector receive the same pay as union workers can be seen in the case of the Detroit car industry, which has been increasingly out-competed by Japanese and other foreign car makers hiring lower paid non-unionized workers in the South and elsewhere. Unions can only raise the relative wage for their workers if they are able to block competition from other workers. If they fail to do so, their members will lose their jobs, just like in the case of the Detroit car industry.

The increase in relative wages caused by unions thus applies to all workers within a sector that work with the same tasks. The increase in relative wages is instead relative t other workers, both in completely different sectors and workers performing other tasks in the same companies. It is these other workers (including management that sees their income drop as a result of union actions. Also, the elevated wages attained by unions will also come at the expense of people who become unemployed because wages are higher than their marginal productivity.

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