The US House of Representatives recently passed The Protecting the Right to Organize Act, known as the PRO Act by a 224 to 194 margin.
What are its provisions?
. It would pretty much “cancel” right to work laws now prevailing in 27 different states.
. It would further empower the National Labor Relations Board to exact fines on corporations for so-called “unfair practices.”
. It would require employers to give unions information about their employees’
. It would allow certification via “card check” rather than anonymous vote
. Anything else you can think of that will advantage organized labor is probably in there too.
But do not be afraid, let alone very afraid- at least not yet: it is unlikely in the extreme that this initiative will gather anything like the 60-40 support in the Senate needed to implement it as law.
Although it is never explicitly made clear in the bill, the underlying motivation on the part of its sponsors is to do good: to raise the compensation of American workers and improve working conditions.
This leads to the very important question: do labor unions actually have this effect? At the outset, this would appear to be a silly question. “Of course they do, just look at the statistics,” might be the quick response. And, indeed, unionized workers do earn more compared to those working in similar capacities who are unorganized. But this leaves open the objection that the former are more highly skilled than the latter, and that this is the source of the wage differential.
These deliberations lead in turn to the question of what determines wage levels in the first place. The theory seemingly animating the supporters of the PRO Act is, wait for it- employer generosity. Or, rather, the lack of it. The owners of firms, it is contended, are notoriously stingy when it comes to compensation. They need to be “poked” a bit into doing the right thing, and a strong labor union is precisely the remedy.
But does LeBron James really earn an astronomical salary due to the big-heartedness of the Los Angeles Lakers? Does the person who asks if you “want fries with that?” impecunious because his employer is parsimonious?
Of course not. Instead, productivity is the answer! This basketball star can sell tickets to watch him play, and attract advertisers who want to sell their wares. He adds a gargantuan amount to the bottom line of his employer. The burger seller adds value, too, but on a much more modest scale.
Economists have a simple proof that wages tend to equal productivity (actually, discounted marginal revenue product, but we can leave these complications to another day). Suppose someone adds $20 per hour to the bottom line, but is earning only $15. The employer is earning $5 per hour surplus from his labor (the Marxists would call this “exploitation”), but this is not sustainable. Someone else will offer $15.25 or so, and the bidding war for his services will take place. It will continue until $20 is reached (ignoring the transactions costs of finding him, convincing him to switch jobs, etc.) Nor can a wage of $22 per hour be sustained. When multiplied over numerous workers, it will spell bankruptcy for the hiring firm (assuming no bailouts).
So, does organized labor raise or lower the productivity of the rank and file? It seems difficult to adopt the former viewpoint. For the union will divert the workers’ focus on the job with organizing; there will be internecine fights between different labor organizations; there will be political proselytizing; there will be “make work” schemes designed to increase the demand for this factor of production. See the Sopranos television series for “no show” jobs. And above and beyond all of these everyday considerations, there will be walkouts, strikes, demonstrations for more and “better” labor legislation, all at the expense of productivity. There will be “runaway” shops, which seek greener pastures, leaving in their wake “rust belts.”
No, labor unions do not raise productivity; the very opposite is the case. They reduce real wages; they do not increase them.
READER COMMENTS
Alan Goldhammer
May 28 2021 at 3:33pm
Does the history of the United Mine workers or the Auto Workers union argue for or against your thesis?
john hare
May 28 2021 at 4:21pm
How many of them have been replaced by competitors employees? Or how many of their jobs went away due to overpricing and underperforming relative to alternative options. Customers don’t have to buy from John if Isoruko and Irwin are each offering a superior product for less money
Frank
May 28 2021 at 4:23pm
Unions in the US institutional framework can raise wages if and only if they can prevent entry of competing producers.
That’s why right-to-work states are a bane for unions, but so is international trade.
The heyday of US unions was characterized by an absence of foreign competition, be it through trade policy, be it through the destruction of Europe and Japan.
MarkW
Jun 1 2021 at 9:42am
Unions in the US institutional framework can raise wages if and only if they can prevent entry of competing producers.
Exactly. And they’re fully aware of this, which is why unions fight against ‘right to work’ laws to prevent competition from non-union shops in conservative states and likewise fight for trade barriers. I assume that if it were constitutional, they’d also fight for trade barriers against conservative, right-to-work states. The bottom line is that for unions to raise wages in an industry, they need a monopoly on the supply of labor in that industry (which, for example, the UAW had for several decades in the auto industry during the middle of the 20th century). Without such a monopoly their wages will be limited by their productivity as Walter Block suggests, and unions definitely don’t want that.
David Seltzer
May 28 2021 at 5:04pm
I worked at Inland Steel during the summers of my college and grad school years. I asked a union rep what the union would do if Inland hired a person willing to take less than union wages because that person desperately needed work. He said “His guys would wildcat!” Growing up in NW Indiana, I witnessed several violent attacks on “scabs” by strikers and destruction of property. One could ask. Do unions capture regulators and are unions a government sanctioned monopoly? Rent seeking and limiting competition are the result of both.
Jerry Brown
May 28 2021 at 7:00pm
“Suppose someone adds $20 per hour to the bottom line, but is earning only $15. The employer is earning $5 per hour surplus from his labor (the Marxists would call this “exploitation”), but this is not sustainable. Someone else will offer $15.25 or so, and the bidding war for his services will take place. It will continue until $20 is reached…”
That is a nice story but what is your evidence that it actually works that way? A lot of people very much NEED an income they can only get through supplying their labor. To house and feed their families. The employer’s need for employees rarely approaches that level of necessity (if it ever does). Why assume away that difference?
john hare
May 28 2021 at 9:15pm
Because we are in business to make money. And we can only make money off of productive people. So we will hire productive people at every opportunity.
Non-productive people are a liability at any price. And people that depend on the government to raise minimum wage are of minimum utility on the average.
Jerry Brown
May 28 2021 at 10:44pm
John, I’m in business myself, and if I remember correctly, in a similar sort of business as you. But that doesn’t matter- most only hire when they are pretty sure they have work for the people they might hire to do. It doesn’t matter how productive they are if nobody is paying for their product.
When there is a lot of demand for the product, they will want to hire productive workers. When there is not, well, those potential workers still need to eat and pay rent- and that creates, in my opinion, a pretty big difference. A difference that does not get explained away by nice stories about how eventually employers will compete to drive wages up to exactly the value the employee might produce.
Zeke5123
May 30 2021 at 8:13am
This is diving into theory of the firm but there is I believe an argument to make that business owners take on some entrepreneurial risks in exchange for a slightly lower salary from the employee. But in this situation the employee isn’t trying to solely maximize dollars per hour but instead is trying to solve two problems at once: (1) maximize income while (2) minimizing down side.
Jon Murphy
May 28 2021 at 9:33pm
There are countless empirical studies that show the world works that way.
Jerry Brown
May 28 2021 at 10:52pm
And then Jon, you can look at the world and see something different from the ‘countless empirical studies’.
What’s your favorite one by the way? I might read it if you think it was really good. Seriously.
Jon Murphy
May 29 2021 at 9:22am
Of course. But then one needs to wonder if one is really witnessing something different. One ought to be very careful in attempting to overturn a scientific law.
I like to give my students this example: does a balloon (or airplane) violate the law of gravity? On its face, it appears so. So many objections rely on these “on its face” objections, but once one digs in further, we see no violation.
Depends on how mathematical you want to go. My favorite layman’s report is probably this one by Heritage. If I recall, George Stigler has a good exploration in his textbook The Theory of Price, but my copy is in a moving box right now so I cannot check.
Jerry Brown
May 29 2021 at 10:30am
Thanks Jon- I will read it.
Jerry Brown
May 29 2021 at 2:16pm
Yes- James Sherk’s piece is definitely readable and thanks again Jon. But you kind of know there is a critique of sorts coming. So here’s mine.
The first third of his paper tries to explain why various other measures of worker pay do not show that worker’s pay will always reflect a particular worker’s output- that ‘nice story’ I asked Walter Block what was his evidence that was true. And yes, there are a lot of different ways to measure things- and it matters if you exclude some people, like corporate executives and the self-employed when you try to see what is the share of the output of the economy labor manages to receive.
But really- nobody considers CEO’s and members of the corporate executive suite as ‘labor’ and why should their salaries get lumped in as part of the ‘labor share’ of the economy? You stick one guy making $20 million a year with 99 people making fifty thousand a year and you get an average wage of $249,500 a year? Kind of makes that a useless statistic.
But my main objection would be that the James Sherk piece, while it considers the entirety of labor does not address the question of the individual worker. There is a fallacy of composition in there. Just because your entire grouping as a whole might be compensated at a level we might consider fair does not mean that the individual workers are compensated according to the value of their output.
There is that story that the good worker will be bid away by other firms offering higher wages. Like there is some auction always going on where everyone knows the value of everything. As Russ Roberts is fond of saying- I’m a bit skeptical.
Jon Murphy
May 29 2021 at 3:11pm
Because it is labor. Are you telling me you do no work running your company? That’s the problem with your critique: you change the definitions of things. Of course if you change the definition, the original theory that is built around original definitions no longer holds. But that’s like saying “What evidence do you have that 2+2 = 4, if 2 actually means 3”?
But also note that wages are tied to productivity regardless of what position they occupy.
Which is why he breaks it down into various categories. The problem with the “wages are not tied to productivity” crowd is they make the mistake of lumping dissimilar people together.
If everyone knew the value of everything, there would be no bidding. By definition, at that point all resources will be perfectly allocated.
But, as you point out, there is imperfect information. Imperfect information means profit opportunities. And, indeed, we see informal bidding go on all the time. How many of your employees have quit looking for better or different work and you have to replace them? How many times in an interview have you offered a wage only to have the person turn you down?
Jerry Brown
May 29 2021 at 6:17pm
Jon, I’m pretty sure you understand what I am saying and I think I understand what you are saying. And we just happen to disagree about it- not the worst thing in the world 🙂
Thank you for the discussion.
Jon Murphy
May 30 2021 at 8:24pm
I’m not sure I do understand. I am trying to take your words literally.
David Seltzer
May 30 2021 at 3:14pm
Jerry, I took Stiglers’s course when I was a grad student at U of C. The text book was “Price Theory.” It’s well worth the read. The principles explained are clear and he uses every day examples.
Phil H
May 29 2021 at 6:19am
“Instead, productivity is the answer!”
This is a… Marxist? theory of prices. The idea that prices depend on the underlying value of the good (labour, in this case) is pretty 19th century. In the modern age, particularly on a free market website, I would expect writers to recognize that prices are set by the interplay of supply and demand. If the form of the market privileges suppliers (workers), we would expect prices to be artificially high. The theory behind labour unions is that the form of the market artificially privileges consumers (employers).
Abandoning modern pricing theory in favour of outdated models makes for bad arguments.
Jon Murphy
May 29 2021 at 9:23am
That’s what productivity is. Both supply and demand are determined by the productivity of the asset. That an asset is productive does not imply inherent value the way Marxists do.
Tucker Omberg
May 30 2021 at 2:21pm
I think this analysis mixes up “productivity” and “marginal productivity”. Wages in equilibrium are determined by marginal productivity, or the value to the firm of the last worker hired. We typically think of an increase in productivity as being a rightward shift of the entire labor demand curve. By restricting the supply of labor, labor unions move along the labor demand curve, raising marginal productivity and thus wages. Unions raise wages by restricting supply, which increases marginal productivity even while the total productivity of the firm might fall.
Jon Murphy
May 30 2021 at 8:24pm
True. Block is being imprecise with his language here
William Ehlhardt
Jun 1 2021 at 6:38am
I was pretty intrigued by the title of this post, since it’s surely an important question. But I was disappointed by the total lack of empirical observations. I think that it’s much more important at this point to see what the real-world data tells us than to reiterate the firmly settled theoretical analysis.
William Ehlhardt
Jun 1 2021 at 6:42am
The linked https://www.econlib.org/library/Enc/LaborUnions.html does contain some real-world observations, thankfully.
Floccina
Jun 1 2021 at 1:55pm
Don’t unions reduce employment at there job, raising the productivity per worker and prices? Leaving those employed in the union shop better off in the short run.
Warren Platts
Jun 3 2021 at 9:11am
Respectfully disagree. Productivity merely places an upper limit on wages. If there are a million surplus immigrants in the labor force, if the “someone else” offers $15.25, then other workers (scabs) will bid $7.12; then the “surplus” for labor is $12.75; there is no reason this could not happen, given a firehose of surplus labor.
Thus, when an economy shifts from a free market where workers (aka parents) decide how much labor to supply to an economy where technocrats and lobbyists decide how much labor should be supplied, one can predict that the share of the GDP that goes to labor will go down.
Comments are closed.