Why Do We Need Unions? – John Goodman

Original post at NCPA.

There is one group of workers who have signed a consent decree with the federal government, agreeing to never form a union. Do you know who they are? Answer below the fold.

The economics of unions is quite simple. Like medieval guilds, the goal of a modern union is to monopolize the supply of labor to a market. (See David Henderson here.) With that power, the union can then limit the labor supply and secure above-market wages. Why do unions push for higher wages and benefits even when they cause layoffs? Because trading off smaller output for higher prices is what all monopolies do.

It is sometimes thought that unions are needed to offset the superior bargaining power of employers. But this is bad economics. Do you need to band with other consumers in order to bargain better with Wal-mart? Of course not. Wal-mart’s prices are low not because of your bargaining power, but because it has competitors. Similarly, competition among employers is what keeps wages high in the labor market.

It is sometimes argued that unions are needed to lift people out of poverty. This is even worse economics. Above-market wages for unionized workers are possible only if less fortunate workers can be kept out of the market. Moreover, like the members of medieval guilds, the vast majority of unionized workers today have above-average incomes. They are squarely in the top half of the income distribution, not the bottom half. Unionized professional athletes are downright rich. Poor people almost never form successful labor unions.

Here is a song by Pete Seeger and Arlo Guthrie via Ezra Klein. I’ve added a different caption.

NFL Football Players
Have Learned this Lesson Well

Who gains and who loses from union activity? The natural inclination is to think that if wages are above-market, employer profits must be lower. But this is more bad economics. By restricting the supply of labor to a market, the union at the same time limits industry output. With less output available, consumers will have to pay higher market-clearing prices. The workers’ higher wages are paid out of the pockets of consumers, not employers.

Ultimately, though, consumers only have so much income to spend. If they spend more on products produced by union labor, they will spend less on products produced by nonunion labor. In a sense, higher wages for unionized labor are made possible by lower wages for other workers.

Who are the people left out of the union? Historically, they are blacks, women and other minorities. Either they are denied admission to the union or they are the last to be called to the job site. Racial and gender discrimination by unions has been far worse than any case I’ve ever heard about involving employers. But I’ve never heard of a civil rights case brought against a union. (Are they exempt from the civil rights law?)

How is it possible to monopolize the supply of labor? In a free labor market, it isn’t. Workers who aren’t in the union (scabs) will offer their services for lower wages than the union is demanding. Employers will be more than willing to hire them. The only way to prevent this is through force — either by the government or by the union itself. This is why the history of American union movement has been marked by so much violence. In a very real sense, there is no such thing as a peaceful picket line. The only purpose of a picket line is to intimidate.

Why are so many people sympathetic with labor unions? I think for most it is a lack of understanding of basic economics. The more puzzling question is: why are so many economists sympathetic with unions? I can’t think of any economic argument for government sanctioning, much less promoting, the arbitrary creation of labor monopolies. And the original critic of the guild system was the father of economics, Adam Smith. Yet Paul Krugman and Ezra Klein and many other economists are distinctly pro-union.

When I was a student at Columbia, Kelvin Lancaster proudly announced to our price theory class that he would never cross a picket line. He wasn’t talking about a union picket line. He was talking about a bunch of students protesting the Vietnam War. I was tempted to test his resolve by organizing a student picket line outside his condo. Would he really spend the night on the sidewalk? Ah…., but he was on my dissertation committee. So I thought better of it.

I learned an important lesson about my colleagues, however. You can be brilliant in economic theory and, at the same time, be totally lacking in common sense.

Oh, and the group that has agreed never to be a union or act like a union? It’s doctors. The consent decree was signed by the American Medical Association (AMA).

As I described in Regulation of Medical Care, from its very first meeting, about 160 years ago, the AMA single-mindedly set out to restrict entry into the profession and discourage price and quality competition among doctors. From early 20th century occupational licensing barriers it moved to control the output of medical schools and then helped make the regulation of hospitals and insurance companies serve its interest as well. From beginning to end there was never any question about its motive: more income for physicians.

Yet in doing these things, the AMA acted no differently than the auto workers, the teamsters and the longshoremen. It’s hard to think of any rational reason to be against these activities when doctors are the actors, but favor them for everybody else.

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