Employer Organizations
In earlier centuries, it was the employers who were more likely to be organized and setting pay and working conditions as a group. In medieval guilds, the master craftsmen collectively made the rules determining the conditions under which apprentices and journeymen would be hired and how much customers would be charged for the products. Today, major league baseball owners collectively make the rules as to what is the maximum of the total salaries that any given team can pay to its players without incurring financial penalties from the leagues.
Clearly, pay and working conditions tend to be different when determined collectively than in a labor market where employers compete against one another individually for workers and workers compete against one another individually for jobs. It would obviously not be worth the trouble of organizing employers if they were not able to gain by keeping the salaries they pay lower than they would be in a free market. Much has been said about the fairness or unfairness of the actions of medieval guilds, modern labor unions or other forms of collective bargaining. Here we are studying their economic consequences—and especially their effects on the allocation of scarce resources which have alternative uses.
Almost by definition, all these organizations exist to keep the price of labor from being what it would be otherwise in free and open competition in the market. Just as the tendency of market competition is to base rates of pay on the productivity of the worker, thereby bidding labor away from where it is less productive to where it is more productive, so organized efforts to make wages artificially low or artificially high defeat this process and thereby make the allocation of resources less efficient for the economy as a whole.
For example, if an employers’ association keeps wages in the widget industry below the level that workers of similar skills receive elsewhere, fewer workers are likely to apply for jobs producing widgets than if the pay rate were higher. If widget manufacturers are paying $10 an hour for labor that would get $15 an hour if employers had to compete with each other for workers in a free market, then some workers will go to other industries that pay $12 an hour. From the standpoint of the economy as a whole, this means that people capable of producing $15 an hour’s worth of output are instead producing only $12 an hour’s worth of output somewhere else. This is a clear loss to the consumers—that is, to society as a whole, since everyone is a consumer.
The fact that it is a more immediate and more visible loss to the workers in the widget industry does not make that the most important fact from an economic standpoint. Losses and gains between employers and employees are social or moral issues, but they do not change the key economic issue, which is how the allocation of resources affects the total wealth available to society as a whole. What makes the total wealth produced by the economy less than it would be in a free market is that wages set below the market level cause workers to work where they are not as productive, but where they are paid more because of a competitive labor market in the less productive occupation.
The same principle applies where wages are set above the market level. If a labor union is successful in raising the wage rate for the same workers in the widget industry to $20 an hour, then employers will employ fewer workers at this higher rate than they would at the $15 an hour rate that would have prevailed in free market competition. In fact, the only workers that will be worth hiring are workers whose productivity is at least $20 an hour. This higher productivity can be reached in a number of ways, whether by retaining only the most skilled and experienced employees, by adding more capital to enable the labor to turn out more products per hour, or by other means—none of them free.
Those workers displaced from the widget industry must go to their second-best alternative. As before, those worth $15 an hour producing widgets may end up working in another industry at $12 an hour. Again, this is not simply a loss to those particular workers who cannot find employment at the higher wage rate, but a loss to the economy as a whole, because scarce resources are not being allocated where their productivity is highest.
Where unions set wages above the level that would prevail under supply and demand in a free market, widget manufacturers are not only paying more money for labor, they are also paying for additional capital or other complementary resources to raise the productivity of labor above the $20 an hour level. Higher labor productivity may seem on the surface to be greater “efficiency,” but producing fewer widgets at higher cost per widget does not benefit the economy, even though less labor is being used. Other industries receiving more labor than they normally would, because of the workers displaced from the widget industry, can expand their output. But that expanding output is not the most productive use of the additional labor. It is only the artificially-imposed union wage rate which causes the shift from a more productive use to a less productive use.
Either artificially low wage rates caused by an employer association or artificially high wage rates caused by a labor union reduces employment in the widget industry. One side or the other must now go to their second-best option—which is also second-best from the standpoint of the economy as a whole, because scarce resources have not been allocated to their most valued uses. The parties engaged in collective bargaining are of course preoccupied with their own interests, but those judging the process as a whole need to focus on how such a process affects the economic interests of the entire society, rather than the internal division of economic benefits among contending members of the society.
Even in situations where it might seem that employers could do pretty much whatever they wanted to do, history often shows that they could not—because of the effects of competition in the labor market. Few workers have been more vulnerable than newly freed blacks in the United States after the Civil War. They were extremely poor, most completely uneducated, unorganized, and unfamiliar with the operation of a market economy. Yet organized attempts by white employers and landowners in the South to hold down their wages and limit their decision-making as sharecroppers all eroded away in the market, amid bitter mutual recriminations among white employers and landowners.{411}
When the pay scale set by the organized white employers was below the actual productivity of black workers, that made it profitable for any given employer to offer more than the others were paying, in order to lure more workers away, so long as his higher offer was still not above the level of the black workers’ productivity. With agricultural labor especially, the pressure on each employer mounted as the planting season approached, because the landowner knew that the size of the crop for the whole year depended on how many workers could be hired to do the spring planting. That inescapable reality often over-rode any sense of loyalty to fellow landowners. The percentage rate of increase of black wages was higher than the percentage rate of increase in the wages of white workers in the decades after the Civil War, even though the latter had higher pay in absolute terms.
One of the problems of cartels in general is that, no matter what conditions they set collectively to maximize the benefits to the cartel as a whole, it is to the advantage of individual cartel members to violate those conditions, if they can get away with it, often leading to the disintegration of the cartel. That was the situation of white employer cartels in the postbellum South. It was much the same story out in California in the late nineteenth and early twentieth centuries, when white landowners there organized to try to hold down the pay of Japanese immigrant farmers and farm laborers.{412} These cartels too collapsed amid bitter mutual recriminations among whites, as competition among landowners led to widespread violations of the agreements which they had made in collusion with one another.
The ability of employer organizations to achieve their goals depends on their being able to impose discipline on their own members, and on keeping competing employers from arising outside their organizations. Medieval guilds had the force of law behind their rules. Where there has been no force of law to maintain internal discipline within the employer organization, or to keep com
peting employers from arising outside the organization, employer cartels have been much less successful.
In special cases, such as the employer organization in major league baseball, this is a monopoly legally exempted from anti-trust laws. Therefore internal rules can be imposed on each team, since none of these teams can hope to withdraw from major league baseball and have the same financial support from baseball fans, or the same media attention, when they are no longer playing other major league teams. Nor would it be likely, or even feasible, for new leagues to arise to compete with major league baseball, with any hope of getting the same fan support or media attention. Therefore, major league baseball can operate as an employer organization, exercising some of the powers once used by medieval guilds, before they lost the crucial support of law and faded away.
Labor Unions
Although employer organizations have sought to keep employees’ pay from rising to the level it would reach by supply and demand in a free competitive market, while labor unions seek to raise wage rates above where they would be in a free competitive market, these very different intentions can lead to similar consequences in terms of the allocation of scarce resources which have alternative uses.
Legendary American labor leader John L. Lewis, head of the United Mine Workers from 1920 to 1960, was enormously successful in winning higher pay for his union’s members. However, an economist also called him “the world’s greatest oil salesman,” because the resulting higher price of coal and the disruptions in its production due to numerous strikes caused many users of coal to switch to using oil instead. This of course reduced employment in the coal industry.
By the 1960s, declining employment in the coal industry left many mining communities economically stricken and some became virtual ghost towns. Media stories of their plight seldom connected their current woes with the former glory days of John L. Lewis. In fairness to Lewis, he made a conscious decision that it was better to have fewer miners doing dangerous work underground and more heavy machinery down there, since machinery could not be killed by cave-ins, explosions and the other hazards of mining.
To the public at large, however, these and other trade-offs were largely unknown. Many simply cheered at what Lewis had done to improve the wages of miners and, years later, were compassionate toward the decline of mining communities—but made little or no connection between the two things. Yet what was involved was one of the simplest and most basic principles of economics, that less is demanded at a higher price than at a lower price. That principle applies whether considering the price of coal, of the labor of mine workers, or anything else.
Very similar trends emerged in the automobile industry, where the danger factor was not what it was in mining. Here the United Automobile Workers’ union was also very successful in getting higher pay, more job security and more favorable work rules for its members. In the long run, however, all these additional costs raised the price of automobiles and made American cars less competitive with Japanese and other cars, not only in the United States but in markets around the world.
As of 1950, the United States produced three-quarters of all the cars in the world and Japan produced less than one percent of what Americans produced. Twenty years later, Japan was producing almost two-thirds as many automobiles as the United States and, ten years after that, more automobiles.{413} By 1990, one-third of the cars sold within the United States were Japanese. In a number of years since then, more Honda Accords or Toyota Camrys were sold in the United States than any car made by any American car company. All this of course had its effect on employment. By 1990, the number of jobs in the American automobile industry was 200,000 less than it had been in 1979.{414}
Political pressures on Japan to “voluntarily” limit its export of cars to the U.S. led to the creation of Japanese automobile manufacturing plants in the United States, hiring American workers, to replace the lost exports. By the early 1990s, these transplanted Japanese factories were producing as many cars as were being exported to the United States from Japan—and, by 2007, 63 percent of Japanese cars sold in the United States were manufactured within the United States.{415} Many of these transplanted Japanese car companies had work forces that were non-union—and which rejected unionization when votes were taken among the employees in secret ballot elections conducted by the government. The net result, by the early twenty-first century, was that Detroit automakers were laying off workers by the thousands, while Toyota was hiring American workers by the thousands.
The decline of unionized workers in the automobile industry was part of a more general trend among industrial workers in the United States. The United Steelworkers of America was another large and highly successful union in getting high pay and other benefits for its members. But here too the number of jobs in the industry declined by more than 200,000 in a decade, while the steel companies invested $35 billion in machinery that replaced these workers, {416} and while the towns where steel production was concentrated were economically devastated.
The once common belief that unions were a blessing and a necessity for workers was now increasingly mixed with skepticism and apprehension about the unions’ role in the economic declines and reduced employment in many industries. Faced with the prospect of seeing some employers going out of business or having to drastically reduce employment, some unions were forced into “give-backs”—that is, relinquishing various wages and benefits they had obtained for their members in previous years. Painful as this was, many unions concluded that it was the only way to save members’ jobs. A front page news story in the New York Times summarized the situation in the early twenty-first century:
In reaching a settlement with General Motors on Thursday and in recent agreements with several other industrial behemoths—Ford, DaimlerChrysler, Goodyear and Verizon—unions have shown a new willingness to rein in their demands. Keeping their employers competitive, they have concluded, is essential to keeping unionized jobs from being lost to nonunion, often lower-wage companies elsewhere in this country or overseas.{417}
Unions and their members had, over the years, learned the hard way what is usually taught early on in introductory economics courses—that people buy less at higher prices than at lower prices. It is not a complicated principle, but it often gets lost sight of in the swirl of events and the headiness of rhetoric.
The proportion of the American labor force that is unionized has declined over the years, as skepticism about unions’ economic effects spread among workers who have increasingly voted against being represented by unions. Unionized workers were 32 percent of all workers in the middle of the twentieth century, but only 14 percent by the end of the century.{418} Moreover, there was a major change in the composition of unionized workers.
In the first half of the twentieth century, the great unions in the U.S. economy were in mining, automobiles, steel, and trucking. But, by the end of that century, the largest and most rapidly growing unions were those of government employees. By 2007, only 8 percent of private sector employees were unionized.{419} The largest union in the country by far was the union of teachers—the National Education Association.
The economic pressures of the marketplace, which had created such problems for unionized workers in private industry and commerce, did not apply to government workers. Government employees could continue to get pay raises, larger benefits, and job security without worrying that they were likely to suffer the fate of miners, automobile workers, and other unionized industrial workers. Those who hired government workers were not spending their own money but the taxpayers’ money, and so had little reason to resist union demands. Moreover, they seldom faced such competitive forces in the market as would force them to lose business to imports or to substitute products. Most government agencies have a monopoly of their particular function.{xx} Only the Internal Revenue Service collects taxes for the federal government and only the Department of Motor Vehicles issues states’ driver licenses.
In private industry, many companies
have remained non-union by a policy of paying their workers at least as much as unionized workers received. Such a policy implies that the cost to an employer of having a union exceeds the wages and benefits paid to workers. The hidden costs of union rules on seniority and many other details of operations are for some companies worth being rid of for the sake of greater efficiency, even if that means paying their employees more than they would have to pay to unionized workers. The unionized big three American automobile makers, for example, have required from 26 hours to 31 hours of labor per car, while the largely non-unionized Japanese automakers required from 17 to 22 hours.{420}
Western European labor unions have been especially powerful, and the many benefits that they have gotten for their members have had their repercussions on the employment of workers and the growth rates of whole economies. Western European countries have for years lagged behind the United States both in economic growth and in the creation of jobs. A belated recognition of such facts led some European unions and European governments to relax some of their demands and restrictions on employers in the wake of an economic slump. In 2006, the Wall Street Journal reported:
Europe’s economic slump has given companies new muscle in their negotiations with workers. Governments in Europe have been slow to overhaul worker-friendly labor laws for fear of incurring voters’ wrath. That slowed job growth as companies transferred operations overseas where labor costs were lower. High unemployment in Europe depressed consumer spending, helping limit economic growth in the past five years to a meager 1.4% average in the 12 countries that use the euro.{421}
In the wake of a relaxation of labor union and government restrictions in the labor market, the growth rate in these countries rose from 1.4 percent to 2.2 percent and the unemployment rate fell from 9.3 percent to 8.3 percent.{422} Neither of these statistics was as good as those in the United States at the time, but they were an improvement over what existed under previous policies and practices in the European Union countries.
Basic Economics Page 29
