Labor Unions - Part Two

Productive or Not?

 

(sources:  Zimmerman and Ruback, Richard B. Freeman and James L. Medoff, John W. Scoville, Walter Williams, John K. Galbraith, By R.H. Mabry and A.D. Sharplin, other sources, common knowledge)

 

The real question has been whether unions increase or decrease national income – are they productive or counter productive?

 

For over 200 years most economists have argued no – although their reasons have changed over time.

 

Why no?  Same as anti-competitive producer combinations:

 

1.)                Restrict the supply of labor services in their markets.

2.)                Distort the structure of relative labor prices.

3.)                Induce misallocations of productive resources.

            a.   Limit managerial flexibility.

            b.  Oppose new technology

            c.  Compel excessive use of labor (so-called featherbedding or over-manning) – Redundant employees

            d.  Foster adversarial attitudes

            e.  Disrupt production through strikes, strike threats and alter tactics

 

Professors at Harvard disagree:  say unions increase productivity through their collective – voice/institutional response role

 

Richard B. Freeman and James L. Medoff  (What Do Unions Do?)

 

How?  Increase productivity in unionized enterprises (not necessarily in the economy as a whole) by:

 

1.                  reducing labor turnover

2.                  enhancing worker morale and cooperation

3.                  providing an efficient collective voice in negotiating workplace characteristics and grievance resolution

4.                  pressuring management into stricter efficiency

 

 Explanations:

 

1.          Decrease turnover by providing workers with a direct means to voice their discontent to management and establish job rights.  Decrease discontent of workers leads to decrease in turnover leads which leads to employers offering more job specific training and thereby increasing productivity.

 

(Evidence does suggest unions decrease turnover rates.)   Also – unions usually base promotion on seniority  - leads to a decrease in rivalry and increase in the amount of informal on-the-job training by more experienced workers to less experienced.

 

2.         Increase economic rewards will lead to better morale and cooperation

 

3.         Don’t have to bargain individually – saves time and money.

 

4.          Unions provide mechanism by which labor can point out possible changes in work rules or production techniques that will benefit both labor and management.

 

All of these lead to the conclusion that unions increase productivity.

 

Empirical Evidence?  (see Zimmerman and Ruback, Journal of Political Economy) -

 

If so, shareholders may want unions (while managers do not) because unions would constrain managerial discretion and prerogatives -

Agency problem -

 

However, almost all studies have found that an announcement of unionization decreases the price of a stock. 

Are shareholders wrong about unions and productivity?

 

Let’s look at Collective Bargaining in general:

 

ANTI - Collective bargaining Wrong in Principle by John W. Scoville -

 

Collective bargaining – if an employer does not accept union demands, employees go on strike and by picket lines and perhaps violence, prevent other workers from taking their jobs.

  

Analyze the “right of collective bargaining.”

 

Rights and the law --

 

Analogy:  All human acts fall into 2 categories:

 

1.                  Acts of which the law takes no notice.

2.                  Acts command or forbidden by law.

 

His analogy - let's have some fun!

 

A man has the right to marry.  This “right” is in the first category….the law neither forbids nor commands.
 

Young man asks 10 women to marry him.  They all say no.

 

Goes to the legislature and says that women are denying him the “right” to marry.

 

So – legislature passes a law which prohibits any woman from interfering with the right of a man to marry.

 

So – goes to his favorite woman and demands she marry him.

 

If she refuses – goes to the National Marriage Relations Board which decides the woman is engaged in an unfair marriage practice and that she cannot interfere with the man’s right to marry.

 

The Board draws up a marriage agreement or contract and compels the woman to sign it.

 

We observe:

 

  1. The law took from the woman the right to decide whom to marry or whether she should marry at all.
  2. Before the law was passed, the right to marry meant the man had the right to marry if he could find a woman to agree to it.
  3. After the law was passed, the right to marry meant something else – the right to coerce a woman to marry him.
  4. The marriage contract was signed under duress – therefore was not a contract at all, but a legal mandate.

 

The Wagner Act – (National Labor Relations Act 1935) – does just this.  Labor agreements or contracts signed by employers under duress – are not contracts at all!

 

This is not bargaining – which is voluntary activity.

 

Labor unions make demands, not bargains or offers…with the power and will to use force.

 

Substitutes force for competition.

 

PRO- Collective bargaining is “fair” because the relationship between firms and workers is not an equal one to start with. 

 

If one side to a contract has more “power” – usually because the workers choices are limited – then giving legal power to the other side evens out the situation. 

 

In other words – duress already exists on the part of the firm since workers have no choice but to work.

 

So with respect to the analogy above - one does not HAVE to get married to survive - they do have to work.

 

 

 

How Do Unions Achieve Their Objectives?

 

 They try to make the demand for their labor more inelastic - through their bargaining, through lobbying efforts, legislation.

 

Example:  unions support minimum wage laws.  The decrease in relative wage (skilled union worker and unskilled non-union worker) decreases the substitutability between the two.  This is why unions also call for legislation against imports - decrease the substitutability.

 

GRAPH

 

 

 

 

 

 

 

 

 

Increase wages, lose less employment with inelastic curve.

 

Also – if the union (or otherwise) can shift demand out – then increase employment even with wage increase.

 

So unions want growing industries with inelastic labor demand curves.

 

Summary:  Unions try to increase demand for labor or reduce wage elasticity for their services (decrease substitutes):

 

These include (determinates of wage elasticity):

 

  1. Price elasticity of demand for final product.

 

  1. Ease of substitution of other inputs

 

  1. Responsiveness of the supply of other inputs to their prices.

 

If price elasticity of demand for the final product is less elastic, if it is difficult to substitute other inputs for union labor, and if supply schedules of other inputs are unresponsive to their prices, a more inelastic demand for union labor will result.

 

(If productivity of machinery increases does not bring forth more supply of machinery, unions are better off.)

 

Unions try to increase demand by:

(shift to the right) and decrease wage elasticity

 

  1. lobby for quotas or tariffs on foreign produced goods.  Includes supporting domestic content legislation – which require that imported autos contain certain minimum percentage of American made components.
  2. encourage or try to influence people’s tastes by ad “Buy American,” etc.
  3. support minimum wage laws.
  4. support prevailing wage legislation (Davis-Bacon)

Federal contracts must pay “prevailing wage” – which is often union wage, this eliminates any cost advantage the non-union construction workers may have, thereby increase demand for union labor.

  1. support anti-immigration laws.

 

Unions also attempt to restrict the substitute of other inputs for union labor through collective bargaining:

 

  1. Some unions (airline, railroad, printing, i.e.) have sought and won guarantees of minimum crew sizes.  Such staffing requirements prevent employers from substituting capital for labor.
  2. Won contract provisions that prohibit employers from subcontracting for some or all of the services they provide.  Or have “hiring hall” agreements where employers contract the union to do a job and the union always only hires union workers.  Construction. restaurant and hotel, longshoremen.
  3. Craft unions often negotiate specific contract provisions that restrict the functions that members of each individual craft can perform – thereby limiting the substitute of one type of union labor for another and
  4. This leads to featherbedding (requires employer to limit production or employ more workers than needed because of safety regulations or union rules).
  5. Craft unions also limit the substitute of unskilled union labor for skilled union labor by establishing rules about the maximum number of apprentice workers that can be employed relative to the experienced journeymen.
  6. Fight for the “seniority principle” – pay increases and promotion not based on merit – but based on length of employment.  Workers don’t quit – want their seniority – can’t substitute nonunion workers.