The art of economics consists in looking not merely at the immediate, but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group, but for all groups.
This is an ongoing series of posts on Henry Hazlitt’s Economics in One Lesson. You can access the Table of Contents here. Although written in 1946, it still touches on many of the issues we face in 2017, particularly the fallacies government economic programs are built upon.
This chapter is especially interesting to me because my father was a union organizer. I grew up serving coffee in the union meetings, listening to the other side of this argument. I have matured in my own understanding of unions over time. Lela
“The power of labor unions to raise wages over the long run and for the whole working population has been enormously exaggerated. This exaggeration is mainly the result of failure to recognize that wages are basically determined by labor productivity. It is for this reason, for example, that wages in the United States were incomparably higher than wages in England and Germany all during the decades when the “labor movement” in the latter two countries was far more advanced.”
Labor union leaders don’t agree with this, of course, and economic writers love to parrot them, as if they are experts. Hazlitt didn’t just rest his argument on assumptions. He provided reasoned analysis.
No, employers are not uniformly kind and generous folks eager to do what is right. They are, in fact, eager to increase their own profit to the maximum. “If people are willing to work for less that they are really worth to him, why should he not take the fullest advantage of this?” It makes sense for an employer to get $10 an hour’s worth of work out of a workman than to see a rival get $20 an hour’s worth of work out of him. “Thus, there is a tendency for employers to bid workers up to their full economic worth.”
In other words, the employer who really wants to succeed will pay his workers slightly more than the competition does because he knows he’ll get more value out of them.
This doesn’t mean that unions serve no useful of legitimate function. They assure their members get the true market value of their services. Hazlitt recognized the market does not work perfectly.
Neither individual workers nor individual employers are likely to be fully informed concerning the conditions of the labor market. An individual worker, without the help of a union or a knowledge of “union rates,” may not know the true market value of his services to an employer.
Workers are in a much weaker bargaining position than an employer because mistakes of judgment are far more costly to him than to an employer. An employer merely loses the net profit he might have made from employing that one man out of a hundred or a thousand. A worker’s entire livelihood is involved. He can’t afford to be without work, so may take a job for less that what he knows is his “real worth” rather than face unemployment.
When an employer’s workers deal with him as a body, however, and set a known “standard wage” for a given class of work, they may help to equalize bargaining power and the risks involved in mistakes.
Government-mandated organizing unions that put compulsions solely on employers, such as seeking to fix wages above their real market work may create unemployment. We certainly saw this after Hazlitt’s time when Detroit began shedding auto manufacturing jobs.
Unions use many methods for making this possible. One of the most common is restricting membership of the union on some other basis than proven skill. This is done in a variety of ways. Nowadays the most common are arbitrary membership qualifications. In Hazlitt’s day these restrictions were based on religion, race or sex, but today’s Alaska IBEW has what the guys refer to as “the secret handshake”. If the BA doesn’t want you to work, you’ll be turned around by every company they dispatch you to. The employer doesn’t have to say why they rejected you. You weren’t a good fit. And, yes, the employers and the IBEW work together for this purpose because many of the employers were union hands, indoctrinated into the system and then given permission to become signatories to the union.
Unions also tend to resort to intimidation and force. The most obvious example of this is a strike.
A peaceful strike is possible. To the extent that it remains peaceful, it is a legitimate labor
weapon, even though it is one that should be used rarely and as a last resort. If his workers as a body withhold their labor, they may bring a stubborn employer, who has been underpaying them, to his senses. He may find that he is unable to replace these workers by workers equally good who are willing to accept the wage that the former have now
Hazlitt considered pickets to be a form of union violence and intimidation. They are meant to prevent old workers from continuing at their jobs, or to prevent the
employer from hiring new permanent workers to take their places.
Their case becomes questionable. For the pickets are really being used, not primarily against the employer, but against other workers. These other workers are willing to take the jobs that the old employees have vacated, and at the wages that the old employees now reject. The fact proves that the other alternatives open to the new workers are not as
good as those that the old employees have refused. If, therefore, the old employees succeed by force in preventing new workers from taking their place, they prevent these new workers from choosing the best alternative open to them, and force them to take something worse. The strikers are therefore insisting on a position of privilege, and are using force to maintain this privileged position against other workers.
Hazlitt distinguished between the “strikebreaker” who is a professional thug or someone hired for a temporarily higher wage to keep a factory going until the striking workers can be frightened back to work at the old rates and the men and women who are looking for permanent jobs and are willing to accept them at the old rate.
[T]hey are workers who would be shoved into worse jobs than these in order to enable the striking workers to enjoy better ones. And this superior position for the old employees could continue to be maintained, in fact, only by the ever-present threat of force.
The use of emotional economics has created theories that reason could not justify. One of these is that labor is “underpaid” generally. That’s like saying grocery prices are chronically too low.
Another weird theory that makes no rational sense is that the interests of the nation’s workers are all identical and that an increase in the wages for one union somehow helps all other workers.
[T]he truth is that, if a particular union by coercion is able to enforce for its own members a wage substantially above the real market worth of their services, it will hurt all other workers as it hurts other members of the community.
Imagine a community with overly simplified numbers. There’s a half dozen groups of workers who are all paid equally and their product all as the same market value.
Let’s say these groups are:
- farm hands
- retail store workers
- workers in the clothing trades
- coal miners
- building workers, and
- railway employees.
Their wage rates, determined without any element of coercion, are not necessarily equal; but whatever they are, let us assign to each of them an original index number of 100 as a base. Now let us suppose that each group forms a national union and is able to enforce its demands in proportion not merely to its economic productivity but to its political power and strategic position. Suppose the result is that the farm hands are unable to raise their wages at all, that the retail store workers are able to get an increase of 10 percent, the clothing workers of 20 percent, the coal miners of 30 percent, the building trades of 40 percent, and the railroad employees of 50 percent.
Using these assumption, we can say the overall wages increased by 25 percent. For the sake of arithmetical simplicity, let’s say the price of the product that each group of workers makes rises by the same percentage as the increase in that group’s wages.
The cost of living has risen by an average of 25 percent. Yay!
Unless you’re a farm hand. The farm hands received no change in their monetary wages, so they are considerably worse off in regards to purchasing power.
The retail store workers got an increase in their monetary wages of 10 percent, but they are still worse off than before the race began. So are the garment workers who received a 20 percent increase in wages, which doesn’t match the 25% increase in prices.
The coal miners, with a money-wage increase of 30 percent, will have made a slight gain in purchasing power.
The building and railroad workers will of course have made a gain, but one much smaller in actuality than in appearance.
Of course, these calculations rest on the assumption that the forced increase in wages didn’t cause any unemployment.
This is likely to be true only if the increase in wages has been accompanied by an equivalent increase in money and bank credit; and even then it is improbable that such distortions in wage rates can be brought about without creating pockets of unemployment, particularly in the trades in which wages have advanced the most. If this corresponding monetary inflation does not occur, the forced wage advances will bring about widespread unemployment.
The situation cannot be rectified by providing unemployment relief, which is paid for out of the wages of those who work, thus reducing actual wages. As Hazlitt has previously demonstrated, adequate relief payments create unemployment through various means. When strong labor unions in the past made it their function to provide for their own unemployed members, they thought twice before demanding a wage that would cause
heavy unemployment. Now that the relief system is supported by taxes, the restraint on excessive union demands is no longer in force.
Moreover … “adequate” relief will cause some men not to seek work at all, and will cause others to consider that they are in effect being asked to work not for the wage offered, but
only for the difference between that wage and the relief payment.
High unemployment means fewer goods are produced, which makes the nation poorer overall. There is less for everybody.
Union leaders will sometimes attempt to answer this problem with a bit of magical thinking. It may be true, they will admit, that the members of strong unions today exploit, among non-unionized workers, but the remedy is to unionize everybody.
Problem solved. Let’s head home!
Of course, even in Hazlitt’s day when union membership was at its fullest, only about one-quarter of gainfully employed workers were unionized. That number is down to single digits now, though higher in the government sectors.
The conditions propitious to unionization are much more special than generally recognized. But even if universal unionization could be achieved, the unions could not possibly be equally powerful, any more than they are today. Some groups of workers are in a far better strategic position than others, either because of greater numbers, of the more essential nature of the product they make, of the greater dependence on their industry of other industries, or of their greater ability to use coercive methods.
But set that aside for a moment and just assume that “all workers by coercive methods could raise their wages by an equal percentage. How would anyone be better off in the long run, since the increase in wages would cause a concurrent increase in the cost of living?
An increase in wages is gained at the expense of the profits of employers. That’s the general assumption anyway, and may be the case for short periods or under special circumstances.
If wages are forced up in a particular firm, in such competition with others that it cannot raise its prices, the increase will come out of its profits. This is much less likely to happen, however, if the wage increase takes place throughout a whole industry. The industry will in most cases increase its prices and pass the wage increase along to consumers. As these are likely to consist for the most part of workers, they will simply have their real wages reduced by having to pay more for a particular product.
Hazlitt proposed that it is possible to imagine a case in which the profits in a whole industry are reduced without any corresponding reduction in employment, that somehow an increase in wage rates means a corresponding increase in payrolls, with the whole cost coming from the industry’s profits without throwing any firm out of business. Such a result is not likely, but Hazlitt found it remotely conceivable.
He used the railroads as an example. They cannot always pass increased wages along to the public in the form of higher rates, because government regulation will not permit
it, although Hazlitt noted that the railroads had laid off a lot of workers since they were unionized. He suggested we overlook actualities for the moment and talk as if we were discussing a hypothetical case.
It is possible for unions to make their gains in the short run at the expense of employers and investors. The investors put their liquid funds into the fixed assets of rails and freight cars. That investment is now trapped, so to speak, in one particular form. The railway unions may force them to accept smaller returns on this invested capital. It will pay the investors to continue running the railroad if they can earn anything at all above operating expenses, even if it is only one-tenth of 1 percent on their investment.
But there is an inevitable corollary of this. If the money that they have invested in railroads now yields less than money they can invest in other lines, the investors will not put a cent more into railroads. They may replace a few of the things that wear out first, to protect the small yield on their remaining capital; but in the long run they will not
even bother to replace items that fall into obsolescence or decay. If capital invested at home pays them less than that invested abroad, they will invest abroad. If they cannot find sufficient return anywhere to compensate them for their risk, they will cease to invest at all.
The exploitation of capital by labor can at best be merely temporary. It will come to an end by forcing marginal firms out of business entirely, increasing unemployment, and the forced readjustment of wages and profits to the point where the prospect of normal profits leads to a resumption of employment and production.
[A]s a result of the exploitation, unemployment and reduced production will have made everybody poorer. Even though labor for a time will have a greater relative share of the national income, the national income will fall absolutely; so that labor’s relative gains in these short periods may mean a Pyrrhic victory.
Unions may, for a time, be able to secure an increase in monetary wages for their members, partly at the expense of employers and non-unionized workers, but in the long run, the whole body of workers do not see an increase real wages at all.
Whoa, where is that topic being discussed today?
Remember, Hazlitt was talking about fallacies — economic delusions. One such fallacy is post hoc ergo propter hoc. The 20th century saw an enormous rise in wages in the last half century, primarily due to the growth of capital investment and scientific and technological advances. Those who don’t recognize the fallacy, ascribed this phenomenon to the unions because the unions were also growing during this period.
By considering only the short term benefit to a limited group of people (union workers), the advocates for this fallacy failed to trace the effects of this advance on employment,
production and the living costs of all workers, including those who forced the increase.
One may go further … and raise the question whether unions have not, in the long run and for the whole body of workers, actually prevented real wages from rising to the extent to
which they otherwise might have risen. They have certainly been a force working to hold down or to reduce wages if their effect, on net balance, has been to reduce labor productivity; and we may ask whether it has not been so.
Hazlitt praised the trade unions that had insisted upon standards to increase the level of skill and competence. My dad would have pointed to all the unions had done to protect the health of their members. Where labor was plentiful, individual employers often stood to gain by speeding up workers and working them long hours in spite of ultimate ill effects upon their health, because they could easily be replaced with others. At times ignorant or shortsighted employers would even reduce their own profits by overworking their employees. In all these cases the unions, by demanding decent standards, often increased the health and broader welfare of their members at the same time as they increased their real wages.
As their power grew and the public became more tolerant of union violence, unions had begun to work against their own members. Hazlitt used the example of the shorter work week that started out as a health benefit that actually increased productivity, but that had become more of a gain for leisure that had affected both productivity and worker income.
But it is not only in reducing scheduled working hours that union policy has worked against productivity. That … is one of the least harmful ways in which it has done so; for the compensating gain, at least, has been clear. But many unions have insisted on rigid subdivisions of labor which have raised production costs and led to expensive
and ridiculous “jurisdictional” disputes. For example:
- They have opposed payment on the basis of output or efficiency, and insisted on the same hourly rates for all their members regardless of differences in productivity.
- They have insisted on promotion for seniority rather than for merit.
- They have initiated deliberate slowdowns under the pretense of fighting “speedups.”
- They have denounced, insisted upon the dismissal of, and sometimes cruelly beaten, men who turned out more work than their fellows.
- They have opposed the introduction or improvement of machinery.
- They have insisted on make-work rules to require more people or more time to perform a given task.
- They have even insisted, with the threat of ruining employers, on the hiring of people who are not needed at all.
Most of these policies have been followed under the assumption that there is just a fixed amount of work to be done, a definite “job fund” which has to be spread over as many people and hours as possible so as not to use it up too soon. This assumption is utterly false.
There is no limit to the amount of work to be done because work creates work. What A produces constitutes the demand for what B produces. This false assumption and the union policies based on it have resulted in reduced productivity below what it would otherwise have been. Real wages have been reduced in the long run and for all workers. By real wages we mean what can be bought with what is earned. And we see the consequences of that in 2017
The real cause for the tremendous increase in real wages in the last half century (especially in America) has been, to repeat, the accumulation of capital and the enormous technological advance made possible by it. Reduction of the rate of increase in real wages is not, of course, a consequence inherent in the nature of unions. It has been the result of shortsighted policies. There is still time to change them.