"It is the highest impertinence and presumption, therefore, in kings and ministers, to pretend to watch over the economy of private people, and to restrain their expence, either by sumptuary laws, or by prohibiting the importation of foreign luxuries. They are themselves always, and without any exception, the greatest spendthrifts in the society. Let them look well after their own expence, and they may safely trust private people with theirs. If their own extravagance does not ruin the state, that of their subjects never will." ~ Adam Smith
Column by Jim Davies.
Exclusive to STR
On February 14th the UAW took another kick in the teeth; employees of Volkswagen at its plant in Chattanooga voted 712 to 626 not to join. Trade unionists everywhere were buzzing like demented hornets; on The Guardian website I offered a little comfort (“The union lost. Boo-hoo. Get over it. Unions are parasites.”) but, alas, I was heavily outnumbered. The efficacy of unions is still, apparently, a cherished article of religion on the Left and my soothing words were regarded as sacrilege.
The VW result was quite pleasing, given that the UAW had poured itself into a campaign to revive its flagging fortunes, but it was also a bit skewed by government money (that is, money stolen by government from real people). The local tin gods were offering incentives to VW, apparently conditional on the plant remaining non-union. So perhaps that influence balanced the UAW's effect on the vote.
Why would a state government do that? As a kind of investment, obviously. Hand over some new access roads and limited-period tax abatements to get the firm to open the plant, then later on reap the returns in the form of decades of tax revenue. It's therefore notable that in Tennessee, the Pols realize that a non-union factory will be more profitable, and so yield more tax, than one held in the grip of unions.
So I thought here to try to show why unions are parasitic, and whether they will exist in the coming free society.
The union sales pitch that employees can get a better deal by joining, is correct in most cases. The claim is not false. Collective “bargaining” works. An employer with 1,000 workers will give up more to them if faced by extortion (the threat of a strike, closing his business down) than if he deals with them one by one. Notice, the union is not offering services in exchange for money; it is not a subcontractor with employees, bidding on a job. It has a lot of negotiating power, but no responsibility at all; it's a parasite. The parties with responsibilities are the individual worker, and the employing company – so the wage offered without union representation we call the “market rate” for the job; the hirer offers enough to attract people of the desired skills, but not more. So both parties are equally satisfied. Call that rate $x.
Enter now the union, and it forces an increase of $y. The employer is now paying $y more than he wants to, but at $(x+y) he can still stay in business, making some profit. There are consequences to that. But while he loses $y, the hiree gains $(y-z) – where $z is the membership fee he must pay to join the union. Normally, y will exceed z, so he gets a bargain. The union gets $z for its extortion services.
Now let's look at those consequences. Profits having been reduced by $y, the employer has some choices about what to do. He can cut or cancel plans for expansion, so abandoning hopes of increasing profits and an enlarged work force – jobs. Or he can cancel plans for capital investment, so abandoning hopes of lower costs of production with all that would have meant in terms of lower prices, increased sales, increased profits – and more jobs. Or he can just swallow the profit loss, meaning he will curtail his ability to borrow money when next he needs it. There are these various ways to allocate the loss of $y, but the loss will, for sure, impact the whole business in one way or another. The 1,000 employees have a gain, but only at the cost of future benefit for themselves and for others who might have joined them.
Put more simply: If A gets paid more than his labor is worth, B will not have a job at all. The market is optimal; anything other than a market transaction is less than optimal. There is loss.
Some firms repair their loss by shifting work overseas, where (unionized or not) labor rates can be much lower. It needs care, because not every foreign worker is as skilled or teachable as American ones; but frequently it works well. Then, the unions bleat that “jobs have been sent offshore” as if that was somehow unpatriotic, or as if they had not caused it to happen.
Hence, unions are parasitic; they take $z out of the pot, and at the same time heavily distort what remains. They can do this because government laws allow them to ignore the labor contracts that have been made, in good faith, between hirer and hiree.
Such a contract will specify the kind of work the employee agrees to do, and the pay and benefits he will enjoy by doing it. It will cover the eventualities of illness and vacations, etc. Outside of those agreed terms, if the worker stops work, the contract is broken--so, unless the breach is repaired, the job is lost. He goes home. But the legalized extortion by his union can prevent that severance; he can strike, yet expect to keep his job. This is chaos.
Forced into a corner, the employer might still escape by closing down, liquidating assets and opening up elsewhere, having learned never to deal with any union and to insert a no-join clause in every labor contract. Trouble is, government laws may again enter the scene and force him to take that clause out again, to accept unions if (for example) a majority of his employees so desire. So there is no escape. He is permanently damaged by the parasite. The (optimal) market arena has been replaced by the (sub-optimal) political arena. The political vote has defied reality. Reality suffers.
There are frequently other distortions, depending on the specific terms the extortioner forces upon the employer; for example, it may specify a flat rate of pay for a grade, regardless of performance. Then, the firm cannot pay more productive people more, and less productive people, less – so creating an incentive to excellence. This has contributed to the disaster of government schools. When such clauses apply, they provide an extra impediment to profitable operation; for again, only the market is optimal.
There is one circumstance in which I can see benefit, today, from union representation: the case of a monopoly employer. In that circumstance, a market wage cannot be agreed and collectivization may be the applicant's best alternative available. But notice: The anomaly is caused by the monopoly, not by the market. A monopoly is not a market phenomenon. A monopoly cannot long survive in a market, assuming it ever comes to exist at all. Monopolies (like AT&T) survive only if they are supported by government laws that exclude competition. Take away those props, the monopoly folds – and with it, this exception to the general rule.
Another kind of labor-market distortion happens when a union forces a “closed shop” within a firm; that is, anyone joining its work force must join the union whether he wants to or not. That is a monopoly on the labor-supply side, and its dreadful consequence is that the power to offer a job is transferred from the one who values the work enough to pay for it, to the ones who have no stake whatever in either the work done or the wage paid. It's very interesting to me that Hitler named this very problem as one of the key factors that, in his youth, turned him away from the Left. He wrote (page 42 of Mein Kampf) “I was ordered to join the trade union . . . but when I was told that I must join the union I refused. The grounds which I gave for my refusal were simply that I knew nothing about the matter and that anyhow I would not allow myself to be forced into anything.” This, from the one who became the archetype of force; I wonder whether irony comes any richer.
Surviving monopolies are all government operations. Schools, for example. I understand that teachers are boxed in, and feel the need to unionize. It's a lousy deal for everyone – and it results from the monopoly.
So, will unions be around when society becomes free?
No way will they survive in anything like their present form; for their present form is created as above by government laws; and since there will be no government, there will be no such laws. If a company hires someone, the contract on which the two agree will be the only bond between them. Unless it grants the right to strike (fat chance), there will be no right to strike. The pay package agreed will not be open to cancellation by a third party. No more parasites.
Accordingly the labor market will be optimal. There will be no minimum wage law, for example, so there will be no unemployment; if someone wants to work, there will always be a rate of pay that will “clear the market.” The lowest won't be much, but it will suffice to keep a school leaver, living with parents, nicely equipped with iPads and (even more important) savings. It will also equip him with on-the-job experience, a.k.a. training; very soon he will no longer be unskilled, but skilled; able to negotiate a better pay rate, with his current employer or another. His career will be off and running. And the employer will be well served, at market rates.
Will employees form a union, even so? Of course, in a free society they may combine however they wish, whether to play chess or drink beer or debate philosophy or to propose changes to their various employment contracts. If they see a possible improvement, the club officers might approach management and suggest that it be implemented for all. But unless management agrees, the existing contracts will remain in force; and anyone breaking their terms will be regarded as having quit.
Quitting, in fact, is in a free labor market the worker's primary sanction. A firm can afford to lose a few – indeed, expects to lose a few, a small percentage each year, called “attrition.” It would be amazing if every single hire worked out fully satisfactory to both parties. But if that rate rises above noise level, attention gets focused. Something must be causing it. Maybe there is some company practice or policy that is unpopular and needs changing. Maybe a competitor (for labor) has arrived in town and is bidding up prevailing rates. Then it's time to negotiate pay raises. That's how markets work. It's why they are optimal.