text: This blog is a commentary on contemporary business, politics, economics, society, and culture, based on the values of Reason, Rational Self-Interest, and Laissez-Faire Capitalism. Its intellectual foundations are Ayn Rand's philosophy of Objectivism and the theory of the Austrian and British Classical schools of economics as expressed in the writings of Mises, Böhm-Bawerk, Menger, Ricardo, Smith, James and John Stuart Mill, Bastiat, and Hazlitt, and in my own writings.
  
  Wednesday, April 23, 2014
  
  Labor Unions Are Anti-Labor
  
  Many Americans, perhaps a
  substantial majority, still believe that, irrespective of any problems they may
  have caused, labor unions are fundamentally an institution that exists in the
  vital self-interests of wage earners. Indeed, that it is labor unions that
  stand between the average wage earner and a life of subsistence wages,
  exhausting hours of work, and horrific working conditions.
  
  Nevertheless, labor unions (and the
  public at large) have a profoundly flawed understanding of how real wages and
  the general standard of living are increased. For the individual, the simplest,
  most direct and obvious method for improving his standard of living is to go
  out and earn more money. People observe this behavior of individuals and assume
  that it is also feasible for labor unions to raise the standard of living of wage
  earners throughout the economic system simply by increasing the money that wage
  earners are paid.
  
  This
  is an enormous error.
  
  The goal of earning higher money
  wages is perfectly rational and socially beneficial when pursued by
  individuals. But it is contrary to purpose, highly destructive, and downright
  antisocial when pursued by labor unions.
  
  When pursued by an individual, the
  goal of earning more money almost always requires that he increase the supply
  of goods or services that he produces. This increase in the supply of goods or
  services not only serves to increase the money earned by this particular
  individual but, at the same time, it also serves to increase the overall supply
  of goods and services in the economic system. This, in turn, serves, however
  slightly in most cases, to reduce the prices paid by the buyers of the goods or
  services whose supply has been increased. (There are numerous cases in which
  the increase in supply accompanying the earning of more money is quite
  substantial, as when productive geniuses revolutionize entire industries. In
  these cases, however, the individuals concerned will almost certainly not be
  wage earners but businessmen and capitalists, and the increased money incomes
  in question will be profits, not wages.)
  
  What is crucial to realize is that
  the reduction in prices that results from additional production and supply
  serves to raise the real wages of all
  those wage earners throughout the economic system who are buyers of the goods or services concerned. Real wages are the goods
  and services that wage earners are able to buy with the money they earn. They
  are always the reflection of the relationship between money wages on the one
  side and the prices of goods and services on the other. Increases in production
  and supply raise real wages by virtue of reducing prices and thus enabling any
  given amount of money wages to buy more. In this way, they correspondingly
  raise the wage earner’s standard of living.
  
  Labor unions and the general public
  almost totally ignore the essential role played by falling prices in achieving
  rising real wages. They see only the rise in money wages as worthy of
  consideration. Indeed, in our environment of chronic inflation, prices that
  actually do fall are relatively rare.
  
  Nevertheless, the only thing that
  can explain a rise in real wages throughout the economic system is a fall in
  prices relative to wages. And the only thing that achieves this is an increase
  in production per worker. More production per worker—a higher productivity of
  labor—serves to increase the supply of goods and services produced relative to
  the supply of labor that produces them. In this way, it reduces prices relative
  to wages and thereby raises real wages and the general standard of living.
  
  What raises money wages throughout
  the economic system is not what is responsible for the rise in real wages. That
  is essentially just the increase in the quantity of money and resulting
  increase in the overall volume of spending in the economic system. In the
  absence of a rising productivity of labor, the increase in money and spending would
  operate to raise prices by as much or more than it raised wages. This outcome
  is prevented only by the fact that at the same time that the quantity of money
  and volume of spending are increasing, the output per worker is also
  increasing, with the result that prices rise by less than wages. A fall in
  prices is still present in the form of prices
  being lower than they would have been had only an increase in the quantity of
  money and volume of spending been operative.
  
  With relatively minor exceptions,
  real wages throughout the economic system simply do not rise from the side of
  higher money wages. Essentially, they rise only from the side of a greater
  supply of goods and services relative to the supply of labor and thus from
  prices being lower relative to wages. The truth is that the means by which the
  standard of living of the individual wage earner and the individual businessman
  and capitalist is increased, and the means by which that of the average wage
  earner in the economic system is increased, are very different. For the individual, it is the earning of
  more money. For the average wage earner in the economic system, it is the
  payment of lower prices.
  
  What this discussion shows is that the
  increase in money wages that labor unions seek is not at all the source of
  rising real wages and that the source of rising real wages is in fact a rising
  productivity of labor, which always operates from the side of falling prices,
  not rising money wages. The plain fact is that in their concentration on
  increasing money wages, labor unions demonstrate that they are utterly ignorant
  of the process by which real wages and the standard of living are increased. Indeed,
  their efforts to raise money wages are profoundly opposed to the goal of raising real wages and the standard of
  living.
  
  When the unions seek to raise the
  standard of living of their members by means of raising their money wages,
  their policy inevitably reduces to the attempt to make the labor of their
  members artificially scarce. That is their only means of raising the wages of
  their members. The unions do not have much actual power over the demand for
  labor. But they often achieve considerable power over the supply of labor. And
  their actual technique for raising wages is to make the supply of labor, at
  least in the particular industry or occupation that a given union is concerned
  with, as scarce as possible.
  
  Thus, whenever they can, unions attempt to
  gain con­trol over entry into the labor market. They seek to impose
  apprenticeship programs, or to have licensing require­ments imposed by the
  government. Such measures are for the purpose of holding down the supply of
  labor in the field and thereby enabling those fortunate enough to be admitted
  to it, to earn higher incomes. Even when the unions do not succeed in directly
  reducing the supply of labor, the imposition of their above-market wage demands
  still has the effect of reducing the number of jobs offered in the field and
  thus the supply of labor in the field that is able to find work.
  
  If the unions were confined to just
  one or a small number of industries, and did not have the power to determine
  wage rates in the rest of the economic system, their achievement of higher
  wages in particular indus­tries would not cause unemployment in the economic
  system as a whole. The workers displaced from the unionized industries would be
  able to find work—at lower wages—in the nonunion industries. The effect of
  unions in these circumstances would be the creation of an artificial inequality
  of wages—higher wages in the unionized fields, based on an artificially imposed
  scar­city of labor in those fields, accompanied by correspond­ingly lower wages
  in the nonunion fields, based on an artificially imposed oversupply of labor in
  those fields.
  
  The artificial wage increases
  imposed by the labor unions result in unemployment when above-market wages are
  imposed throughout the economic sys­tem. This situation exists when it is
  possible for unions to be formed easily. If, as in the present-day United States,
  all that is required is for a majority of workers in an establishment to decide
  that they wish to be represented by a union, then the wages imposed by the
  unions will be effective even in the nonunion fields.
  
  Employers in the nonunion fields
  will feel compelled to offer their workers wages comparable to what the union
  workers are receiving—indeed, possi­bly even still higher wages—in order to
  ensure that they do not unionize. The nonunion employers will be likely to
  believe that if they do not pay wages comparable to union wages, then they will
  be faced with a union and, as a result, not only union wages, but also the loss
  of major management prerogatives concerning the efficiency of production, and
  thus experience an even greater increase in costs than is incurred merely by
  matching union wages.
  
  In this case, artificially high wages
  create unemployment in virtually every line of work, and leave no avenue open
  for workers displaced from any one branch of production to find work in another,
  save by displacing still other workers, who then cannot find work. Even if the
  wage increases caused by the unions are not universal, they will still
  certainly result in unemployment if they take place alongside the existence of
  minimum-wage laws and public welfare assistance. Widespread wage increases
  closing large numbers of workers out of numerous occupations put extreme pres­sure
  on the wage rates of whatever areas of the economic system may still remain
  open. These limited areas could absorb the overflow of workers from other lines
  at low enough wage rates. But minimum-wage laws prevent wage rates in these
  remaining lines from going low enough to absorb these workers. So too does the
  exis­tence of public welfare assistance, inasmuch as people are not willing to
  work at such low wages if they can obtain a comparable or higher income without
  working.
  
  In these ways, labor unions cause
  unemployment—and unnecessarily low wages for those who work in whatever lines may
  remain open to free competition. Indeed, they cause unnecessarily low wage
  rates even for workers in unionized fields insofar as there are workers in some
  unionized fields who have been closed out of employment at higher wages in
  other unionized fields (for example, unionized auto workers who might have
  worked at higher pay as electricians or plumbers had they not been excluded by
  unions in those fields).
  
  From the perspective of most of
  those lucky enough to keep their jobs, the most serious consequence of the
  unions is the holding down or outright reduction of the productivity of labor.
  With few exceptions, the labor unions openly combat the rise in the
  productivity of labor. They do so virtually as a matter of principle. They
  oppose the introduction of labor-saving machinery on the grounds that it causes
  unemployment. They oppose competition among workers. As Henry Hazlitt pointed
  out, they force employers to tolerate feather­bedding practices, such as the classic
  requirement that firemen, whose function was to shovel coal on steam
  locomotives, be retained on diesel locomotives. They impose make­work schemes,
  such as requiring that pipe delivered to construction sites with screw thread
  already on it, have its ends cut off and new screw thread cut on the site. They
  impose narrow work classifications, and require that specialists be employed at
  a day’s pay to perform work that others could easily do—for example, requiring
  the employment of a plasterer to repair the incidental dam­age done to a wall
  by an electrician, which the electrician himself could easily repair. (See Henry Hazlitt, Economics In One Lesson, chaps. VII and
  VIII.)
  
  To anyone who understands the role
  of the productivity of labor in raising real wages, it should be obvious that the
  unions’ policy of combatting the rise in the productivity of labor renders them
  in fact a leading enemy of the rise in real wages. However radical this
  conclusion may seem, however much at odds it is with the prevailing view of the
  unions as the leading source of the rise in real wages over the last hundred and
  fifty years or more, the fact is that in combatting the rise in the
  productivity of labor, the unions
  actively combat the rise in real wages!
  
  The unions are almost certainly
  unaware of this fact. That is because all that they see and are concerned with
  is the money wages of their members. They do not care at all about the destructive
  effect of their actions on the prices of the goods or services their members
  help to produce and thus on the real wages of all those workers throughout the
  economic system who are buyers of those goods and services.
  
  In this, their behavior is
  profoundly antisocial. It is, of course, also antisocial in its indifference to
  the destruction of employment opportunities in the unionized fields and the consequent
  reduction of wages in the lines into which the workers displaced by the policy
  of above-market wages must crowd.
  
  In sum, far from being responsible
  for improvements in the standard of living of the average worker, labor unions
  operate in more or less total ignorance of what actually raises the average
  worker’s standard of living. In consequence of their ignorance, they are
  responsible for artificial inequalities in wage rates, for unemployment, and
  for holding down real wages and the av­erage worker’s standard of living. All
  of these destructive, antisocial consequences derive from the fact that while
  individuals increase the money they earn through increasing production and the
  overall supply of goods and services, thereby reducing prices and raising real
  wages throughout the economic system, labor unions increase the money paid to
  their members by exactly the opposite means. They reduce the supply and
  productivity of labor and so reduce the supply and raise the prices of the
  goods and services their members help to produce, thereby reducing real wages
  throughout the economic system.
  
  This
  article is an adaptation and abridgement of material that appears on pages 655
  to 658 of the author’s book Capitalism.