DO UNIONS REALLY RAISE
WAGES?
THE BELIEF THAT labor unions can substantially raise real wages
over the long run and for the whole working population is one
of the great delusions of the present age. This delusion 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.
In spite of the overwhelming evidence that labor productivity
is the fundamental determinant of wages, the conclusion is
usually forgotten or derided by labor union leaders and by that
large group of economic writers who seek a reputation as " liberals"
by parroting them. But this conclusion does not rest on the
assumption, as they suppose, that employers are uniformly
kind and generous men eager to do what is right. It rests on the
very different assumption that the individual employer is eager
to increase his own profits to the maximum. If people are
willing to work for less than they are really worth to him, why
should he not take the fullest advantage of this? Why should he
not prefer, for example, to make $1 a week out of a workman
rather than see some other employer make $2 a week out of
him? And as long as this situation exists, there will be a tendency
for employers to bid workers up to their full economic
worth.
All this does not mean that unions can serve no useful or
legitimate function. The central function they can serve is to
improve local working conditions and to assure that all of their
members get the true market value of their services.
For the competition of workers for jobs, and of employers for
workers, 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 may not know the true market value of his services to an
employer. And he may be in a weak bargaining position.
Mistakes of judgment are far more costly to him than to an
employer. If an employer mistakenly refuses to hire a man from
whose services he might have profited, he merely loses the net
profit he might have made from employing that one man; and
he may employ a hundred or a thousand men. But if a worker
mistakenly refuses a job in the belief that he can easily get
another that will pay him more, the error may cost him dear.
His whole means of livelihood is involved. Not only may he fail
to find promptly another job offering more; he may fail for a
time to find another job offering remotely as much. And time
may be the essence of his problem, because he and his family
must eat. So he may be tempted to take a wage that he believes
to be below his "real worth" rather than face these risks. 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.
But it is easy, as experience has proved, for unions, particularly
with the help of one-sided labor legislation which puts
compulsions solely on employers, to go beyond their legitimate
functions, to act irresponsibly, and to embrace short-sighted
and antisocial policies. They do this, for example, whenever
they seek to fix the wages of their members above their real
market worth. Such an attempt always brings about unemployment.
The arrangement can be made to stick, in fact, only
by some form of intimidation or coercion.
One device consists in restricting the membership of the
union on some other basis than that of proved competence or
skill. This restriction may take many forms: it may consist in
charging new workers excessive initiation fees; in arbitrary
membership qualifications; in discrimination, open or concealed,
on grounds of religion, race or sex; in some absolute
limitation on the number of members, or in exclusion, by force
if necessary, not only of the products of nonunion labor, but of
the products even of affiliated unions in other states or cities.
The most obvious case in which intimidation and force are
used to put or keep the wages of a particular union above the
real market worth of its members' services is that of 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 with workers
equally good who are willing to accept the wage that the former
have now rejected. But the moment workers have to use intimidation
or violence to enforce their demands—the moment they
use mass picketing to prevent any of the old workers from
continuing at their jobs, or to prevent the employer from hiring
new permanent workers to take their places—their case becomes
suspect. 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.
If the foregoing analysis is correct, the indiscriminate hatred
of the "strikebreaker" is not justified. If the strikebreakers
consist merely of professional thugs who themselves threaten
violence, or who cannot in fact do the work, or if they are being
paid a temporarily higher rate solely for the purpose of making
a pretense of carrying on until the old workers are frightened
back to work at the old rates, the hatred may be warranted. But
if they are in fact merely men and women who are looking for
permanent jobs and willing to accept them at the old rate, then
they 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.
Emotional economics has given birth to theories that calm
examination cannot justify. One of these is the idea that labor is
being "underpaid" generally. This would be analogous to the
notion that in a free market prices in general are chronically too
low. Another curious but persistent notion is that the interests
of a nation's workers are identical with each other, and that an
increase in wages for one union in some obscure way helps all
other workers. Not only is there no truth in this idea; the 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.
In order to see more clearly how this occurs, let us imagine a
community in which the facts are enormously simplified
arithmetically. Suppose the community consisted of just half a
dozen groups of workers, and that these groups were originally
equal to each other in their total wages and the market value of
their product.
Let us say that these six groups of workers consist of (1) farm
hands, (2) retail store workers, (3) workers in the clothing
trades, (4) coal miners, (5) building workers, and (6) 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 30 percent, the building trades of
40 percent, and the railroad employees of 50 percent.
On the assumptions we have made, this will mean that there
has been an average increase of wages of 25 percent. Now
suppose, again for the sake of arithmetical simplicity, that the
price of the product that each group of workers makes rises by
the same percentage as the increase in that group's wages. (For
several reasons, including the fact that labor costs do not represent
all costs, the price will not quite do that—certainly not in
any short period. But the figures will nonetheless serve to
illustrate the basic principle involved.)
We shall then have a situation in which the cost of living has
risen by an average of 25 percent. The farm hands, though they
have had no reduction in their money wages, will be considerably
worse off in terms of what they can buy. The retail store
workers, even though they have got an increase in money wages
of 10 percent, will be worse off than before the race began.
Even the workers in the clothing trades, with a money-wage
increase of 20 percent, will be at a disadvantage compared with
their previous position. The coal miners, with a money-wage
increase of 30 percent, will have made in purchasing power
only a slight gain. The building and railroad workers will of
course have made a gain, but one much smaller in actuality than
in appearance.
But even such calculations rest on the assumption that the.
forced increase in wages has brought about no 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 areas 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 unemployment need not necessarily be greatest, in percentage
terms, among the unions whose wages have been advanced
the most; for unemployment will be shifted and distributed
in relation to the relative elasticity of the demand for
different kinds of labor and in relation to the "joint" nature of
the demand for many kinds of labor. Yet when all these allowances
have been made, even the groups whose wages have been
advanced the most will probably be found, when their unemployed
are averaged with their employed members, to be worse
off than before. And in terms of welfare, of course, the loss
suffered will be much greater than the loss in merely arithmetical
terms, because the psychological losses of those who are
unemployed will greatly outweigh the psychological gains of
those with a slightly higher income in terms of purchasing
power.
Nor can the situation be rectified by providing unemployment
relief. Such relief, in the first place, is paid for in large
part, directly or indirectly, out of the wages of those who work.
It therefore reduces these wages. "Adequate" relief payments,
moreover, as we have already seen, create unemployment.
They do so in several ways. 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. But where there is a
relief system under which the general taxpayer is forced to
provide for the unemployment caused by excessive wage rates,
this restraint on excessive union demands is removed.
Moreover, as we have already noted, "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. And heavy unemployment means that
fewer goods are produced, that the nation is poorer, and that
there is less for everybody.
The apostles of salvation by unionism sometimes attempt
another answer to the problem I have just presented. It may be
true, they will admit, that the members of strong unions today
exploit, among others, the nonunionized workers; but the
remedy is simple: unionize everybody. The remedy, however,
is not quite that simple. In the first place, in spite of the
enormous legal and political encouragements (one might in
some cases say compulsions) to unionization under the
Wagner-Taft-Hartley Act and other laws, it is not an accident
that only about a fourth of this nation's gainfully employed
workers are unionized. 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 suppose this were
not so? Suppose, in spite of the self-contradictoriness of the
assumption, that all workers by coercive methods could raise
their money wages by an equal percentage? Nobody would be
any better off, in the long run, than if wages had not been raised
at all.
This leads us to the heart of the question. It is usually
assumed that an increase in wages is gained at the expense of the
profits of employers. This may of course happen for short
periods or in 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
less likely to happen if the wage increase takes place throughout
a whole industry. If the industry does not face foreign competition
it may be able to 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. It is
true that as a result of the increased prices, sales of that
industry's products may fall off, so that volume of profits in the
industry will be reduced; but employment and total payrolls in
the industry are likely to be reduced by a corresponding
amount.
It is possible, no doubt, to conceive of a case in which the
profits in a whole industry are reduced without any corresponding
reduction in employment—a case, in other words, in
which an increase in wage rates means a corresponding increase
in payrolls, and in which the whole cost comes out of the
industry's profits without throwing any firm out of business.
Such a result is not likely, but it is conceivable.
Suppose we take an industry like that of the railroads, for
example, which cannot always pass increased wages along to
the public in the form of higher rates, because government
regulation will not permit it.
It is at least possible for unions to make their gains in the
short run at the expense of employers and investors. The
investors once had liquid funds. But they have put them, say,
into the railroad business. They have turned them into rails and
roadbeds, freight cars and locomotives. Once their capital
might have been turned into any of a thousand forms, but today
it is trapped, so to speak, in one specific form. The railway
unions may force them to accept smaller returns on this capital
already invested, 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 one 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.
Thus the exploitation of capital by labor can at best be
merely temporary. It will quickly come to an end. It will come
to an end, actually, not so much in the way indicated in our
hypothetical illustration, as by the forcing of marginal firms out
of business entirely, the growth of unemployment, and the
forced readjustment of wages and profits to the point where the
prospect of normal (or abnormal) profits leads to a resumption
of employment and production. But in the meanwhile, as 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: they may
mean that labor, too, is getting a lower total amount in terms of
real purchasing power.
Thus we are driven to the conclusion that unions, though
they may for a time be able to secure an increase in money
wages for their members, partly at the expense of employers
and more at the expense of nonunionized workers, cannot, in the
long-run and for the whole body of workers, increase real wages at all.
The belief that they do so rests on a series of delusions. One
of these is the fallacy of post hoc ergo propter hoc, which sees the
enormous rise in wages in the last half century, due principally
to the growth of capital investment and to scientific and technological
advance, and ascribes it to the unions because the
unions were also growing during this period. But the error most
responsible for the delusion is that of considering merely what a
rise of wages brought about by union demands means in the
short run for the particular workers who retain their jobs, while
failing 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 than this conclusion, 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.
With regard to productivity there is something to be said for
union policies, it is true, on the credit side. In some trades they
have insisted on standards to increase the level of skill and
competence. And in their early history they did much to protect
the health of their members. Where labor was plentiful,
individual employers often stood to make short-run gains 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. And sometimes ignorant or shortsighted
employers might 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.
But in recent years, as their power has grown, and as much
misdirected public sympathy has led to a tolerance or endorsement
of antisocial practices, unions have gone beyond their
legitimate goals. It was a gain, not only to health and welfare,
but even in the long run to production, to reduce a seventyhour
week to a sixty-hour week. It was a gain to health and
leisure to reduce a sixty-hour week to a forty-eight-hour week.
It was a gain 'to leisure, but not necessarily to production and
income, to reduce a forty-eight-hour week to a forty-four-hour
week. The value to health and leisure of reducing the working
week to forty hours is much less, the reduction in output and
income more clear. But the unions now talk about, and sometimes
enforce, thirty-five and thirty-hour weeks, and deny that
these can or need reduce output or income.
But it is not only in reducing scheduled working hours that
union policy has worked against productivity. That, in fact, 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. 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 "speed-ups." 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 that if any of their members have been laid off
because of the installation of more efficient or more laborsaving
machinery, the laid-off workers receive "guaranteed
incomes" indefinitely. 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 actually no limit to the
amount of work to be done. Work creates work. What A
produces constitutes the demand for what B produces.
But because this false assumption exists, and because the
policies of unions are based on it, their net effect has been to .
reduce productivity below what it would otherwise have been.
Their net effect, therefore, in the long run and for all groups of
workers, has been to reduce real wages—that is, wages in terms
of the goods they will buy—below the level to which they
would otherwise have risen. The real cause for the tremendous
increase in real wages in the last century has been, to repeat, the
accumulation of capital and the enormous technological advance
made possible by it.
But this process is not automatic. As a result not only of bad
union but of bad governmental policies, it has, in fact, in the
last decade, come to a halt. If we look only at the average of
gross weekly earnings of private nonagricultural workers in
terms of paper dollars, it is true that they have risen from
$107.73 in 1968 to $189.36 in August 1977. But when the
Bureau of Labor Statistics allows for inflation, when it translates
these earnings into 1967 dollars, to take account of the
increase in consumer prices, it finds that real weekly earnings
actually fell from $103.39 in 1968 to $103.36 in August 1977.
This halt in the rise of real wages has not been a consequence
inherent in the nature of unions. It has been the result of
shortsighted union and government policies. There is still time
to change both of them.
WAGES?
THE BELIEF THAT labor unions can substantially raise real wages
over the long run and for the whole working population is one
of the great delusions of the present age. This delusion 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.
In spite of the overwhelming evidence that labor productivity
is the fundamental determinant of wages, the conclusion is
usually forgotten or derided by labor union leaders and by that
large group of economic writers who seek a reputation as " liberals"
by parroting them. But this conclusion does not rest on the
assumption, as they suppose, that employers are uniformly
kind and generous men eager to do what is right. It rests on the
very different assumption that the individual employer is eager
to increase his own profits to the maximum. If people are
willing to work for less than they are really worth to him, why
should he not take the fullest advantage of this? Why should he
not prefer, for example, to make $1 a week out of a workman
rather than see some other employer make $2 a week out of
him? And as long as this situation exists, there will be a tendency
for employers to bid workers up to their full economic
worth.
All this does not mean that unions can serve no useful or
legitimate function. The central function they can serve is to
improve local working conditions and to assure that all of their
members get the true market value of their services.
For the competition of workers for jobs, and of employers for
workers, 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 may not know the true market value of his services to an
employer. And he may be in a weak bargaining position.
Mistakes of judgment are far more costly to him than to an
employer. If an employer mistakenly refuses to hire a man from
whose services he might have profited, he merely loses the net
profit he might have made from employing that one man; and
he may employ a hundred or a thousand men. But if a worker
mistakenly refuses a job in the belief that he can easily get
another that will pay him more, the error may cost him dear.
His whole means of livelihood is involved. Not only may he fail
to find promptly another job offering more; he may fail for a
time to find another job offering remotely as much. And time
may be the essence of his problem, because he and his family
must eat. So he may be tempted to take a wage that he believes
to be below his "real worth" rather than face these risks. 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.
But it is easy, as experience has proved, for unions, particularly
with the help of one-sided labor legislation which puts
compulsions solely on employers, to go beyond their legitimate
functions, to act irresponsibly, and to embrace short-sighted
and antisocial policies. They do this, for example, whenever
they seek to fix the wages of their members above their real
market worth. Such an attempt always brings about unemployment.
The arrangement can be made to stick, in fact, only
by some form of intimidation or coercion.
One device consists in restricting the membership of the
union on some other basis than that of proved competence or
skill. This restriction may take many forms: it may consist in
charging new workers excessive initiation fees; in arbitrary
membership qualifications; in discrimination, open or concealed,
on grounds of religion, race or sex; in some absolute
limitation on the number of members, or in exclusion, by force
if necessary, not only of the products of nonunion labor, but of
the products even of affiliated unions in other states or cities.
The most obvious case in which intimidation and force are
used to put or keep the wages of a particular union above the
real market worth of its members' services is that of 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 with workers
equally good who are willing to accept the wage that the former
have now rejected. But the moment workers have to use intimidation
or violence to enforce their demands—the moment they
use mass picketing to prevent any of the old workers from
continuing at their jobs, or to prevent the employer from hiring
new permanent workers to take their places—their case becomes
suspect. 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.
If the foregoing analysis is correct, the indiscriminate hatred
of the "strikebreaker" is not justified. If the strikebreakers
consist merely of professional thugs who themselves threaten
violence, or who cannot in fact do the work, or if they are being
paid a temporarily higher rate solely for the purpose of making
a pretense of carrying on until the old workers are frightened
back to work at the old rates, the hatred may be warranted. But
if they are in fact merely men and women who are looking for
permanent jobs and willing to accept them at the old rate, then
they 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.
Emotional economics has given birth to theories that calm
examination cannot justify. One of these is the idea that labor is
being "underpaid" generally. This would be analogous to the
notion that in a free market prices in general are chronically too
low. Another curious but persistent notion is that the interests
of a nation's workers are identical with each other, and that an
increase in wages for one union in some obscure way helps all
other workers. Not only is there no truth in this idea; the 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.
In order to see more clearly how this occurs, let us imagine a
community in which the facts are enormously simplified
arithmetically. Suppose the community consisted of just half a
dozen groups of workers, and that these groups were originally
equal to each other in their total wages and the market value of
their product.
Let us say that these six groups of workers consist of (1) farm
hands, (2) retail store workers, (3) workers in the clothing
trades, (4) coal miners, (5) building workers, and (6) 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 30 percent, the building trades of
40 percent, and the railroad employees of 50 percent.
On the assumptions we have made, this will mean that there
has been an average increase of wages of 25 percent. Now
suppose, again for the sake of arithmetical simplicity, that the
price of the product that each group of workers makes rises by
the same percentage as the increase in that group's wages. (For
several reasons, including the fact that labor costs do not represent
all costs, the price will not quite do that—certainly not in
any short period. But the figures will nonetheless serve to
illustrate the basic principle involved.)
We shall then have a situation in which the cost of living has
risen by an average of 25 percent. The farm hands, though they
have had no reduction in their money wages, will be considerably
worse off in terms of what they can buy. The retail store
workers, even though they have got an increase in money wages
of 10 percent, will be worse off than before the race began.
Even the workers in the clothing trades, with a money-wage
increase of 20 percent, will be at a disadvantage compared with
their previous position. The coal miners, with a money-wage
increase of 30 percent, will have made in purchasing power
only a slight gain. The building and railroad workers will of
course have made a gain, but one much smaller in actuality than
in appearance.
But even such calculations rest on the assumption that the.
forced increase in wages has brought about no 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 areas 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 unemployment need not necessarily be greatest, in percentage
terms, among the unions whose wages have been advanced
the most; for unemployment will be shifted and distributed
in relation to the relative elasticity of the demand for
different kinds of labor and in relation to the "joint" nature of
the demand for many kinds of labor. Yet when all these allowances
have been made, even the groups whose wages have been
advanced the most will probably be found, when their unemployed
are averaged with their employed members, to be worse
off than before. And in terms of welfare, of course, the loss
suffered will be much greater than the loss in merely arithmetical
terms, because the psychological losses of those who are
unemployed will greatly outweigh the psychological gains of
those with a slightly higher income in terms of purchasing
power.
Nor can the situation be rectified by providing unemployment
relief. Such relief, in the first place, is paid for in large
part, directly or indirectly, out of the wages of those who work.
It therefore reduces these wages. "Adequate" relief payments,
moreover, as we have already seen, create unemployment.
They do so in several ways. 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. But where there is a
relief system under which the general taxpayer is forced to
provide for the unemployment caused by excessive wage rates,
this restraint on excessive union demands is removed.
Moreover, as we have already noted, "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. And heavy unemployment means that
fewer goods are produced, that the nation is poorer, and that
there is less for everybody.
The apostles of salvation by unionism sometimes attempt
another answer to the problem I have just presented. It may be
true, they will admit, that the members of strong unions today
exploit, among others, the nonunionized workers; but the
remedy is simple: unionize everybody. The remedy, however,
is not quite that simple. In the first place, in spite of the
enormous legal and political encouragements (one might in
some cases say compulsions) to unionization under the
Wagner-Taft-Hartley Act and other laws, it is not an accident
that only about a fourth of this nation's gainfully employed
workers are unionized. 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 suppose this were
not so? Suppose, in spite of the self-contradictoriness of the
assumption, that all workers by coercive methods could raise
their money wages by an equal percentage? Nobody would be
any better off, in the long run, than if wages had not been raised
at all.
This leads us to the heart of the question. It is usually
assumed that an increase in wages is gained at the expense of the
profits of employers. This may of course happen for short
periods or in 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
less likely to happen if the wage increase takes place throughout
a whole industry. If the industry does not face foreign competition
it may be able to 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. It is
true that as a result of the increased prices, sales of that
industry's products may fall off, so that volume of profits in the
industry will be reduced; but employment and total payrolls in
the industry are likely to be reduced by a corresponding
amount.
It is possible, no doubt, to conceive of a case in which the
profits in a whole industry are reduced without any corresponding
reduction in employment—a case, in other words, in
which an increase in wage rates means a corresponding increase
in payrolls, and in which the whole cost comes out of the
industry's profits without throwing any firm out of business.
Such a result is not likely, but it is conceivable.
Suppose we take an industry like that of the railroads, for
example, which cannot always pass increased wages along to
the public in the form of higher rates, because government
regulation will not permit it.
It is at least possible for unions to make their gains in the
short run at the expense of employers and investors. The
investors once had liquid funds. But they have put them, say,
into the railroad business. They have turned them into rails and
roadbeds, freight cars and locomotives. Once their capital
might have been turned into any of a thousand forms, but today
it is trapped, so to speak, in one specific form. The railway
unions may force them to accept smaller returns on this capital
already invested, 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 one 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.
Thus the exploitation of capital by labor can at best be
merely temporary. It will quickly come to an end. It will come
to an end, actually, not so much in the way indicated in our
hypothetical illustration, as by the forcing of marginal firms out
of business entirely, the growth of unemployment, and the
forced readjustment of wages and profits to the point where the
prospect of normal (or abnormal) profits leads to a resumption
of employment and production. But in the meanwhile, as 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: they may
mean that labor, too, is getting a lower total amount in terms of
real purchasing power.
Thus we are driven to the conclusion that unions, though
they may for a time be able to secure an increase in money
wages for their members, partly at the expense of employers
and more at the expense of nonunionized workers, cannot, in the
long-run and for the whole body of workers, increase real wages at all.
The belief that they do so rests on a series of delusions. One
of these is the fallacy of post hoc ergo propter hoc, which sees the
enormous rise in wages in the last half century, due principally
to the growth of capital investment and to scientific and technological
advance, and ascribes it to the unions because the
unions were also growing during this period. But the error most
responsible for the delusion is that of considering merely what a
rise of wages brought about by union demands means in the
short run for the particular workers who retain their jobs, while
failing 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 than this conclusion, 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.
With regard to productivity there is something to be said for
union policies, it is true, on the credit side. In some trades they
have insisted on standards to increase the level of skill and
competence. And in their early history they did much to protect
the health of their members. Where labor was plentiful,
individual employers often stood to make short-run gains 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. And sometimes ignorant or shortsighted
employers might 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.
But in recent years, as their power has grown, and as much
misdirected public sympathy has led to a tolerance or endorsement
of antisocial practices, unions have gone beyond their
legitimate goals. It was a gain, not only to health and welfare,
but even in the long run to production, to reduce a seventyhour
week to a sixty-hour week. It was a gain to health and
leisure to reduce a sixty-hour week to a forty-eight-hour week.
It was a gain 'to leisure, but not necessarily to production and
income, to reduce a forty-eight-hour week to a forty-four-hour
week. The value to health and leisure of reducing the working
week to forty hours is much less, the reduction in output and
income more clear. But the unions now talk about, and sometimes
enforce, thirty-five and thirty-hour weeks, and deny that
these can or need reduce output or income.
But it is not only in reducing scheduled working hours that
union policy has worked against productivity. That, in fact, 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. 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 "speed-ups." 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 that if any of their members have been laid off
because of the installation of more efficient or more laborsaving
machinery, the laid-off workers receive "guaranteed
incomes" indefinitely. 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 actually no limit to the
amount of work to be done. Work creates work. What A
produces constitutes the demand for what B produces.
But because this false assumption exists, and because the
policies of unions are based on it, their net effect has been to .
reduce productivity below what it would otherwise have been.
Their net effect, therefore, in the long run and for all groups of
workers, has been to reduce real wages—that is, wages in terms
of the goods they will buy—below the level to which they
would otherwise have risen. The real cause for the tremendous
increase in real wages in the last century has been, to repeat, the
accumulation of capital and the enormous technological advance
made possible by it.
But this process is not automatic. As a result not only of bad
union but of bad governmental policies, it has, in fact, in the
last decade, come to a halt. If we look only at the average of
gross weekly earnings of private nonagricultural workers in
terms of paper dollars, it is true that they have risen from
$107.73 in 1968 to $189.36 in August 1977. But when the
Bureau of Labor Statistics allows for inflation, when it translates
these earnings into 1967 dollars, to take account of the
increase in consumer prices, it finds that real weekly earnings
actually fell from $103.39 in 1968 to $103.36 in August 1977.
This halt in the rise of real wages has not been a consequence
inherent in the nature of unions. It has been the result of
shortsighted union and government policies. There is still time
to change both of them.
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