Unions have Perverse Effects, but The right to organise is fundamental

There are reasons to prohibit strikes by public sector unions, the risk is significant that they’ll become publicly financed monopolies. But that doesn’t mean they should be gutted. Politicians need to do their job and bargain with them as if their running businesses. Gov. Walker it seems to me wants to avoid that hard work by stripping collective bargaining rights. I understand the problem he’s addressing, but he pursuing the wrong solution. The problem with unions and public sector unions especially is well explained in what follows, along with why they shouldn’t be prohibited.

HT:  Mangerial Economics

Gilles Saint-Paul

ACCORDING to standard economics, wage bargaining by unions is similar to price agreements in cartels and in good logic should fall under antitrust laws and be prohibited. Just as cartels inefficiently increase the price of some goods, similarly unions inefficiently increase the price of some categories of labour. The losers are the unemployed and workers in non-unionised jobs who get lower wages and living standards.

There are large inequalities between workers with similar skills who happen to work in industries with different union bargaining power. One can mention automobile workers in the US, typographers in France (who got collective agreements guaranteeing them three times the minimum wage), air traffic controllers, and so forth. All these workers get substantial wage premia above what they would get in the competitive market, given their skills.

Given that unions tend to reduce the welfare of consumers in general, including some poor and precariously positioned workers, and increase the welfare of some specific categories of workers who are relatively well-off, it is hard to argue that unions play a useful redistributive role.

This being said, unions can be useful in firms or industries that have themselves little market power. The reason is that the rents that can be appropriated by the unions are small, and the incentives of both parties to reach an agreement in case of a labour conflict are strong. In such a situation, unions may be useful to convey information to management about the effects of work practices and organisational choices on the workers.

On the other hand, in the public sector, unions can grab large rents because the customers are captive: there is little competition in the sectors of public transportation, education, or law enforcement. Such unions not only are successful in bidding up the wages of their constituents (in France public employees earn more than private ones for most skill categories), they also can get in the way of government policy, since, by definition, any policy measure implies some change somewhere in the public service. While this is routinely accepted as a fact of life, it undermines democracy, since a reform decided by a democratically elected government can be blocked by the unions (this happens regularly in France and it seems some US states are now going the same way).

Unions do not provide a countervailing force to the supposed power of big business. Whenever big business gets rents from monopoly power, unions often manage to share some of those rents (this explains why unions are more present in concentrated industries like automobiles, as opposed to, say, retail trade). This benefits the employees of big business, and it has indeed been shown that these employees enjoy higher wages and greater fringe benefits. But by raising labour costs it further adds to the harm done to consumers (and workers in the competitive sector) by the monopoly power of business. In addition to being too high because firms collude, the price is also too high because employees collude. Furthermore, the interests of the union and their employers are convergent whenever they deal with the outside world: both want to increase the revenue that the firm or the industry can extract through lobbying activities. To the extent that union leaders provide additional voices, unionisation adds to the lobbying power of an industry.


Brad DeLong’s Response was worth including:

Economics: The right to organise is fundamental.

WELL, let me turn my microphone over to Ronald Wilson Reagan:

Ever since martial law was brutally imposed last December, Polish authorities have been assuring the world that they’re interested in a genuine reconciliation with the Polish people. But…[b]y outlawing Solidarity, a free trade organization to which an overwhelming majority of Polish workers and farmers belong, they have made it clear that they never had any intention of restoring one of the most elemental human rights—the right to belong to a free trade union…

You can argue over whether public employees—whose jobs are such that consumers do not have the option of dealing with a strike by patronising other producers—should have the right to strike. You can argue about how the legal framework within which unions operate should be structured. But it seems to me that the right to assemble as a group and collectively discuss issues of job structure, working conditions, and pay with your employer is an elemental right.

At least, that is what I think.

And that is what Ronald Wilson Reagan thought too.

(Reagan quote courtesy of Zaid Jilani of the Center for American Progress.)


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