The Online Library of Liberty

A project of Liberty Fund, Inc.

• Introduction
• Part 1: Rights, Property, and Markets
• Property Or “property Rights”? *
• “design Faults” In Locke’s Theory of Property Taint Ownership With Guilt *
• Is Ownership a Myth? *
• How to Get a Free Lunch? Just Apply For It *
• The Problem of Contract Enforcement *
• The Public Goods Dilemma *
• Trying the Free Market *
• The Statist Legacy *
• Part 2: The Common Sense of Non-economics
• The Yakoubovich Syndrome, Or Lies, Damn Lies, and Economic Policy *
• Winning Policy Battles But Losing the War Against Economic Realities *
• Paying Ourselves More of Their Money *
• The Doctrine of “unequal Exchange” the Last Refuge of Modern Socialism? *
• Corporate Managers Are They Going to Kill Capitalism? *
• When the Economy Needs Morals *
• The Political Economy of Force-feeding *
• Hostile to Whom? *
• Mannesmann’s Courtesy Could Prove Rare *
• Part 3: French and Russian Tragicomedies
• Can Putin Build a Real Economy From Oil and Rigor? *
• Russia and the New Europe Growing Apart *
• Russia Hopping Along On Clay Feet *
• The French Tragicomedy *
• How the French “social Model” Could Self-destruct *
• A Little Bit of History Repeating *
• There Is No French Exception *
• The Hobbling of Private France *
• Part 4: The Capitalism They Hate
• The Capitalism They Hate *
• Striving to Get Richer and Poorer *
• “bread and Circuses” In the Modern Welfare State *
• Who Minds the Gap? *
• Float Or Sink? the Millstone of the “social Market” In Germany *
• How Germany and France, the Sick Men of Europe, Torture Themselves *
• Shall We Borrow From the Children? *
• Low Pay *
• Freedom to Strike Or Right to Strike? *
• Part 5: Creating Unemployment
• Stamp Your Feet and Demand a Fair Deal *
• Paternalism and Employment *
• The Things Labor Unions Are Up to *
• The Instability of the Welfare State *
• Some Bad News Could Be Good News *
• Built-in Unemployment Social Protection Costs More Than It Is Worth *
• Let ’s Throw This Model Away *
• How to Stifle Employment By “social Protection” *
• Workable Alternatives *
• A Tale of Two Models *
• A Vicious Circle of Social Kindness *
• Part 6: The Future of Europe
• The Economic Consequences of a United States of Europe *
• A Giant Free-trade Area Or a Political Counterweight to America? *
• European Crosscurrents and the Federalist Drift *
• How Confederacy Could Turn Into a Federal Superstate *
• Majority Rule By Any Other Name *
• What Now For “europe”? Why the People Failed Their Masters *
• Free-riding On the Euro *
• Some Democratic Economics *
• The Soviet Legacy *
• A War of Attrition Between Economic Reality and Political Dreams *
• A Brightening of the Economic Skies Over Brussels? *
• Turkey Knocking On Europe’s Door *
• Turkey and the Eu Club *
• Europe More Secular and More Islamist *
• A Bill of Rights Europe Did Not Need *
• Europe’s Social-democratic “government” *
• Power Corrupts, So Let ’s Make It Less Absolute *
• Part 7: Economics, True and False
• On the Economics of Protecting Employment *
• The Costly Mistake of Ignoring Opportunity Costs *
• “globalization” and Its Critics Mutual Gain Vs. Cloud-cuckoo Land *
• Are High Oil Prices a Form of Exploitation? *
• Immigration What Is the Liberal Stand? *
• More Nonsense On Stilts Mr. Bentham Is At It Again *
• Risk, Value, and Externality *

THE THINGS LABOR UNIONS ARE UP TO*

“Unions protect the worker on the shop floor.” “Unions foment strikes.” “Unions are the indispensable channel of communication between management and labor.” “Unions promote the interests of a blue-collar elite at the expense of nonunion workers and the really poor.” “Unions make for orderly industrial relations.” “Unions conspire with big business to rip off the consumer.” “Unions are an outdated relic of the smokestack era.” “Unions carry the workers’ cause from the bargaining table to the political arena.”

None of this is wholly false, but none reveals much of the chain that links effects to their causes. The difference unions can make to a society is one of the most complex and emotionally tainted byways in political economy.

At the level of the single firm, organizing the employees in a stand-alone union not affiliated to a larger body has effects on wages and nonwage relations. Prior to being organized, employees get the “rate for the job” according to local custom. The ultimate origin of custom lies in acts of individual bargaining that establish the area or band of ready acceptability. To change this, the union must be strong enough to discipline its own members so they will only work at the rate negotiated by it on their collective behalf, as well as to discourage nonmembers from free-riding on the union’s efforts. The bluntest way of achieving this is the closed shop.

Where the closed shop runs into strong opposition in the community because it violates the freedom to work, the union can still achieve its objectives if it can browbeat nonunionized employees into not under-cutting it and to support strike action if need be.

For collective bargaining to have a real point, it must achieve wage rates and nonwage conditions more favorable to the employees than the customary rate. It is difficult to verify whether it is really achieving this. Attempts can be made to compare the union rate with rates in nonunionized shops, but for these comparisons to be convincing, all other things must be equal, and of course they seldom are. All in all, however, it is reasonable to hold that unions can raise the wages of unionized labor. They also make wage rates more uniform and less flexible. This would tend to make the wage contract less efficient, equating the firm’s demand for labor to its (local) supply at a lower level than would be the case under less uniform and more flexible wages.

Higher average wages reduce the firm’s profit, lower its output, and raise its prices. How much of each depends on the nature of competition. A special case is conceivable where the firm continues to sell the same output at the same price under perfect competition, but what Alfred Marshall called its quasi-rent gets transferred to its workers. It is this case, in the form of a subconscious dream, that inspires much of prounion sentiment.

Everything becomes more complex and harder to disentangle when labor organization becomes industrywide, let alone nationwide. If wages are pushed up across a whole industry, prices may well follow suit all the way, since there is little or no competition to hold them back. Consequently, profits may be largely maintained. Most or all of the impact falls on the nonunionized sector, which operates under competitive conditions and cannot raise its prices. Therefore its terms of trade will worsen and its profits and employment levels shrink. The pressure will be mitigated and dispersed if capital is mobile and migrates, taking jobs from the unionized to the nonunionized sector, as it did in the United States when it migrated from the Northeast to the Southeast and Southwest, and as it is doing in Europe when it is “exporting jobs” to China, Thailand, and India.

Unionization also shifts the terms of trade in favor of (some) producers at the expense of (all) consumers. This is a common symptom found in all corporatist social organization, guilds in the Middle Ages, chambers of industry in Fascist Italy and Nazi Germany, and labor unions in Western democracies.

Looking at how matters may evolve over time, it seems that in the short run profits and employment in the economy as a whole may suffer but union wages may increase. Unions, then, will have acted to good purpose from their members’ point of view. However, since a far higher proportion of profits than of wages is saved, capital accumulation, productivity, and growth should all be reduced. The long-run damping effect on wages should eventually swamp the short-run boost unionization can give them. Yet like all elected officials, union leaders cannot afford to worry about the long run.

Analyzing the manner, purpose, and effects of union action in largely economic terms is a good enough approximation to American conditions. American political culture accepts capitalism as the best of possible worlds. It finds it normal to think of wages as the price of labor and of labor as one of the several factors of production. In most of Europe, this is either not understood, or if understood, it is rejected. For several generations, the political classes and the teaching professions have taught the people that labor was not an economic, but a “social” category, deserving of higher consideration and a different treatment from the mere economic.

It is something of a philosophical puzzle to decipher what is meant by the word “social,” though it is used confidently enough to suggest that it has a clear meaning. One key to understanding policy and politics in most European countries is to take it that “social” indicates that the matter in hand imperatively demands a political decision to override any market solution that would otherwise emerge.

It should be no surprise, then, that European labor unions are really political organizations, straddling the economic and the “social,” closely allied to left-wing movements, and permanently camping in the “corridors of power” of all governments whether left or right. Their interest is as much to “change society” as to negotiate good wages and conditions for their members.

An exception to most of this is Britain, where the Thatcher reforms of the 1980s have transformed the union landscape. “Official” strikes now require vote by secret ballot, picketing has been curbed, the most glaring legal immunities of the unions have been removed and the rule of law enforced. After the chaotic disruption of the 1970s, Britain has since these commonsense reforms enjoyed unprecedented industrial peace and a clear lead in prosperity over most of continental Europe, where governments of all shades sought to appease and share power with the unions.

Like in most of the industrialized world, union membership in Europe has been declining for decades. But it is not numbers that make for union strength. Union membership as a share of the labor force is over 80 percent in Scandinavia, in the mid-20s in Britain, Germany, Italy, and Spain, and only 8 percent in France, with virtually zero in the private sector. Yet if you guessed that it is in France that the unions have the tightest armlock on the government, you would not be far wrong.

Of the four largest French unions, the largest is the CGT; it is orthodox Communist. The third and fourth largest are the FO and SUD, both of Trotskyist persuasion. Only the second-largest, CFDT, is moderate. The CGT has a mere 670,000 members. However, they are concentrated in the state-owned railways, the Treasury, and the public schools. The CGT can stop all the trains, disrupt tax collection and government payments, and shut the schools. While the latter might not unduly upset the government, the former two fill it with visceral dread.

Led by the CGT, the unions keep on refusing a spate of long-overdue reforms of all kinds, condemning them as “neoliberal.” The government either keeps postponing them, or withdraws them altogether if the unions cry “boo.” Having a comfortable majority in the legislature is no use; it is the unions’ consent the government thinks it needs.

Unions are supposed to live on members’ dues. In France, they cover perhaps a quarter of the budget of the only union, the CFDT, that is honest enough to publish any accounts. It is common knowledge that the bulk of union expenditure, including the cost of keeping their bureaucracies in the comfort they feel entitled to, comes from the government, some avowed, some disguised in more or less ingenious ways.

The system began in 1968 and kept growing in the fond belief that one could buy the cooperation of the unions by bribing them outright. This has never worked, but the bribes have proved habit-forming and curtailing them would drive the union hierarchies to paroxysms of fury.

Yet union strength depends on their members’ obedience, and the members follow the leaders almost entirely because the government treats them as if they were supremely powerful. There is no one to say loud and clear that they are not, that it would suffice to face them down once and for all to realize that the emperor has no clothes.

However, this is not the first nor the last time that governments fail to do what is good for them and their peoples. If failing to do the sensible thing were not their habit, this column would soon be reduced to writing about apple pie and motherhood.

[* ]First published by Liberty Fund, Inc., at www.econlib.org on February 12, 2004. Reprinted by permission.