Assignment
UNIONS: SCAPEGOAT FOR INFLATION
The support of conservatives and businessmen for continuing wage and price controls seems based largely on the stubborn hunch that, without controls, unions would have unlimited power to raise wage rates. Though conservatives realize that we cannot have a free economy without free pricing, their concern about inflation often leads to the belief that we must, however reluctantly, choose government power over union power, socialism over syndicalism. Trade unions have always created another dilemma for those who wish to maximize individual choice: Though people should surely be free to join together to accomplish common goals, it is equally sure that such associations should not be allowed to coerce some workers to join, keep others out, and forcibly prevent employers from hiring workers who choose not to join. From much of the talk about "bargaining power," it isn't clear, however, why unions should have to employ such coercive tactics. It would seem, instead, that a big union would have the "bargaining power" to get everyone employed at high wages, and would therefore have no reason, say, to discriminate against minorities or worry about nonunion rivals. But even the most powerful unions are constrained by the demand for their labor (if their service is sold directly), or by the demand for the end product to which their labor contributes. Each union's ability to raise wages and prices is thus closely related to the availability of substitutes for the labor and/or final product. If consumers can easily substitute nonunion haircuts for union haircuts, and imported clothing for domestic, the barber and textile unions will be severely limited in their ability to raise wage rates continually without creating conspicuous, growing unemployment among their members.
In any industry wide closed shop (where union membership is a condition of employment), the union can reduce the supply of labor to zero by striking, so any further restriction of supply is redundant. With the exception of licensed occupations (where the labor supply is directly limited), apparent "entry restrictions" such as initiation fees, seniority rules, nepotism and racial discrimination-all these serve only to ration desirable jobs among an excess of eager applicants. Unusually high wages and fringe benefits inevitably create a scarcity of job-offers and an overabundance of job-seekers. Successful unions have usually conspired with government agencies to eliminate by law obvious forms of conpetition, but ingenuity often undermines these efforts by expanding the consumers' range of alternatives: The plumber faces the competition of gadgets and chemicals to unstop drains; the painter competes with rollers and spray cans; the restaurant waiter is replaced by frozen dinners and serve yourself franchises; machine-written sales slips and computerized merchandising substitute for many retail clerks; agricultural labor is being supplanted by machine-harvesting and home vegetable gardens; used cars, homes and furniture can serve in place of overpriced new ones. This pervasive availability of substitutes deserves emphasis-it is the major factor preventing wage increases which are unrelated to supply and demand; it is, in a very real sense, the essence of competition. The successful trade union, then, must always keep vigilantly eliminating alternatives to the labor of its members, and to the products they produce. The more effective the union is, the more incentive it creates for nonunion workers to use labor-saving techniques, and for businessmen to create competing products or services which do not require any (or as much) union labor. Where the "bargaining power" of unorganized labor is weakest is in the lobbies of our lawmaking bodies. Building codes, import restrictions, minimum-wage laws and regulations limiting the hours and tasks of women and teen-agers, for example, all raise the cost of using nonunion labor.
There is probably nothing, however, that more completely guarantees union security against low-cost alternatives, than to persuade a legislature to license an occupation "to protect the public." (You've heard this tune before-it's the same dirge they play tojustify minimum prices in the regulated transportation industries.) So far, about 550 trades are limited to licensed practitioners, including scrap and tobacco dealers, threshing machine operators, egg graders, tree surgeons, tattoo artists, well diggers, rainmakers, yacht salesmen, guide dog trainers, beekeepers and lightning rod dealers. Since no one else is qualified to judge the ability to practice these exotic arts, the job invariably goes to the relevant unions. Predictably, the union-staffed licensing commissions make sure their skills are kept increasingly scarce (and therefore valuable), under the guise of ensuring high quality. Licensing is therefore often combined with long and difficult apprenticeship and/or educational requirements. This is obviously a more effective barrier than refusal to grant a license after the costs of training have been borne. Thus, the International Photo Engravers' Union allows one apprentice to seven journeymen, and requires a minimum of six years of apprenticeship. When a union has control over licensing a skill for which there are few substitutes, they can extract really exorbitant incomes for those who are persistent and lucky enough to get in. Just as a successful liar is called a "politician," so a successful union becomes a "professional organization." In 1910, the American Medical Association was given authority to decide which schools' graduates would be eligible to apply for licenses. From 1904 to 1920, the number of accredited medical schools fell from 162 to sixty-nine. The number of medical students was the same in 1955 as it was in 1904. With fewer doctors per capita, average income of physicians increased 218 percent from 1939 to 1951, far more than in any other profession, and many doctors are receiving two to three times the average income of comparable professional men. The licensed skilled building trades likewise have been able to raise their earnings almost 25 percent, relative to comparable nonunion labor, in periods of noninflationary prosperity. There are very few other examples of such dramatic, sustained increases in relative earnings, though printing, railroad, maritime, teamsters, entertainment and airline pilots unions have all done well.
As most of these examples show, successful unions generally represent labor which is essential and which represents a small portion of total costs. Also, as in the case of licensed trades and regulated transportation industries, the lack of substitutes (competition) is often the direct result of deliberate government policy. Even the strongest unions, however, have typically lost ground to nonunion rivals during periods of rapid inflation, such as 1945-1949 and the late Sixties. This is because long-term contracts can't adjust to inflation as easily as can continual individual negotiations, and also because the downward rigidity of union wages makes employers of union members reluctant to use wage increases to solve short-run labor shortages. It seems unlikely that unions could be responsible for inflations since they generally lose ground to nonunion workers. Many essential services, which are, unfortunately, monopolized by the government, have recently aspired to the lofty and lucrative variety of extortion exemplified by the AMA and licensed crafts. Like many others, I would love to teach, for less than the usual salary, but an absurd and elaborate program of apprenticeship and certification (meat inspection) has effectively kept me out. Moreover, teachers, firemen, police, postal workers, garbage collectors etc.-recently all have begun to exploit their enviable monopolistic positions by striking against bureaucrats who are uniquely immune to any concern about rising salary costs. Membership of the three largest government unions grew from 102 to 250 percent from 1957 to 1967, while the AFL-CIO added only 7 percent to its membership in the same period. The result of all this is that the old adage about "public servants" suffering during inflation is laughably false. Public salaries in 1970 were 45 percent higher than nonagricultural private incomes-an 18 percent larger gap than existed in 1960. The average increase in hourly earnings from 1965 to the second quarter of '71 was about 15 percent higher for Federal Government employees than for the highly unionized, supposedly monopolistic, manufacturing sector. Popular folklore insists that union gains are siphoned off the excess profits of greedy capitalists who would never increase wage rates unless threatened by a strike. Since this claim is made repeatedly, year after year, it apparently implies that unions are chipping away at an enormous mountain of profits that is somehow subject to unlimited erosion. Studies by Clark Kerr, Norman Simler and D. Gale Johnson, on the other hand, show that the long-run shares of National Income going to wages and profits have remained about the same for at least a century. Moreover, after-tax corporate profits average only about one-tenth of corporate wage payments. Whenever sizable profits appear, we soon see a horde of copycats entering these lucrative businesses, thereby increasing the supply and driving down the price. Moreover, the incessant greed of capitalists leads them to compete in the attractiveness of their job-offers in order to attract and retain the most productive employees.
Since the profit-share is stable, these continual increases in wages or benefits imply: 1) generally rising prices financed by continual increases in the number of dollars, or 2) offsetting increases in production per man hour, or 3) offsetting reduction in the number of labor-hours employed, or 4) offsetting reduction in some wages and prices elsewhere in the economy. In the recent U.S. experience, wage and price increases dominated offsetting price reductions and also exceeded increases in productivity; this was made possible by a mixture of reduced output and employment together with sizable injections of new money, which bid up prices on a stagnant quantity of goods. The appropriate corrective for this situation will be found at the source, namely in restraining the quantity of money. This is the only possible "direct" control. We have seen that successful unions must restrict or ration entry into their trade, thereby reducing the supply of that particular sort of labor, while simultaneously increasing the supply of labor in unrestricted trade. The resulting flood of labor into low-skill job markets causes weak union and nonunion wages to be lower than they would otherwise be. The gains of strong unions, then, are at the expense of other workers, especially at the expense of those who are arbitrarily excluded from the employment of their choice by the unions' closed-door policy. In the acknowledged best work on the subject H. G. Lewis estimates, rather conservatively, a 3 to 4 percent decline in nonunion incomes which can be directly attributed to the actions of only about one fourth of the unionized labor force. Since only about 25 percent of the labor force is unionized, this means that about 6 percent of all workers (25 percent of 25 percent) have significantly depressed the wages of 75 percent of all workers. Seen in this perspective, the impact of these key unions on relative wages is certainly not negligible, it is simply diluted by the overwhelming majority of employees who belong to no union or to comparatively weak unions. More to the point, neither logic nor evidence indicates that the gap between union and nonunion wages tends to widen continuously over time. The damage (to outsiders) has already been done. But if union wage increases are to push up the general level of wages and prices, they must be doing much more than just "keeping-up" with the inflationary trend of other wages and prices.
It is also necessary, for union wage increases to create upward pressure on prices, that such increases in wage rates not be offset by a reduction in the number of employees, or in hours worked. In a recent article agreeing with my opposition to controls, but defending the notion of costpush inflation (NR, Oct. 8), John Davenport says collective bargaining creates "higher pay for some, declining employment for others." But this implies the total wage-expense may well stay the same, and that there is, therefore, no cost increase to exert upward pressure on prices. Actually, median over-all wages of manufacturing unions (as opposed to government, construction and medical unions) have not even managed to stay even with recent increases in nonunion wages, except for 1970-1971 when some unions tried to recover from their relative losses in four of the previous five years. This timing of manufacturing wage increases conflicts with the common contention that such wages caused the recent price-inflation, which peaked in 1968-1969 and then dropped in the first seven months of this year (when unions achieved sizable gains) to the lowest rate since 1967. Moreover, except for the licensing problem in housing and medical care, recent price increases have been greatest in nonunionized fields, such as services, and the smallest price increases have been in union-produced consumer durables, including automobiles. Unions may cause high prices, they have not caused rising prices.
Unions may, however, have contributed to total unemployment if, by displacing prospective entrants, they created an excess supply of job-seekers at institutional or legal minimum-wage rates. But even if there were sufficient low-skilled jobs to absorb those excluded from unions, there remains a clear implication of underemployment, in the sense of manpower waste, which has reduced potential output and growth. Many other typical union activities likewise suggest a reduced rate of production: These include opposition to rewarding superior individual productivity, control over fringe benefits and seniority rights (which reduces labor mobility), and the creation of make-work schemes which retain labor where it isn't needed ("disguised unemployment"). There is, therefore, both on grounds of equity and efficiency, a powerful argument for reducing the monopoly power of certain unions by eliminating compulsory use of licensed tradesmen, introducing competition into the overly regulated transportation industry, and opening industry wide de facto closed shops through antitrust action. To buttress this case with the notion that unions cause inflation is redundant and unnecessary. More important, it simply isn't true. To summarize, in order for unions to cause lasting increases in specific prices, they must be protected against competition by government. In order for these few protected unions to cause generally rising prices, their wage-rate increases must not be offset by reduced wages and/or employment in the same industry or elsewhere, their relative advantage over nonunion wages must be increasing substantially, and their employers must face continually rising monetary demand in order to raise prices year after year without experiencing continually falling sales.
DISCUSSION
1. Reynolds seems to be saying that unions need the cooperation of the government or consumers in order to reach settlements for unfairly high wages. What could the latter two groups do to avoid such cooperation?
2. Reynolds says, "Unions may cause high prices; they have not caused rising prices." Is that possible? What is he really trying to say?
3. What would happen if unions were subject to antitrust legislation to the same extent as big business? Have unions become a part of the establishment, or do they still represent the little man?
The response should include a reference list. Double-space, using Times New Roman 12 pnt font, one-inch margins, and APA style of writing and citations.