This is Jeffrey Tucker. We're continuing our series on Economics 1 Lesson, the new edition
from the Mises Institute. And I'm very excited to introduce George Reisman, who's joined us
to discuss unions and wages. Dr. Reisman.
Well, very glad to be here, Jeff. Thank you for having me.
So we first tackled the issue of minimum wage laws, the almost universal confusion, even after all these years.
What does Hesitant say about minimum wage?
Well, his basic point is that minimum wage laws, or any legislation that raises wage rates above the free market level, causes unemployment.
And both of his discussions, I think, are excellent, and I don't know of any better book as an introduction to economics.
And I've taught from it for many years in the past, always with very good results.
And if you put his chapters on minimum wage and unions together, one of his main points
is that unions cannot raise wage rates for all workers taken together.
The most they can do is raise wage rates for some groups of workers.
They cause unemployment in those particular fields.
For example, if a carpenters union raises the wage rates of carpenters, there'll be
fewer carpenters employed.
The unemployed carpenters will then have to seek employment somewhere else.
That enlarges the supply of labor elsewhere and in order for them to be absorbed, wage
rates in the new lines where they enter have to go down.
So the unions make a gain for the carpenters who keep their jobs but impose a loss on workers
elsewhere in the economy.
And then, if we have unions throughout the economic system, the unions in the higher
areas of skill force certain workers out into lower lines. That either depresses the wage
rates in the lower lines, or if they have unions, the more skilled, better qualified
workers cause less skilled workers to be unemployed. They then go down a rung lower, and then it
concentrates at the bottom and where you have the minimum wage laws and then you
simply end up with permanent unemployment now you know many people who
advocate repealing the minimum wage laws don't realize they hear the
opposition well that the wage rates would be horrendously low to absorb the
unemployed the unemployed could be absorbed on much better terms if the
The repeal of minimum wages was coupled with the repeal of pro-union legislation, because
then more people would be employed higher up the ladder, that would take the pressure
off at the bottom.
Now back in 1946, unions were far more prevalent than they are today.
Right.
And I did a review of an edition of Economics in One Lesson that came out, I think, in 1981,
and I reread the book at that time.
And one of the things I noticed was that here and there there'd be some statement by Hazlitt,
unions on the whole are pretty bad and destructive, except of course when workers are being underpaid
or whatever.
And I made the point that these statements seemed totally out of place and I got a letter
from Hazlitt who acknowledged that they were, they didn't really make sense, but he had
to put them in here and there just in order to have the book published when it appeared.
Yeah. It was a different world, really. Yeah. Almost, how much of the economy was, how much
of the labor force was unionized in 1946? It was 40%? Possibly. Much, much higher than
today. And something had to happen, didn't it? I mean, it was on the verge of collapse.
Yeah, well... Stagnation, extreme stagnation. Well, they were certainly a growing problem,
I guess the Taft-Hartley Act set them back somewhat but the natural effect of unions especially if the industries in which they predominate are subject to foreign competition or non-union competition the unions effect is to destroy those industries so a major reason that the United States has lost so much of its manufacturing is the power of unions in such fields as automobiles, steel, you know people
People complain or used to complain more about Monday morning cars, because the workers would
come in hungover from the weekend, and that's a simple issue to solve, you tell them either
you come in fit for work on Monday or don't bother to come in at all, and so they could
have improved the quality, but they couldn't do that because such action would provoke
a major strike. So the American automobile industry lost greatly in competition because
of the poor quality of the cars produced by union workers, their work rules that lower
productivity plus their wage demands, the pensions. I would say they're responsible
in large measure for the destruction of our automobile industry, our steel industry and
other major industries. I know here in Alabama we're benefiting from this in some way. We
We keep getting auto plants moving down, machine small engines.
So long as they remain non-union.
Yeah, and they move here because we don't have these kind of, we have open shop rules.
And so the same thing has happened on an international level, the capital chases, the places that
have relatively less restricted...
Yeah, places our industry is at a great handicap.
Yes, right.
Now what would you say to those, well, let me ask you this.
Are there any conditions under which minimum wage laws or laws favoring union organizations
actually help workers? I can't imagine any. I mean, they should be free to organize any
voluntary association they want, but they should not have any right to prevent other
people able and willing to do their jobs at a lower wage.
This is a great confusion about this whole question of whether or not unions are voluntary
or not. If you had a free market of labor, would we see anything like modern unions anywhere
to your mind?
I don't think we'd see unions organized for strikes and things of that kind. You might
see fraternal associations, you know, maybe people who work in the same plant, maybe they
want to have a softball team or something or a burial fund or God knows what. But I
I don't think you would see anything where they're organizing strikes and stoppages because
so long, it would not be possible for any one group of workers to get significantly higher
wages than other workers able to do their jobs.
Right.
So the guild is just not likely to succeed over the long term, especially not in the
modern age.
Exactly.
Not under economic freedom.
Right.
What about the next chapter? Hayek has the talks about this idea of enough to, the title
is, enough to buy back the product. Right. What does he mean by that? Okay, well, it's
a popular argument of the unions, widely accepted, that the source of demand for the products
is from the payment of wages. Now, it's certainly true that the workers' expenditure of their
to whatever inequality we might have had, it doesn't increase the inequality, it doesn't
add to profits. Now as a matter of fact, suppose we started out, we had a total spending to
buy consumers' goods of 400 units of money. Each unit can be however many hundreds of
billions of dollars or whatever. And 300 units of money spent to pay wages. Well, we could
make reasonably estimate profits at 100. Now, if we raised wages by 100 and the workers
spent all the wages, now we'd have 400 of wages, 500 of sales, profits would still be
100, and as a percentage of sales and cost, they'd be lower. Now, profit margins would
go up if total wages went down, and even if sales revenues went down, because we're subtracting
Inequality equals from unequals, the amount of the inequality is unaffected and becomes
a larger percentage.
Now, also, one of the things I've discovered, suppose we have a situation where we're trying
to recover from a depression and that there's substantial unemployment and wage rates need
to fall.
Now, suppose some of the funds previously used to pay wages are now instead devoted
to the purchase of machinery.
It's going to be the same total sales revenues. The wage earners might spend less for consumers' goods, but more is spent to buy the machines, and for a protracted period of time, costs in the economy will be less, because what you pay out as ordinary wages will show up as costs quite quickly, but if you're using those funds to buy a machine or construct a factory that lasts many years, the only element of cost is the depreciation. So profits would actually increase,
This is what was typically believed, if you have mass on profitability, as in a depression,
you need a reduction in wage rates, in part to restore profitability. And it does so to
the extent that expenditures are diverted to such things as machines and factory construction.
Yes. And do you expect that, right now we're entering in a recessionary environment, do
you agree with that?
It certainly seems so that the potential is there for a major deflation.
And we're starting to see some response in the unemployment rate, right?
It seems to be going up.
So in light of your exposition and in light of what do you expect needs to happen?
Well, as far as unemployment becomes an issue, all legislation, artificially propping up
of Wage Rates should be repealed. But an even bigger issue that would need to be dealt with
is the situation of the money supply and financial contraction. And the potential is there right
now. We could have something worse than 1929. I'm not saying we will, but the potential
is there. And that would have to be addressed.
Does Hazard address the question of unemployment insurance?
He might, but I don't recall it. I don't think so.
Could you elaborate on unemployment insurance in particular?
With unemployment insurance, if you mean people when they become unemployed are getting government
funds.
I should say benefits, really.
All right, naturally.
Well, that enables people to avoid looking for work for a while and it prevents the fall
in wage rates.
Right.
You see, if you didn't have it, the pressure to reduce wage rates would be that much greater.
Yeah.
would occur more quickly.
And in Britain, unemployment insurance, which was very elaborate in the 1930s, actually
prevented restoration of normal economic times to even to a greater extent than the U.S.
And yet, every time we go into a recession, Congress, Republicans and Democrats are ready
to jump in.
Right.
And one other thing I think is very important in this context, even if you have unions just
in a few key industries and they're in a position to prevent a fall in wage rates in those particular
industries. That operates to necessitate a vastly greater fall in wage rates in other industries
because when we try to expand production we need to have expansion occurring more or less throughout
the economy. Like suppose we wanted to produce more automobiles but something was acting acting
as a bottleneck in the production of copper. Well, then that greatly retards our productivity
in every area that depends on copper. So, if you have unions in certain key fields whose
expansion is being held back, in order to make the employment of people worthwhile elsewhere,
you have to overcome this barrier of their productivity being artificially held down
because of lack of supplies of complementary factors of production.
That's a very interesting point.
So that even if unions constitute only, say, five percent of the private sector workforce,
they could still do a lot of damage.
And now I think they presently, I think it's more than five now, I think it's about eight
or nine percent, to the extent that it's possible for workers easily to unionize.
don't want that to happen so many non-union employers routinely match the
union scales to avoid giving the workers a reason to unionize which means that
the union wage demands are much much wider, have a much wider influence than
just in the unionized field. That would be an example of an unseen cost. Yeah,
so they do in fact serve to raise wage rates very very broadly far
are beyond indicated by the percentage of their membership.
Now in the public sector, unions are far more prevalent, why is that?
Well there the employers are not operating in a market, they're not concerned with matters
of profit and loss, they can pay anything and the taxpayers end up footing the bill
and they're buying votes at the public's expense and they can run bigger departments.
So there I think a good case could be made, there should, no unions should be allowed
certainly in working for the government, because they're taking unfair, it's like taking advantage
of a person incapable of taking care of himself, you know, the government has no profit and
loss incentive, it's not its money, so the unions are dealing with someone who can't
offer appropriate resistance and the incentives are to constantly cater to them.
So when we see those public sector unions out protesting and demanding more wages, they
should hold on to your wallet.
Yeah.
And that's their area of growth because they destroy one private industry after another.
In a way, the unions are vampire-like because they need to find fresh blood in order to
prosper.
Yeah.
That's great.
Well, thank you very much, Dr. Reisman, for your exposition today, which is very clear
and wonderful.
Well, thank you.
Thank you very much. It's been my pleasure.