WEBVTT NOTE 10.04. Labor Unions 1 00:00:00.000 --> 00:00:04.000 4. Labor unions 2 00:00:04.000 --> 00:00:08.000 a. Restrictionist pricing of labor 3 00:00:08.000 --> 00:00:18.000 It might be asserted that labor unions, in exacting higher wage rates on the free market, are achieving identifiable monopoly prices. 4 00:00:18.000 --> 00:00:24.000 For here, two identifiable contrasting situations exist. 5 00:00:24.000 --> 00:00:34.000 a. where individuals sell their labor themselves, and b. where they are members of labor unions which bargain on their labor for them. 6 00:00:34.000 --> 00:00:43.000 Furthermore, it is clear that while cartels, to be successful, must be economically more efficient in serving the consumer, 7 00:00:43.000 --> 00:00:51.000 no such justification can be found for unions, since it is always the individual laborer who works, 8 00:00:51.000 --> 00:00:56.920 and since efficiency in organization comes from management hired for the task, 9 00:00:56.920 --> 00:01:02.120 forming unions never improves the productivity of an individual's work. 10 00:01:03.000 --> 00:01:10.760 It is true that a union provides an identifiable situation, however it is not true that a union 11 00:01:10.760 --> 00:01:17.560 wage rate could ever be called a monopoly price, for the characteristic of the monopolist is 12 00:01:17.560 --> 00:01:22.760 It is precisely that he monopolizes a factor or commodity. 13 00:01:22.760 --> 00:01:29.460 To obtain a monopoly price, he sells only part of his supply and withholds selling the 14 00:01:29.460 --> 00:01:36.920 other part, because selling a lower quantity raises the price on an inelastic demand. 15 00:01:36.920 --> 00:01:43.640 It is the unique characteristic of labor in a free society, however, that it cannot be 16 00:01:43.640 --> 00:01:45.120 monopolized. 17 00:01:45.120 --> 00:01:52.600 Each individual is a self-owner and cannot be owned by another individual or group. Therefore, 18 00:01:52.600 --> 00:01:59.760 in the labor field, no one man or group can own the total supply and withhold part of 19 00:01:59.760 --> 00:02:07.680 it from the market. Each man owns himself. Let us call the total supply of a monopolist's 20 00:02:07.680 --> 00:02:09.680 Product P 21 00:02:09.680 --> 00:02:17.320 When he withholds W units in order to obtain a monopoly for P-W, the increased revenue 22 00:02:17.320 --> 00:02:26.040 he obtains from P-W must more than compensate him for the loss of revenue he suffers from 23 00:02:26.040 --> 00:02:33.360 not selling W. A monopolist's action is always limited by loss of revenue from the 24 00:02:33.360 --> 00:02:35.320 and the Withheld Supply. 25 00:02:35.320 --> 00:02:39.840 But in the case of labor unions, this limitation does not apply. 26 00:02:39.840 --> 00:02:46.940 Since each man owns himself, the withheld suppliers are different people from the ones 27 00:02:46.940 --> 00:02:49.640 getting the increased income. 28 00:02:49.640 --> 00:02:55.840 If a union, in one way or another, achieves a higher price than its members could command 29 00:02:55.840 --> 00:03:02.720 and by individual sales, its action is not checked by the loss of revenue suffered by 30 00:03:02.720 --> 00:03:05.320 the withheld laborers. 31 00:03:05.320 --> 00:03:12.480 If a union achieves a higher wage, some laborers are earning a higher price, while others are 32 00:03:12.480 --> 00:03:18.280 excluded from the market and lose the revenue they would have obtained. 33 00:03:18.280 --> 00:03:24.240 Such a higher price, wage, is called a restrictionist price. 34 00:03:24.240 --> 00:03:30.920 A restrictionist price by any sensible criterion is worse than a monopoly price. 35 00:03:30.920 --> 00:03:36.480 Since the restrictionist union does not have to worry about the laborers who are excluded 36 00:03:36.480 --> 00:03:43.480 and suffers no revenue loss from such exclusion, restrictionist action is not curbed by the 37 00:03:43.480 --> 00:03:51.320 elasticity of the demand for labor, for unions need only maximize the net income of the working 38 00:03:51.320 --> 00:03:57.000 Banking Members, or indeed of the Union bureaucracy itself. 39 00:03:57.000 --> 00:04:03.400 A restrictionist rather than a monopoly price can be achieved because the number of laborers 40 00:04:03.400 --> 00:04:11.200 is so important in relation to the possible variation in hours of work by an individual 41 00:04:11.200 --> 00:04:14.840 laborer that the latter can be ignored here. 42 00:04:14.840 --> 00:04:22.120 If, however, the total labor supply is limited originally to a few people, then an imposed 43 00:04:22.120 --> 00:04:28.440 higher wage rate will cut down the number of hours purchased from the workers who remain 44 00:04:28.440 --> 00:04:35.880 working, perhaps so much as to render a restrictionist price unprofitable to them. In such a case, 45 00:04:35.880 --> 00:04:40.720 it would be more appropriate to speak of a monopoly price. 46 00:04:40.720 --> 00:04:44.920 How May a Union Achieve a Restrictionist Price? 47 00:04:44.920 --> 00:04:52.040 What unions do, in fact, is to insist upon a certain wage rate as a minimum, below which 48 00:04:52.040 --> 00:04:55.160 they will not work in that industry. 49 00:04:55.160 --> 00:05:02.160 The union has thus achieved a restrictionist wage rate, but a sacrifice has been made. 50 00:05:02.160 --> 00:05:06.460 Specifically, there are now fewer workers hired. 51 00:05:06.460 --> 00:05:08.620 What happens to them? 52 00:05:08.620 --> 00:05:13.620 These discharged workers are the main losers in this procedure. 53 00:05:13.620 --> 00:05:19.240 Since the union represents the remaining workers, it does not have to concern itself, as the 54 00:05:19.240 --> 00:05:23.080 monopolist would, with the fate of these workers. 55 00:05:23.080 --> 00:05:31.420 At best, they must shift, being a non-specific factor, they can do so, to some other, non-unionized 56 00:05:31.420 --> 00:05:32.600 industry. 57 00:05:32.600 --> 00:05:37.920 The trouble is, however, that the workers are less suited to the new industry. 58 00:05:37.920 --> 00:05:45.160 Their having been in the now unionized industry implies that their DMVP in that industry was 59 00:05:45.160 --> 00:05:48.960 higher than in the industry to which they must shift. 60 00:05:48.960 --> 00:05:52.560 Consequently, their wage rate is now lower. 61 00:05:52.560 --> 00:05:59.280 Moreover, their entry into the other industry depresses the wage rates of the workers already 62 00:05:59.280 --> 00:06:00.280 there. 63 00:06:00.280 --> 00:06:07.060 Consequently, at best, a union can achieve a higher restrictionist wage rate for its 64 00:06:07.060 --> 00:06:20.020 in the economy, production efforts in the economy are also distorted, but in addition, 65 00:06:20.020 --> 00:06:26.540 the wider the scope of union activity and restrictionism in the economy, the more difficult 66 00:06:26.540 --> 00:06:33.640 it will be for workers to shift their locations and occupations to find non-unionized havens 67 00:06:33.640 --> 00:06:39.720 Unions in which to work, and more and more the tendency will be for the displaced workers 68 00:06:39.720 --> 00:06:47.240 to remain permanently or quasi-permanently unemployed, eager to work but unable to find 69 00:06:47.240 --> 00:06:50.760 non-restricted opportunities for employment. 70 00:06:50.760 --> 00:06:56.800 The greater the scope of unionism, the more a permanent mass of unemployment will tend 71 00:06:56.800 --> 00:06:59.080 to develop. 72 00:06:59.080 --> 00:07:05.520 Humans try as hard as they can to plug all the loopholes of non-unionism, to close all 73 00:07:05.520 --> 00:07:10.460 the escape hatches where the dispossessed workmen can find jobs. 74 00:07:10.460 --> 00:07:17.080 This is termed ending the unfair competition of non-union low-wage labor. 75 00:07:17.080 --> 00:07:24.820 A universal union control and restrictionism would mean permanent mass unemployment, growing 76 00:07:24.820 --> 00:07:31.300 ever greater in proportion to the degree that the Union exacted its restrictions. 77 00:07:31.300 --> 00:07:37.600 It is a common myth that only the old-style craft unions, which deliberately restrict 78 00:07:37.600 --> 00:07:44.660 their occupational group to highly skilled trades with relatively few numbers, can restrict 79 00:07:44.660 --> 00:07:46.600 the supply of labor. 80 00:07:46.600 --> 00:07:52.620 They often maintain stringent standards of membership and numerous devices to cut down 81 00:07:52.620 --> 00:07:55.980 from the Supply of Labor Entering the Trade. 82 00:07:55.980 --> 00:08:01.700 This direct restriction of supply doubtless makes it easier to obtain higher wage rates 83 00:08:01.700 --> 00:08:03.680 for the remaining workers. 84 00:08:03.680 --> 00:08:10.740 But it is highly misleading to believe that the newer style industrial unions do not restrict 85 00:08:10.740 --> 00:08:11.740 supply. 86 00:08:11.740 --> 00:08:17.580 The fact that they welcome as many members in an industry as possible cloaks their restrictionist 87 00:08:17.580 --> 00:08:18.840 policy. 88 00:08:18.840 --> 00:08:25.340 The crucial point is that the unions insist on a minimum wage rate higher than what would 89 00:08:25.340 --> 00:08:30.280 be achieved for the given labor factor without the union. 90 00:08:30.280 --> 00:08:36.600 By doing so, they necessarily cut the number of men whom the employer can hire. 91 00:08:36.600 --> 00:08:42.960 Ergo, the consequence of their policy is to restrict the supply of labor, while at the 92 00:08:42.960 --> 00:09:12.960 In fact, the consequences of industrial unionism are more devastating than those of craft unionism, for the craft unions, being small in scope, displace and lower the wages of only a few workers, the industrial unions, larger and more inclusive, 93 00:09:12.960 --> 00:09:29.800 There is another reason why an openly restrictionist union will cause less unemployment than a 94 00:09:29.800 --> 00:09:36.400 more liberal one, for the union which restricts its membership serves open warning on workers 95 00:09:36.400 --> 00:09:41.840 hoping to enter the industry that they are barred from joining the union. 96 00:09:41.840 --> 00:09:47.280 As a result, they will swiftly look elsewhere, where jobs can be found. 97 00:09:47.280 --> 00:09:52.400 Suppose the union is democratic, however, and open to all. 98 00:09:52.400 --> 00:09:58.960 An open union does not have the one virtue of the closed union, rapid repulsion of the 99 00:09:58.960 --> 00:10:02.520 displaced workers from the unionized industry. 100 00:10:02.520 --> 00:10:09.820 Instead, it attracts even more workers into the industry, thus aggravating and swelling 101 00:10:09.820 --> 00:10:14.940 Following the Amount of Unemployment With market signals distorted, it will take a 102 00:10:14.940 --> 00:10:21.620 much longer time for workers to realize that no jobs are available in the industry. 103 00:10:21.620 --> 00:10:27.000 The larger the scope of open unions in the economy, and the greater the differential 104 00:10:27.000 --> 00:10:32.420 between their restrictionist wage rates and the market wage rates, the more dangerous 105 00:10:32.420 --> 00:10:36.020 will the unemployment problem become. 106 00:10:36.020 --> 00:10:41.820 The unemployment and the mis-employment of labor caused by restrictionist wage rates 107 00:10:41.820 --> 00:10:44.740 need not always be directly visible. 108 00:10:44.740 --> 00:10:51.480 Thus, an industry might be particularly profitable and prosperous either as a result of a rise 109 00:10:51.480 --> 00:10:57.700 in consumer demand for the product or from a cost-lowering innovation in the productive 110 00:10:57.700 --> 00:10:59.060 process. 111 00:10:59.060 --> 00:11:04.940 In the absence of unions, the industry would expand and hire more workers in response to 112 00:11:04.940 --> 00:11:11.040 to the New Market Conditions, but if a union imposes a restrictionist wage rate, it may 113 00:11:11.040 --> 00:11:16.140 not cause the unemployment of any current workers in the industry. 114 00:11:16.140 --> 00:11:22.560 It may instead simply prevent the industry from expanding in response to the requirements 115 00:11:22.560 --> 00:11:26.420 of consumer demand and the conditions of the market. 116 00:11:26.420 --> 00:11:34.540 Here, in short, the union destroys potential jobs in the making and imposes a misallocation 117 00:11:34.540 --> 00:11:41.220 Union of Production by Preventing Expansion It is true that without the union, the industry 118 00:11:41.220 --> 00:11:45.860 will bid up wage rates in the process of expansion. 119 00:11:45.860 --> 00:11:53.460 But if unions impose a higher wage rate at the beginning, the expansion will not occur. 120 00:11:53.460 --> 00:11:59.820 Some opponents of unionism go to the extreme of maintaining that unions can never be free 121 00:11:59.820 --> 00:12:06.140 Free Market Phenomena and are always monopolistic or coercive institutions. 122 00:12:06.140 --> 00:12:12.460 Although this might be true in actual practice, it is not necessarily true. 123 00:12:12.460 --> 00:12:18.860 It is very possible that labor unions might arise on the free market and even gain restrictionist 124 00:12:18.860 --> 00:12:20.940 wage rates. 125 00:12:20.940 --> 00:12:25.800 How can unions achieve restrictionist wage rates on the free market? 126 00:12:25.800 --> 00:12:29.980 The answer can be found by considering the displaced workers. 127 00:12:29.980 --> 00:12:37.680 The key problem is, why do the workers let themselves be displaced by the union's minimum? 128 00:12:37.680 --> 00:12:43.840 Since they were willing to work for less before, why do they now meekly agree to being fired 129 00:12:43.840 --> 00:12:47.020 and looking for a poorer paying job? 130 00:12:47.020 --> 00:12:53.300 Why do some remain content to continue in a quasi-permanent pocket of unemployment in 131 00:12:53.300 --> 00:12:58.440 in an industry, waiting to be hired at the excessively high rate. 132 00:12:58.440 --> 00:13:04.360 The only answer in the absence of coercion is that they have adopted, on a commandingly 133 00:13:04.360 --> 00:13:12.460 high place on their value scales, the goal of not undercutting union wage rates. 134 00:13:12.460 --> 00:13:18.300 Unions naturally are most anxious to persuade workers, both union and non-union, as well 135 00:13:18.300 --> 00:13:24.900 as well as the general public to believe strongly in the sinfulness of undercutting union wage rates. 136 00:13:24.900 --> 00:13:30.920 This is shown most clearly in those situations where union members refuse to continue working 137 00:13:30.920 --> 00:13:38.100 for a firm at a wage rate below a certain minimum or on other terms of employment. 138 00:13:38.100 --> 00:13:41.180 This situation is known as a strike. 139 00:13:41.180 --> 00:13:46.760 The most curious thing about a strike is that the unions have been able to spread the belief 140 00:13:46.760 --> 00:14:05.120 The natural answer of the employer, of course, is to turn somewhere else, and to hire laborers 141 00:14:05.120 --> 00:14:08.560 who are willing to work on the terms offered. 142 00:14:08.560 --> 00:14:14.520 Yet unions have been remarkably successful in spreading the idea through society that 143 00:14:14.520 --> 00:14:37.520 To the extent, then, that non-union workers feel ashamed or guilty about strike-breaking, or other forms of undercutting union-proclaimed wage scales, the displaced or unemployed workers agree to their own fate. 144 00:14:37.520 --> 00:14:50.520 These workers, in effect, are being displaced to poorer and less satisfying jobs voluntarily and remain unemployed for long stretches of time, voluntarily. 145 00:14:50.520 --> 00:15:02.520 It is voluntary because that is the consequence of their voluntary acceptance of the mystique of not crossing the picket line or of not being a strikebreaker. 146 00:15:02.520 --> 00:15:11.160 The economist qua economist can have no quarrel with a man who voluntarily comes to the conclusion 147 00:15:11.160 --> 00:15:17.500 that it is more important to preserve union solidarity than to have a good job. 148 00:15:17.500 --> 00:15:20.760 But there is one thing an economist can do. 149 00:15:20.760 --> 00:15:26.160 He can point out to the worker the consequences of his voluntary decision. 150 00:15:26.160 --> 00:15:31.720 There are undoubtedly countless numbers of workers who do not realize that their refusal 151 00:15:31.720 --> 00:15:37.880 to Cross a Picket Line, their sticking to the union may result in their losing their 152 00:15:37.880 --> 00:15:41.060 jobs and remaining unemployed. 153 00:15:41.060 --> 00:15:47.560 They do not realize this because to do so requires knowledge of a chain of praxeological 154 00:15:47.560 --> 00:15:51.200 reasoning such as we have been following here. 155 00:15:51.200 --> 00:15:57.200 The consumer who purchases directly enjoyable services does not have to be enlightened by 156 00:15:57.200 --> 00:15:58.560 economists. 157 00:15:58.560 --> 00:16:05.580 He needs no lengthy chain of reasoning to know that his clothing or car or food is enjoyable 158 00:16:05.580 --> 00:16:07.080 or serviceable. 159 00:16:07.080 --> 00:16:11.280 He can see each perform its service before his eyes. 160 00:16:11.280 --> 00:16:17.600 Similarly, the capitalist entrepreneur does not need the economist to tell him what acts 161 00:16:17.600 --> 00:16:20.620 will be profitable or unprofitable. 162 00:16:20.620 --> 00:16:25.740 He can see and test them by means of his profits or losses. 163 00:16:25.740 --> 00:16:32.020 But for a grasp of the consequences of acts of governmental intervention in the market, 164 00:16:32.020 --> 00:16:38.780 or of union activity, knowledge of praxeology is requisite. 165 00:16:38.780 --> 00:16:42.900 Economics cannot itself decide on ethical judgments. 166 00:16:42.900 --> 00:16:49.060 But in order for anyone to make ethical judgments rationally, he must know the consequences 167 00:16:49.060 --> 00:16:52.740 of his various alternative courses of action. 168 00:16:52.740 --> 00:16:58.800 In questions of government intervention or union action, economics supplies the knowledge 169 00:16:58.800 --> 00:17:01.200 of these consequences. 170 00:17:01.200 --> 00:17:06.980 Knowledge of economics is therefore necessary, though not sufficient, for making a rational 171 00:17:06.980 --> 00:17:09.960 ethical judgment in these fields. 172 00:17:09.960 --> 00:17:16.640 As for unions, the consequences of their activity, when discovered, for example, displacement 173 00:17:16.640 --> 00:17:35.640 will be considered unfortunate by most people, therefore it is certain that when knowledge of these consequences becomes widespread, far fewer people will be pro-union or hostile to non-union competitors. 174 00:17:35.640 --> 00:17:42.640 Such conclusions will be reinforced when people learn of another consequence of trade union activity, 175 00:17:42.640 --> 00:17:48.640 that a restrictionist wage raises costs of production for the firms in the industry. 176 00:17:48.640 --> 00:17:56.640 This means that the marginal firms in the industry, the ones whose entrepreneurs earn only a bare rent, 177 00:17:56.640 --> 00:18:03.640 will be driven out of business, for their costs have risen above their most profitable price on the market, 178 00:18:03.640 --> 00:18:20.640 The price that had already been attained, their ejection from the market and the general rise of average costs in the industry signify a general fall in productivity and output, and hence a loss to the consumers. 179 00:18:20.640 --> 00:18:28.640 Displacement and unemployment, of course, also impair the general standard of living of the consumers. 180 00:18:28.640 --> 00:18:33.140 Unions have had other important economic consequences. 181 00:18:33.140 --> 00:18:36.640 Unions are not producing organizations. 182 00:18:36.640 --> 00:18:40.640 They do not work for capitalists to improve production. 183 00:18:40.640 --> 00:18:48.140 Rather, they attempt to persuade workers that they can better their lot at the expense of the employer. 184 00:18:48.140 --> 00:18:57.140 Consequently, they invariably attempt, as much as possible, to establish work rules that hinder management's directives. 185 00:18:57.140 --> 00:19:04.840 These work rules amount to preventing management from arranging workers and equipment as it sees fit. 186 00:19:04.840 --> 00:19:12.140 In other words, instead of agreeing to submit to the work orders of management in exchange for his pay, 187 00:19:12.140 --> 00:19:20.740 the worker now sets up not only minimum wages, but also work rules, without which he refuses to work. 188 00:19:20.740 --> 00:19:27.740 The effect of these rules is to lower the marginal productivity of all union workers. 189 00:19:27.740 --> 00:19:32.740 The lowering of marginal value product schedules has a twofold result. 190 00:19:32.740 --> 00:19:39.740 One, it itself establishes a restrictionist wage scale with its various consequences, 191 00:19:39.740 --> 00:19:47.740 for the marginal value product has fallen while the union insists that the wage rate remain the same. 192 00:19:47.740 --> 00:19:55.480 2. Consumers lose by a general lowering of productivity and living standards. Restrictive 193 00:19:55.480 --> 00:20:02.820 work rules, therefore, also lower output. All this is perfectly consistent with a society 194 00:20:02.820 --> 00:20:11.300 of individual sovereignty, however, provided always that no force is employed by the Union. 195 00:20:11.300 --> 00:20:17.720 To advocate coercive abolition of these work rules would imply literal enslavement of the 196 00:20:17.720 --> 00:20:24.120 of the Workers to the Dictates of Catallactic Consumers, but once again it is certain that 197 00:20:24.120 --> 00:20:30.680 knowledge of these various consequences of union activity would greatly weaken the voluntary 198 00:20:30.680 --> 00:20:36.840 adherence of many workers and others to the mystique of unionism. 199 00:20:36.840 --> 00:20:43.600 We can deal here only with the directly catallactic consequences of labor unionism. 200 00:20:43.600 --> 00:20:49.740 Some also has other consequences, which many might consider even more deplorable. 201 00:20:49.740 --> 00:20:55.420 Prominent is the fusing of the able and the incompetent into one group. 202 00:20:55.420 --> 00:20:59.760 Seniority rules, for example, are invariable favorites of unions. 203 00:20:59.760 --> 00:21:06.300 They set restrictively high wages for less able workers, and also lower the productivity 204 00:21:06.300 --> 00:21:07.520 of all. 205 00:21:07.520 --> 00:21:14.060 But they also reduce the wages of the more able workers, those who must be chained to 206 00:21:14.060 --> 00:21:19.900 the stultifying march of seniority for their jobs and promotions. 207 00:21:19.900 --> 00:21:26.780 Seniority also decreases the mobility of workers and creates a kind of industrial serfdom by 208 00:21:26.780 --> 00:21:34.600 establishing vested rights in jobs according to the length of time the employees have worked. 209 00:21:34.600 --> 00:21:40.740 Unions therefore are theoretically compatible with the existence of a purely free market. 210 00:21:40.740 --> 00:21:46.300 In actual fact, however, it is evident to any competent observer that unions acquire 211 00:21:46.300 --> 00:21:52.520 almost all their power through the wielding of force, specifically force against strike 212 00:21:52.520 --> 00:21:56.120 breakers and against the property of employers. 213 00:21:56.120 --> 00:22:03.220 An implicit license to unions to commit violence against strike breakers is practically universal. 214 00:22:03.220 --> 00:22:10.260 These commonly either remain neutral when strikebreakers are molested, or else blame the strikebreakers 215 00:22:10.260 --> 00:22:13.800 for provoking the attacks upon them. 216 00:22:13.800 --> 00:22:19.540 Certainly few pretend that the institution of mass picketing by unions is simply a method 217 00:22:19.540 --> 00:22:24.540 of advertising the fact of a strike to anyone passing by. 218 00:22:24.540 --> 00:22:29.220 These matters, however, are empirical, rather than theoretical questions. 219 00:22:29.220 --> 00:22:35.460 Theoretically we may say that it is possible to have unions on a free market, although 220 00:22:35.460 --> 00:22:40.520 empirically we may question how great their scope would be. 221 00:22:40.520 --> 00:22:46.860 Analytically we can also say that when unions are permitted to resort to violence, the state 222 00:22:46.860 --> 00:22:53.540 or other enforcing agency has implicitly delegated this power to the unions. 223 00:22:53.540 --> 00:22:58.500 The unions, then, have become private states. 224 00:22:58.500 --> 00:23:05.760 We have in this section investigated the consequences of unions achieving restrictionist prices. 225 00:23:05.760 --> 00:23:13.220 This is not to imply, however, that unions always achieve such prices in collective bargaining. 226 00:23:13.220 --> 00:23:19.740 Indeed, because unions do not own workers and therefore do not sell their labor, the 227 00:23:19.740 --> 00:23:26.180 collective bargaining of unions is an artificial replacement for the smooth workings of individual 228 00:23:26.180 --> 00:23:47.180 and Social Bargaining on the labor market, whereas wage rates on the non-union labor market will always tend toward equilibrium in a smooth and harmonious manner, its replacement by collective bargaining leaves the negotiators with little or no rudder, with little guidance on what the proper wage rates would be. 229 00:23:47.180 --> 00:24:00.680 Even with both sides trying to find the market rate, neither of the parties to the bargain could be sure that a given wage agreement is too high, too low, or approximately correct. 230 00:24:00.680 --> 00:24:13.180 Almost invariably, furthermore, the Union is not trying to discover the market rate, but to impose various arbitrary principles of wage determination, 231 00:24:13.180 --> 00:24:31.180 such as keeping up with the cost of living, a living wage, the going rate for comparable labor in other firms or industries, an annual average productivity increase, fair differentials, etc. 232 00:24:31.180 --> 00:24:37.180 B. Some Arguments for Unions, a Critique 233 00:24:37.180 --> 00:24:40.180 1. Indeterminacy 234 00:24:40.180 --> 00:24:46.180 A favorite reply of union advocates to the above analysis is this, 235 00:24:46.180 --> 00:24:52.180 Oh, that is all very well, but you are overlooking the indeterminacy of wage rates. 236 00:24:52.180 --> 00:24:59.180 Wage rates are determined by marginal productivity in a zone rather than at a point, 237 00:24:59.180 --> 00:25:06.180 and within that zone unions have an opportunity to bargain collectively for increased wages 238 00:25:06.180 --> 00:25:12.240 without the admittedly unpleasant effects of unemployment or displacement of workers 239 00:25:12.240 --> 00:25:14.400 to poorer jobs. 240 00:25:14.400 --> 00:25:20.440 It is curious that many writers move smoothly through rigorous price analysis until they 241 00:25:20.440 --> 00:25:28.580 come to wage rates, when suddenly they lay heavy stress on indeterminacy, the huge zones 242 00:25:28.580 --> 00:25:33.520 within which the price makes no difference, etc. 243 00:25:33.520 --> 00:25:39.540 In the first place, the scope of indeterminacy is very small in the modern world. 244 00:25:39.540 --> 00:25:47.540 We have seen that in a two-person barter situation, there is likely to be a large zone of indeterminacy 245 00:25:47.540 --> 00:25:53.720 between the buyer's maximum demand price and the seller's minimum supply price for 246 00:25:53.720 --> 00:25:56.260 a quantity of a good. 247 00:25:56.260 --> 00:26:01.840 Within this zone, we can only leave the determination of the price to bargaining. 248 00:26:01.840 --> 00:26:08.160 However, it is precisely the characteristic of an advanced monetary economy that these 249 00:26:08.160 --> 00:26:13.840 zones are ever and ever narrowed and lose their importance. 250 00:26:13.840 --> 00:26:21.840 The zone is only between the marginal pairs of buyers and sellers, and this zone is constantly 251 00:26:21.840 --> 00:26:28.440 dwindling as the number of people and alternatives in the market increase. 252 00:26:28.440 --> 00:26:35.080 Building civilization, therefore, is always narrowing the importance of indeterminacies. 253 00:26:35.080 --> 00:26:42.400 Secondly, there is no reason whatever why a zone of indeterminacy should be more important 254 00:26:42.400 --> 00:26:47.720 for the labor market than for the market for the price of any other good. 255 00:26:47.720 --> 00:26:55.120 Thirdly, suppose that there is a zone of indeterminacy for a labor market and let us assume that 256 00:26:55.120 --> 00:26:57.400 no union is present. 257 00:26:57.400 --> 00:27:03.840 This means that there is a certain zone, the length of which can be said to equal a zone 258 00:27:03.840 --> 00:27:08.440 of the discounted marginal value product of the factor. 259 00:27:08.440 --> 00:27:14.600 This parenthetically is far less likely than the existence of a zone for a consumer's 260 00:27:14.600 --> 00:27:22.640 good, since in the former case there is a specific amount, a DMVP, to be estimated. 261 00:27:22.640 --> 00:27:28.760 But the maximum of the supposed zone is the highest point at which the wage equals the 262 00:27:28.760 --> 00:27:30.760 DMVP. 263 00:27:30.760 --> 00:27:37.880 Now competition among employers will tend to raise factor prices to precisely that height 264 00:27:37.880 --> 00:27:40.840 at which profits will be wiped out. 265 00:27:40.840 --> 00:27:49.600 In other words, wages will tend to be raised to the maximum of any zone of the DMVP. 266 00:27:49.600 --> 00:27:55.240 Rather than wages being habitually at the bottom of a zone, presenting unions with a 267 00:27:55.240 --> 00:28:01.560 golden opportunity to raise wages to the top, the truth is quite the reverse. 268 00:28:01.560 --> 00:28:08.760 Assuming the highly unlikely case that any zone exists at all, wages will tend to be 269 00:28:08.760 --> 00:28:15.160 at the top, so that the only remaining indeterminacy is downward. 270 00:28:15.160 --> 00:28:25.720 2. Monopsony and Oligopsony 271 00:28:25.720 --> 00:28:32.260 It is often alleged that the buyers of labor, the employers, have some sort of monopoly 272 00:28:32.260 --> 00:28:38.800 and earn a monopoly gain, and that therefore there is room for unions to raise wage rates 273 00:28:38.800 --> 00:28:45.920 without injuring other laborers. However, such a monopsony for the purchase of labor 274 00:28:45.920 --> 00:28:52.960 would have to encompass all the entrepreneurs in the society. If it did not, then labor, 275 00:28:52.960 --> 00:28:59.520 a non-specific factor, could move into other firms and other industries. And we have seen 276 00:28:59.520 --> 00:29:07.040 that one big cartel cannot exist on the market. Therefore, a monopsony cannot exist. 277 00:29:07.040 --> 00:29:25.040 The problem of oligopsony, a few buyers of labor, is a pseudo problem. As long as there is no monopsony, competing employers will tend to drive up wage rates until they equal their DMVPs. 278 00:29:25.040 --> 00:29:31.040 The number of competitors is irrelevant. This depends on the concrete data of the market. 279 00:29:31.040 --> 00:29:32.040 Market. 280 00:29:32.040 --> 00:29:39.320 Later, we shall see the fallacy of the idea of monopolistic or imperfect competition, 281 00:29:39.320 --> 00:29:41.360 of which this is an example. 282 00:29:41.360 --> 00:29:48.280 Briefly, the case of oligopsiny rests on a distinction between the case of pure or perfect 283 00:29:48.280 --> 00:29:55.560 competition, in which there is an allegedly infinitely elastic supply of labor, and the 284 00:29:55.560 --> 00:30:01.400 The Supposedly Less Elastic Supply of the Imperfect Oligopsinie 285 00:30:01.400 --> 00:30:09.040 Actually, since people do not move en masse and all at once, the supply is never infinitely 286 00:30:09.040 --> 00:30:12.680 elastic, and the distinction has no relevance. 287 00:30:12.680 --> 00:30:20.440 There is only free competition, and no other dichotomies, such as between pure competition 288 00:30:20.440 --> 00:30:24.280 and oligopsinie, can be established. 289 00:30:24.280 --> 00:30:32.640 The truth is that labor, or any other factor, tends to get its DMVP on the market. 290 00:30:32.640 --> 00:30:34.600 3. 291 00:30:34.600 --> 00:30:38.960 Greater Efficiency and the Ricardo Effect 292 00:30:38.960 --> 00:30:45.160 One common pro-union argument is that unions benefit the economy through forcing higher 293 00:30:45.160 --> 00:30:47.880 wages on the employers. 294 00:30:47.880 --> 00:30:53.640 At these higher wages, the workers will become more efficient, and their marginal productivity 295 00:30:53.640 --> 00:31:01.040 will rise as a result. If this were true, however, no unions would be needed. Employers, 296 00:31:01.040 --> 00:31:07.080 ever eager for greater profits, would see this, and pay higher wages now to reap the 297 00:31:07.080 --> 00:31:13.960 benefits of the allegedly higher productivity in the future. As a matter of fact, employers 298 00:31:13.960 --> 00:31:21.520 often train workers, paying higher wages than their present marginal product justifies in 299 00:31:21.520 --> 00:31:27.880 in order to reap the benefits of their increased productivity in later years. 300 00:31:27.880 --> 00:31:34.160 A more sophisticated variant of this thesis was advanced by Ricardo and has been revived 301 00:31:34.160 --> 00:31:35.720 by Hayek. 302 00:31:35.720 --> 00:31:42.420 This doctrine holds that union-induced higher wage rates encourage employers to substitute 303 00:31:42.420 --> 00:31:44.620 machinery for labor. 304 00:31:44.620 --> 00:31:50.960 This added machinery increases the capital per worker and raises the marginal productivity 305 00:31:50.960 --> 00:31:55.560 of Labor, thereby paying for the higher wage rates. 306 00:31:55.560 --> 00:32:02.360 The fallacy here is that only increased saving can make more capital available. 307 00:32:02.360 --> 00:32:05.560 Capital investment is limited by saving. 308 00:32:05.560 --> 00:32:11.840 Union wage increases do not increase the total supply of capital available. 309 00:32:11.840 --> 00:32:17.160 Therefore there can be no general rise in labor productivity. 310 00:32:17.160 --> 00:32:24.720 Instead the potential supply of capital is shifted, not increased, from other industries 311 00:32:24.720 --> 00:32:30.580 to those industries with higher wage rates, and it is shifted to industries where it would 312 00:32:30.580 --> 00:32:35.360 have been less profitable under non-union conditions. 313 00:32:35.360 --> 00:32:42.240 The fact that an induced higher wage rate shifts capital to the industry does not indicate 314 00:32:42.240 --> 00:32:49.400 Economic Progress, but rather an attempt, never fully successful, to offset an economic 315 00:32:49.400 --> 00:32:54.640 retrogression, a higher cost in the manufacture of the product. 316 00:32:54.640 --> 00:32:58.920 Hence, the shift is uneconomic. 317 00:32:58.920 --> 00:33:05.480 A related thesis is that higher wage rates will spur employers to invent new technological 318 00:33:05.480 --> 00:33:09.040 methods to make labor more efficient. 319 00:33:09.040 --> 00:33:15.880 Here again, however, the supply of capital goods is limited by the savings available, 320 00:33:15.880 --> 00:33:23.200 and there is almost always a sheaf of technological opportunities awaiting more capital anyway. 321 00:33:23.200 --> 00:33:29.460 Furthermore, the spur of competition and the desire of the producer to keep and increase 322 00:33:29.460 --> 00:33:36.380 his custom is enough of an incentive to increase productivity in his firm without the added 323 00:33:36.380 --> 00:33:38.100 Burden of Unionism.