American Workers Do Not Need Unions

The gap between libertarians and certain conservatives has grown broader in recent years, and nowhere is that divide more evident than in the disputes over the status and legitimacy of the American labor union movement. The new wave conservatives want to revive labor unions as part of their ongoing effort to counteract the dominance of business, professional, and intellectual elites. These elites command too large a share of the pie, so that ordinary working people end up with too little. Only a determined return to a strong New Deal pro-labor movement can restore a rough measure of income and wealth parity on which the well-being of our collective institutions necessarily depends.

The obvious intellectual target of this new offensive is traditional classical liberal thought—I will refine this word shortly—which mistakenly holds that market solutions can continuously generate appropriate levels of support and satisfaction throughout society. I think that this modern fascination of the new conservative regime is a profound mistake because it wishes to return to some bucolic period of labor relations that never was. It is all too easy for modern commentators to forget the huge “strike wave” that followed in the aftermath of World War II when union strikes were perhaps the central issue of domestic policy, leading in 1947 to the passage (over Truman’s veto) of the Taft-Hartley revisions of the National Labor Relations Act that among other things allowed states to pass right-to-work laws that gave workers the option to take a job without joining an union, and created a list of unfair labor practices by workers to parallel those by employers. Those revisions most notably allow the president to announce an 80-day cooling-off period between labor and management, thus affording the government an opportunity to enjoin any strike by convincing a federal court that the strike constitutes a national emergency or otherwise imperils the “national health and safety.”

On this issue, the so-called libertarian position, correctly understood, supplies a better answer by rejecting the romantic illusion that unions advance overall welfare. One key part of the current pro-union fad comes from its stick-pin caricatures of classical liberalism, which gives government these additional powers: the control of monopoly power (including that exercised by unions, whether through the antitrust laws or rate regulation; and the use of the powers of taxation and eminent domain. The more (anarcho)libertarian position that finds it difficult, if not impossible to incorporate these commonplace features of social life into their intellectual framework. It is therefore commonplace that attacks on larger libertarian theory takes the easy route by concentrating its fire on the narrow version of libertarianism and not its classical liberal branch. Thus Michael Lind poses questions that he thinks libertarians just can’t answer: “Wouldn’t there be at least one country, out of nearly two hundred, with minimal government, free trade, open borders, decriminalized drugs, no welfare state and no public education system?” Lind is not a cautious thinker, but prefers to paint in very broad strokes. One can be in favor of free trade, as I am, but still be aware of the enormous limitations that have to be put on that principle to deal with (for example) the transmission of disease across national borders and the prohibitions against giving away top-secrets to our enemies. One can be very cautious about the legalization of any and all drugs, given that the risks of their use to minors and the possibility that those who use drugs may well commit crimes of violence against others—think of the havoc from the recent opioid crisis. Of course, any program of open borders is a total nonstarter if admission into the country will upset the balance of political power and impose incredible strains on other our social institutions. But some immigration is essential to national welfare, and it is critical to articulate sensible policies that set the total number of immigrants allowed, and which then divide that total among the key objectives in that area: reuniting families, helping refugees, and promoting economic strength by allowing skilled workers into the country.

Competing Visions

A sensible person who is uncertain about the future could differ rationally on the kinds of restrictions that should be put into place to deal with these uncertainties and this is not the place to get into detailed discussion about these issues. The task here is to assess the place of labor unions in the comparison of competition and monopoly, not only in labor markets, but everywhere else. Hardcore libertarians are leery about any taxation, eminent domain and any use of the antitrust laws to deal with these imbalances, since taxation and eminent domain involve the use of government force, while the market dislocations from monopoly practices do not involve the use of force or fraud. In contrast, classical liberals have a somewhat broader conception of the proper role of government, which on this points allows a constrained—typically flat—taxation, the use of eminent domain power, and the control of monopoly by a limited application of the antitrust laws, chiefly directed toward cartels and monopolies.

On this last point, the most contentious issue is whether to treat trade unions, who rely on collective refusal to deal as a way to achieve exclusive bargaining rights against a targeted employer, as monopolies of labor under antitrust laws. In the pre-New Deal period, the collective refusal to deal by trade unions was treated under the 1890 Sherman Act in the same way as a collective refusal to deal by firms, as held in the famous case of Loewe v. Lawlor (1908).That decision was sound as a matter of economic logic, but it did not last long in the face of the majoritarian politics of the progressive movement. The initial innovation in the Woodrow Wilson presidency was the passage of Section 6 of the 1914 Clayton Act, which conferred on labor unions (and agricultural cooperatives) a blanket immunity from the antitrust laws. Next came the passage of the National Labor Relations Act (NLRA) in 1935. That law did more than exempt labor unions from the antitrust laws; it also gave a powerful boost to union monopoly power through mandatory collective bargaining.

The innovation is deeply problematic. The simple bedrock assumption is that labor unions were—and remain—organized monopolies that should not be given special dispensation under the NLRA and similar forms of state statutes. In some instances, it is costly to attempt to break up monopoly institutions with a frontal assault and thus it is important to ensure that conditions of market entry are alive and well, so that the incumbents will be forced to shed their monopoly profits in order to retain their customer base. But the difficulties in determining how to regulate the exercise of monopoly power never justify government policies intended to prop up unions in the fashion undertaken by the NLRA, whose central tenet is that a majority of workers in some government-designated bargaining unit shall be able to appoint a particular union as its sole representative. It may, for political reasons, not be possible to undo the provision of the NLRA, but whether or not that is true, nothing should be done to strengthen the hands of unions, as would happen through the currently moribund Employee Free Choice Act.

That statute, if ever enacted, would allow a union to be designated as the exclusive bargaining agent solely on signed union authorization cards, without any union election, and impose a first union “contract” for two years on an unwilling employer by mandatory arbitration. Any coercive pro-union government intervention poses two risks to the full class of employees. The first is that collective bargaining works to the detriment of those workers who are necessarily excluded from employment by this arrangement—monopoly wages result in lower demand for labor. The second is that collective bargaining forces workers within the bargaining unit who would rather opt out of the union to choose between having to resign their positions or to accept union domination. It is a simple illusion to think that unionization could ever increase the welfare of all workers simultaneously, when it necessarily aggravates the conflicts of interest that exist among different groups of workers.

Monopoly’s Losers

A pro-union strategy is still more disastrous when its so-called “incidental effects” are taken into account. It is well-established in economic theory that the benefits to any monopolist do not come from increased productivity, but from its ability to raise price above marginal cost, such that some beneficial transactions that would have taken place in competitive markets are eliminated to preserve monopoly power. That simple insight means the gains to the labor union and its members come both at the expense of excluded workers, and from the squeeze put on shareholders, suppliers, and customers. Even if these were just dollar-for-dollar trade-offs, it is questionable as a social matter whether we should favor policies that redistribute wealth towards union members and away from lower-income workers. But there is no reason to dwell on these niceties, because the legislative scheme here is not zero-sum; it is negative sum. The union members gain less than other members of society lose, as in all cases of monopoly. And every one has to bear the high administrative costs to keep this system in place. Indeed, the situation is still worse because the union is not a unitary monopolist like a well-structured corporation, but a loose confederation of individuals who have typical conflicts among themselves. Unlike a corporation whose shareholders are in rough alignment, there are constant struggles to divide the gains from monopolization among different classes of workers. Thus, some select group may have craft skills that command greater wages than the bulk of the rank and file; and older workers are much more interested in funding pension plans than preserving jobs for younger workers. Union leaders therefore must engineer delicate internal transfers within their ranks to keep their winning coalition alive, so that the cartel-arrangement (like OPEC) that ensues operates like an inefficient monopolist, with still greater social losses.

What then is a possible justification for these social losses? One older rationale that seems to be making something of a comeback today is that the unions are needed to supply countervailing power to the superior economic strength of management in all labor negotiations. But the point is misguided in all particulars. First, many firms, even very large ones, operate in competitive markets, and thus there is no monopoly power to combat. The union thus injects an element of monopoly into an otherwise competitive market. Such a union might in certain particular cases—mining is the obvious example—be able to extract site-specific Ricardian rents—which are easiest to do because no mine has a credible alternative use. But that fight over rents only diminishes social welfare, which is why a contract with workers that prevents them from seeking to gain those rents—the “yellow dog contract” so-called—makes perfectly good economic sense. Second, even where the management side has some monopoly power, the creation of a counter-monopoly force increases bargaining costs, as well as the risk of strike or lock-out, closure or movement out of the jurisdiction, in the competition for rents, which in turn reduces social welfare.

It is precisely their need to have a reliable source of monopoly profits that make union political activities even more dangerous. Union power critically depends on the erection (usually with the cooperation of employers) of strong barriers to entry, often in the form of tariff protections against international competition, and land use restrictions against local competition. Hence, the flattening of international trade barriers, and the general increase in domestic competitiveness reduces the level of potential gains available from unionization, until (to the regret of unions everywhere) they fall below the administrative costs of keeping this union structure together. At this point, we should expect the decline in the union sector, which in the private sector has gone about 35 percent of the market in 1954 to around 6 percent today. That decline in membership is not a function of the change in basic labor law, which has remained roughly constant since the adoption in 1947 of the Taft-Hartley Act. It is a function of the simpler fact that unions do not make sense for their potential members.

Membership does not come cheap, either in terms of dollars paid or work contributions expected. Yet when the decline of large assembly line plants is coupled with the higher mobility of labor, workers rightly balk at having to make short-term sacrifices that work for the benefit of some group of unidentified successors, if they work at all. The highly competitive labor environment makes it difficult for workers to mount strikes. That in turn leaves union leaders acutely aware that if their demands are too high, layoffs and even the shuttering of factories can follow. It is no wonder that nonunionized plants run by foreign automakers in the South resist well-orchestrated pleas for recognition from the United Workers. The wage premium that is promised is precarious because workers need only recall what has happened in UAW plants in the Midwest to realize that those promised gains are not sustainable. Faced with these many obstacles, it becomes hard to put forward any coherent case that explains why workers need unions to protect themselves, when that purported alliance is so fraught with risk to potential union members. The situation, moreover, is not solved by envisioning an overall system where unions don’t have to face the competition of pesky nonunion rivals. There is no question that this mandated unionization everywhere will eliminate the cost advantages, both in terms of wages and work conditions, that nonunionized firms have over their unionized rivals. But across the board, the new arrangements will be less efficient than those that exist otherwise, so that total output and long-term growth will decline. And with these new found rigidities, workers trapped in one firm will find it difficult to find many unionized or many nonunionized employers to which they can turn. And the universe of customers, suppliers and shareholders will suffer as well.

Finding a Voice

In response to these arguments, it is commonly lamented that individual workers have no effective voice to deal with a firm unless there is a union to represent them. To the extent that communications between the workers and the firm are frustrated by the want of any intermediary, there are two ways to handle the question. Under the current union law, the union gets to speak for the workers but at a high price: the workers are not allowed to speak for themselves, and are, in both the public and private sectors, required to accept one-size-fits all arrangements.

One area where this really matters is wages, given the common situation where high-wage earners (e.g. STEM teachers) and low wages teachers (social sciences and English) are in the same unit, for which a single, uniform pay scale applies. Even routine matters of administration quickly become legal minefields. Thus if an employer approaches its workers directly to ask what kind of equipment, work spaces, pensions, health plans, or vacations they prefer, it will face an unfair labor practice charge given the union’s status as the exclusive bargaining agent. In these cases, it thus becomes risky for a worker to speak out against a union position, so that the union structure places barriers to communications between the two sides.

The point here is exceptionally important in whenever changes in technology or market conditions require a fundamental correction in business direction while the existing collective bargaining agreement is still in place. The unionized firm has to endure a steady stream of major renegotiation risks, where the union will take the position that the firm can have its way on some key issue only if it makes some collateral concession to the union. This loss of speed to meet the threat could easily result in the loss of business opportunities, hurting both the firm and its workers. That outcome need not happen in all cases, for surely some unions are savvy enough to encourage the speedy conclusion of these negotiations. But even the best unions will not do as well as those firms that can act unilaterally—knowing full well that by undercutting the wages and benefits for current workers, they could spur a march to the exit, coupled with difficulties in recruiting new workers in what would be, after all a competitive market. It follows that the firm for its own survival must develop good communications with its workers, and meet their concerns and objections to maintain morale and prevent defection from the ranks.

To meet this goal, sensible managers try to develop good working relationships with workers’ individual matters such as leave time and vacation days. But in part the response has to be institutional, whereby the firm seeks to empower certain workers to represent the group on matters of general importance to the overall business plan of the firm. The suggestion box is one time honored way to deal with this problem. But to achieve a more comprehensive system of review, many employers organize workers committees to address key common issues. Those committees often become a company union organized by the firm itself. This term invokes gales of hostility from union representatives. Union hostility to these arrangements is there for good reason. It is not that these company unions are shams and useless. If they were, they would gain no traction with workers. It is that they work all too well, because they give the company vital information about worker preferences that cannot be turned against it in a collective bargaining negotiations, where knowledge of the potential profitability and structure of the firm can be used against the firm.

The simple point here is that an adverse union has two constraints. Within limits, it wants higher output, which is all to the good. But at the same time, it wants a larger share of whatever pie is created. The company union does not have that conflict of interest because it can neither organize negotiations nor call strikes. Hence the company union will in general be a more efficient way to share information than could ever happen with an adversarial union. It is no surprise, then, that Section 8(a)(2) of the NLRA bans company unions, precisely to disarm the firm from counter-strategies that thwart independent unions. As matters now stand, virtually all nonunion firms have some committee of this sort to close the information gap. And true to form, the moment an organizing drive appears, management under the NLRA is bound to shut this operation down.

Escaping Old Predictions

In the private sphere, therefore, it is odd to claim that unions can protect workers when if they overstep their limitations their actions can lead to a loss of jobs. It is worth commenting briefly about the role of unions in the public sphere, where they are far more influential than in the private one. The NLRA never gave organization rights to public unions, but this was accomplished first in January 1962 by Executive Order 10988, “Employee Management Cooperation in the Federal Sector,” and then by a myriad of state statutes that provided the same protection for public workers, including the Illinois Public Labor Relations Act (IPLRA), which give the selected union exclusive powers of representation. The original NLRA contained no such provisions because of the fear that public unions could prove too powerful against indifferent political officials. Unlike public firms, government officials do not have strict profit and loss responsibility, and hence could be able to giveaway too much to unions. In addition, they can exert far greater power than private sector unions, because there is no credible private alternatives to prison guards and public school teachers—which is why unions are so opposed to charter schools, and why they contribute so much to key electoral campaigns.

Those fears proved true with the massive rise of public unions, and the IPLRA was then subject to a judicial attack in Janus v AFSCME (2018) which by a 5-to-4 vote held that individual workers on First Amendment grounds were entitled to opt out of paying dues to a union whose activities they consistently oppose. The effect of that decision is still uncertain because under the so-called “Hotel California” rules, whose endless restrictions on when and how withdrawal may be done have made it difficult for these workers to withdraw from the unions. These conflicts of interest should caution anyone about thinking that all workers are in agreement with the ends of their unions. But in truth a large number of workers do support the union, which points to the simple fact that a public workers strike in an kind of service industry, like transport or education, imposes massive and immediate dislocations on the public at large. No union, or firm, should have that kind of monopoly power on any segment of the economy, which gives it the power to extract premium salary and benefit gains, which in turn can lead with the stroke of a pen to massive financial dislocations in public budgets, as in California and elsewhere.

As against these palpable dangers, just what do the conservative promoters of unions hope to achieve? In his recent book, The Once and Future Worker, Oren Cass laments the state of the American economy that contains “decades of stagnant wages.” At no point does he explain how it is that his supposed labor reforms would work, and why they would be any better than the generations tried before. And beyond the total muddiness as to means is the confusion over ends. At one level, this claim has got to be wrong, for as Phil Gramm and John Early have argued, it is easy to lowball the measures of improvement, by refusing to take into account inflation, and by ignoring new products and quality changes in older ones, in making these calculations. It is also clear that, before the coronavirus hit, the claims for doom and gloom for the labor market that were so justified in the Obama age, were quickly becoming a thing of the past, with rising demand for labor at the bottom of the pool, owing in part to the laxer enforcement of the various employment laws, which in spite of their differences all share a common feature. A regulation or tax hits hardest at the bottom, because, even if that tax or regulation increases with salaries, it does so more slowly than the salary itself. Hence there is a disproportionate impact of taxes and regulations on the bottom of the income scale. Conversely as the burdens, both explicit and implicit get smaller, the wage boost at the bottom gets larger. Deregulation, lower tax burdens, more competition, and greater choice lead to productivity growths which is what working people need; not the promise of more unionization that will slow down growth in the future just as it has done in the past.

Note: The author wishes to thank Tiberius Davis, Kenneth Lee, and Matt Pociask of the University of Chicago Law School for their valuable research assistance.