WHAT DO UNIONS REALLY DO?
Tyler, Gus
What do unions do? They cause inflation, unemployment, low productivity, and inequality. Hence, what they do is bad. How? The high wages that unions impose cause inflation. The same high wages...
...As labor moved into politics, elected officials occasionally rearranged the national income through legislation that further enlarged aggregate demand...
...To DeLeon, the labor leaders, accumulating tiny incremental gains for the proletariat, were "labor fakirs...
...For employers to put time and money into improving their technology (labor-saving devices, automation, computerization), they must have an incentive...
...But that was not enough...
...To blame labor for inflation is another one of those instances where the victim is accused of the crime—usually by one of the real culprits...
...The minimum-wage and maximum-hour law puts a floor under the earnings of the nonunionized...
...Just about all did better not only for themselves but for the unorganized too, who enjoyed the indirect benefits of unionization...
...The solution: invest the capital overseas—a passing ploy at best until the moment when "overseas" presented the same problem as the home market...
...The workmen desire to get as much, the masters to give as little, as possible...
...All that talk about the high cost of labor serves one purpose: it drowns out any talk about the high cost of capital...
...And to the extent that they succeed in doing so, whether by collective bargaining or political action, unions provide the macrocondition to maximize productivity...
...There was the need for a reservoir of talent in the nation, a pool of trained brains, to do the research, development, application...
...Likewise, unionism, in the first place, recognizes the equality of the worker with the boss—not economically, but as a human being —a concept that is at the core of a free society...
...So, if the question is whether or not unions have made for greater equality or inequality among workers today as contrasted with the days when unions did not exist in any meaningful way, then it must be concluded that unions have promoted inequality— a highly beneficent inequality, by which just about all workers were able to rise from the level of the inert to some level of life, albeit not to the same extent...
...the second behavioral...
...The economic gains are a result of the political change in the occupational power structure...
...the worker can feel like a human being and not just a hunk of fearful flesh...
...When some of them discovered Sir John's prescription, they took the elixir in great gulps—undisturbed by the realization that Keynes had concocted the medicine to aid capitalism, not to abolish it...
...High productivity requires maximum usage of productive facilities...
...And because it is not, the econometric methodology has no way of evaluating the single most important thing that unions do...
...There is a perverse pattern in Burns's description of the differing rates of inflation in the different sectors of the economy...
...Adam Smith knew about this too...
...On equality: "On the basis of the new empirical research, it appears that trade unionism in the United States reduces inequality by about 3 percent...
...Second, to compete with the union employers for workers, nonunion employers had to offer comparable wages and conditions...
...Inflation THERE IS A DOUBLE ASSUMPTION underlying the "received maxim" that high wages are the main cause of inflation...
...Arthur F. Burns, then running the Federal Reserve Board, came to the same conclusion as Smith —although adjusting the "conspiracy" theory to the more subtle style of our modern economy...
...On productivity: "The new quantitative studies indicate that productivity is generally higher in unionized establishments than in otherwise comparable establishments that are nonunion...
...But for the economy as a whole, Uncle Sam is still the front-runner...
...Both assumptions are invalid...
...Very shortly, we will address ourselves to the historic role of unions in raising productivity—a sadly neglected subject...
...As Adam Smith would have suggested: where it was easy to conspire they did so...
...Reform," said DeLeon, "is chloroform...
...This description of the union as a malevolent creature, a "special interest" serving a greedy few at the expense of the rest of society, is not simply the stock-in-trade of some politicians but has also become a kind of professorial pap...
...where there is concentration of ownership (Smith's "conspiracy"), inflation runs rampant...
...Unions liberated nonunion workers, along with dues-paying members, from the iron cage...
...He was writing in pre-Chartist England, before the common people had the vote...
...Workers were viewed as workers—not consumers...
...they also have income from oil sold here...
...When the economy goes slack, productivity falls because there is, of necessity, much idle manpower at all levels, especially at the supervisory and maintenance level...
...Meanwhile, in the less concentrated industries, such as processed foods, skins, leathers and hides, and textile products and apparel, price changes were below average, at about 2 percent...
...The "ism" needs high wages...
...Smith's "behavioral" argument was his observation that "people of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices...
...First, the cost is added directly to price...
...The "empirical" evidence, as gathered by econometricians and processed by their cool computers, is so abundant at the moment that the various conclusions about the antisocial impact of unions is, by now, almost a "given...
...In that context the Medoff-Freeman book would be a solid tile in a larger mosaic...
...On inflation: "There is no evidence that union wage gains are a major factor in the inflation of the 1970s...
...In plain language, the average worker produces more and ends up with less...
...But it is heartening to know that people who have access to a big computer can do regression analysis, have access to millions of pieces of data, and devote themselves to a project for ten years have concluded from "quantitative studies" that unions are not the root of our economic ills...
...Burns spoke out of frustration bordering on fury in the 1970s, when he found that his efforts to check inflation by high interest rates and massive dosages of unemployment were not slowing price escalation...
...Equality ONE CAN ASSERT, with minimal research, that there was greater equality in the preunion era: everybody got "starvation wages...
...Masters are always and everywhere," he wrote, "in a tacit, but constant and uniform combination, not to raise the wages above their natural level...
...To ask the question in this way, of course, is to answer it...
...Obviously, the inclusion of executive salaries with all other "wages and salaries" totally overstates the amount going to run-of-the-mill employees...
...Yet, irony of ironies, high wages are exactly what capitalists don't want...
...What need to introduce expensive machinery when labor is so cheap...
...And they display the required diligence: they * Richard B. Freeman and James L. Medoff, What Do Unions Do...
...In more formal terms, if productivity increases as wages increase, prices will remain constant...
...in the capital-intensive sector, where wages are a low percentage of unit costs, the inflation rate is high...
...meanwhile, the cost of land and financing has multiplied several times over...
...The former are disposed to combine in order to raise wages, the latter in order to lower the wages of labor...
...New York: Basic Books, 1984...
...Fortunately, they write in comprehensible English...
...But such findings, though worthwhile, don't disclose labor's true impact on productivity, namely, the historic dynamics emanating from the labor movement's persistent push to achieve high wages, widespread education, and full employment— the mainstays of progress in productivity...
...The labor content in a gallon of gasoline is several pennies: the unconscionable rise in the price of oil was the work of OPEC—not of any union...
...To Adam Smith, the "natural rate" was determined basically, with slight variations, by the "iron law of wages...
...By dividing the working class into two groups— the unionized with their high wages and the nonunionized with their low wages—unions perpetuate and promote inequality...
...Yet the high cost of capital has been an inflationary factor of 471 major proportions as capital-intensive companies pass on the cost of capital to the consumer...
...transportation equipment up 9 percent...
...The "iron law" had everyone entrapped...
...Productivity FIRST, A FACT: productivity (output per worker hour) in the United States for the economy as a whole is by far the highest in the world...
...While capitalists then were busy digging their own graves, working people were busy infusing the "system" with adrenalin—in the form of "unnatural" wages—namely, wages above what their bosses deemed "natural...
...It was Daniel DeLeon, that dogmatic pure socialist, who saw in this process a betrayal of the revolutionary purpose...
...In addition, executive salaries should be excluded from calculations of the income of workers...
...Wages are but one of the costs of production...
...machinery and equipment up 7 percent...
...For a couple of centuries—actually both before and after Adam Smith (I776)—economists agonized over this all too apparent contradiction...
...Prior to the Emancipation Proclamation, slaves enjoyed "equality," with a few favorable exceptions for domestics and other "privileged" few...
...The skills of the historian, the macroeconomist, and the political scientist are needed to present a fuller answer to the question: What Do Unions Do...
...They see high wages as cutting into their profits and they see high employment—a tight labor market—as the cause of high wages...
...the "ist" wants low wages...
...But the great contribution of unions to the democratic ideal has not been quantitative but qualitative...
...They prefer—indeed, demand—a loose labor market and low wages...
...George Hatsopoulos, chairman of the high-tech Thermo Electron Corporation and a director of the Federal Reserve Bank of Boston, writes that "since 1973, the cost of capital services has increased relative to the cost of labor by more than 20 percent...
...The masters must, "upon all ordinary occasions, have the advantage in the dispute and force the other into a compliance with their terms...
...Income should not be limited to the "personal" income of American residents...
...Yet labor costs are a minor factor in all four of these areas...
...and so they made a market for the market economy...
...Indeed, productivity varies from quarter to quarter and sometimes from month to month, often quite dramatically—a phenomenon that cannot be explained by changes in worker traits or in technology, for neither of these leaps up and down in such short time spans...
...has been able to achieve its high productivity (output per worker hour) because it has historically been a high-wage country, thanks in no small degree to militant unions...
...This insistence on the part of the capitalist to keep wages down to as low a level as possible was noted centuries ago by Adam Smith himself...
...In their work on unions, Medoff and Freeman do a yeomanlike job with their econometric tools...
...Way back in 1776, Adam Smith attributed this fallacy to employers who wanted to blame high prices on wages rather than on other factors—like their own profits: In reality [Smith wrote], high profits tend much more to raise the price of work than high wages...
...And anyone who knows the difference between simple and compound interest knows that the latter adds up many times faster than the former...
...Adam Smith had two reasons—both very commonsensical—for concluding that the mas470 ters rather than the workers were responsible for inflation...
...Historically, in this country, they usually have had a double incentive...
...Second, high wages spurred management to find more efficient methods of production so that the output of the highly paid worker would increase, to hold down unit costs...
...The phrase— wages and salaries—includes the 25 top corporate executives who, in 1983, received more than $2 million apiece in salaries and bonuses...
...Second, another fact: The U.S...
...On unemployment: "Unions affect neither the total amount of labor adjustment to the business cycle nor the aggregate level of unemployment...
...But no: worker real wage—disposable income —has fallen steadily in that decade...
...Once the worker is liberated, wins "recognition," has job security, he or she then uses that freedom to do something about wages, hours, working conditions...
...An appropriate parallel is the abolition of black slavery in the United States...
...They say nothing concerning the bad effects of high profits...
...293 pp., $22.95...
...First, by expanding the economy through expanded aggregate demand, the unions created a tighter labor market: this meant that the unorganized could demand more for their labor— union or nonunion...
...Masters too sometimes enter into particular combinations to sink the wages of labor even below this rate...
...Some countries are catching up...
...How come...
...The conclusion is clear: where competition exists in industry, inflation is nearly nonexistent...
...Second, the high cost of capital has curbed productivity because "as capital becomes more costly relative to labor, firms will tend to forgo investments needed to boost labor productivity...
...Third, to ward off unionorganizing drives, employers had to volunteer a reasonable facsimile of union wages, fringes, and so on...
...But Adam Smith had no faith whatever that labor would prevail...
...The rate of inflation in these sectors has been about double that of commodities that were not necessities...
...Proof...
...Our merchants and master-manufacturers complain much of the bad effects of high wages in raising the price...
...These conclusions will be challenged, of course, since it is now empirically proven that computers have social and political biases...
...Left in the hands of the capitalist, capitalism would be starved to death for want of a market...
...In the labor-intensive sector, where wages are a high percentage of unit costs, inflation is low...
...Natural intelligence informs us that unions, 469 by expanding aggregate demand, are the primum mobile of employment...
...He concluded that his enemy was "monopoly," which he described more euphemistically as "concentration": In the concentrated industries [recorded Burns, a Nixon appointee], energy up 11 percent...
...If costs to the society are equated with income, then all income should be included, such as income to government, to corporations, to foreign investors, to oil suppliers and the like, since all these represent costs to consumers...
...where it was difficult to conspire they didn't...
...But when masters attach a percentage to costs to realize their profits, they add to costs at a geometric rate—like "compound interest...
...The first assumption is that wages are the sole or the major cost of production...
...In some sectors, other countries surpass the United States...
...For instance, a breakdown of costs in auto production in Detroit shows about 75 percent going to "fixed costs," which include everything but labor and raw materials...
...indeed, for many of the liberated, liberation at first was a disaster: they no longer had a master who would take care of them because they represented a capital investment...
...But the unions did most for the nonunion worker through legislation, enacted and improved over the years through the efforts of organized labor in politics...
...If all of the foregoing has been more confusing than clarifying, here is a simple test to find out whether labor has been responsible for inflation...
...But not all income is "personal...
...Consider, for instance, each of the ma468 jor questions of unemployment, inflation, productivity, and inequality...
...So, if the worker were getting a fair share of that increased output, he or she should be living about 20 percent better...
...What were the capitalists to do with their capital as they saw their goods turn to glut in a nation where consumption was weak because wages were low...
...Because they are obliged to quantify everything, they must ask questions that have quantitative answers...
...As unions organized to bend or break the "iron law," not all workers moved out of the cage at the same time or at the same speed or to the same degree: some did well and others less well...
...This jump in capital costs is doubly inflationary...
...Unfortunately, the tools are limited...
...This is all spelled out in Chapter Eight of The Wealth of Nations, where Smith points to the superior economic and political power of the masters: they would always hold wages down to the subsistence level...
...Hence unions are bad for most workers and for the society as a whole...
...To make the point again in bold relief: imagine an America where the wage is as low as in present China (16 cents an hour in the apparel industry...
...The common answer to this is that "wages and salaries" make up about 60 percent of all personal income in the United States...
...others are land, building, machinery, raw material, supervisory personnel, profits, interest, taxes...
...As productivity (output per worker hour) has risen, has the real wage (money wage adjusted to inflation and taxes) risen...
...Also, these Four Horsemen of Inflation make up about two-thirds of the budget of the median family and much more of the budget of families below the mid-line...
...It is limited to "personal income...
...This perverse pattern is painfully evident in those sectors of the economy that have been primarily responsible for our recent inflation: fuel, food, housing, and health care...
...and rubber and plastic products up 5 percent...
...He was describing the power of unions in their infancy...
...They are silent with respect to the pernicious effects of their own gains...
...474...
...By such a recalculation, labor's income would be far less than half the income of the country...
...Without such a mass market it would not pay management to make large investments in costly machinery: there wouldn't be enough customers making purchases to recoup the investment and to make a profit...
...nonmetallic minerals up 6 percent...
...Most unfortunately, in a discussion of "equality" as a desirable trait of a social order, the econometricians are contorted by their methodology into asking the wrong question...
...Union work rules interfere with efficiency and productivity...
...The real mushiness is to be found in the kind of income included in the official statistics...
...They present their case with great gobs of data fed into computers programmed for modeling...
...Little labor goes into food, a heavily capital-intensive industry: food prices are high because the government spends billions annually to keep agricultural products off the market in order to maintain high prices...
...the worker can tell her foreman to keep his hands in his pocket and off her butt...
...At GM alone, five executives received bonuses of more than $1 million apiece and 5,800 managers received bonuses averaging more than $35,000 apiece...
...High wages have provided the market and the compulsion to heighten productivity...
...Smith was fundamentally correct, but not quite as correct as he thought...
...This "received maxim" (Adam Smith's phrase) is the stock-in-trade of all those who equate wages with costs...
...If wages double but output doubles, then prices need not rise at all...
...The worker can talk back to the boss without fear of being fired...
...But the maxim is very mushy...
...It did not guarantee that the ex-slaves would enjoy greater economic security or income...
...Workers would be paid just enough to keep them alive and to raise another generation of workers who would again be paid just enough to keep them alive et ad infinitum...
...Econometricians will argue over the numbers, but however the numbers are juggled, labor will end up as only a portion of costs, and a relatively small portion at that...
...In judging the role of unions in our society the more crucial question is how workers live today, including those in the least favored positions, as compared with how such workers lived before there were unions—or how they would be living today if unions in America had not so profoundly affected the total economy through collective bargaining and political action...
...Arab sheiks have income from money invested in the United States...
...if their wages are low and unsteady, the market is weak...
...They lifted their wages well above the mystical "natural" level...
...For those who intuitively disagree with these conclusions—or assumptions—but who do not have the time or arcane vocabulary to refute the quantified "findings" of those learned economists, a little book by Richard B. Freeman and James L. Medoff entitled What Do Unions Do?* will come as welcome relief...
...But high productivity requires more than skilled persons at the inventive and operative levels, and more than cleverly designed machines...
...The difference lies in the fact that the labor-intensive sector, with its low capital requirements, is highly competitive while the capital-intensive sector, with its prohibitive capital prerequisites, is highly concentrated...
...In many sectors of the economy, the cost of wages is by far outweighed by the other factors...
...he "earned" more than did 1,300 garment workers, combined...
...Obviously, the differing rates of inflation cannot be traced to labor...
...The first reason was mathematical...
...The authors say that what pap prattling says about unions just ain't so...
...Employment A MARKET ECONOMY—Which capitalism is— requires a market...
...Although there is greater labor input in health care than in the other three sectors, wage increases lag far behind the increased costs of physicians' fees, of sophisticated equipment, and malpractice insurance...
...The same high wages discourage employers from hiring workers, thereby causing unemployment...
...Mathematically, Smith reasoned that when a product goes through stages of production from raw material to finished commodity, wage increases at every stage of production would merely add up to an arithmetic sum— like "simple interest...
...Without them, the market economy is marketless...
...About two centuries later, Dr...
...The unfortunate thing is that academics have so distorted obvious truths that it takes other academics to open a dialogue from which simple verities may once more emerge, verities that can be far better perceived by the application of natural rather than artificial intelligence...
...spent ten years on the research...
...In the building industry, the cost of labor as a percentage of total cost in home-building has been cut in half in the last three decades...
...They multiplied their presence as consumers...
...The zig-zag productivity graph reflects how busy or slow the economy is in the corresponding time period...
...The implication here is that "wages and salaries" must, therefore, make up 60 percent of all costs...
...It is possible for wages to rise and for prices not to rise, even to fall...
...metals and metal products up 8 percent...
...In a 1983 study Dr...
...In the United States, the biggest part of that market, by far, is made up of families that live on wages and salaries...
...Governments have income derived from taxes...
...In short, the high prices of fuel, food, housing, and health care are not logically attributable to the wages of oil workers, farm hands, carpenters, or hospital attendants...
...They complain only of those of other people...
...FREEDOM—like love—is not quantifiable...
...Over the next two centuries, unions broke the iron law of wages...
...And such a pool of skills was available at an early time in the United States because of public schooling at the elementary, secondary, trade, and college levels—a development that was fostered in America from the 1820s down to the present by the active political push of organized labor...
...The worker with a half loaf would never be hungry enough to grab for the whole loaf...
...The workplace is a political entity that can be run dictatorially or democratically, brutally or humanely, through terror or mutual respect...
...Try cutting wages in half and see what your computer tells you about unemployment in America—or any place else that has a market economy...
...Once you know the bent of the electronic brain, you can foretell the result...
...The answer is, no...
...Who would provide the market for mass production...
...First, the relatively high wages in the United States provided a market for mass manufacture with all the savings inherent in large-scale production...
...What unions do above all is to give the worker a voice, a say over his or her own destiny as a worker...
...Again, the parallel with the emancipation of the slaves is appropriate...
...Both authors have the necessary credentials: they are at Harvard...
...472 Maintaining a vigorous overall economy by maintaining adequate buying power is, as we have noted, a prime function of unions...
...One of these, William Anderson, chairman of National Cash Register, headed the list with $13.2 million...
...If their earnings are steady and high, the market is strong...
...These non-duespayers are also the beneficiaries of workers' compensation, unemployment insurance, Social Security, occupational safety and health laws, Medicaid, Medicare, Food Stamps, rent supplements, equal-employment opportunities, low-income housing, the Davis-Bacon Act, and so on...
...Corporations have income that is not necessarily distributed to persons in the form of dividends or interest but is retained in the corporate coffers...
...That is why capitalism— quintessentially a market economy—requires high employment and high wages...
...The important 473 "equality" has been less economic than political...
...Between 1970 and 1980, output per worker hour in the United States rose by about 20 percent...
...Liberation meant, first of all, liberation...
...The fiction that inflation is caused by high wages is not a recent one...
...They did this even before Keynes...
...The real question is not whether some workers who are organized in high-paying trades are living much better than other workers who are unorganized and work in poorly paying trades, although this is a serious matter that deserves the attention of both the labor movement and the total society...
...The second assumption—high wages must mean high prices—is also invalid...
...the second assumption is that a higher wage automatically adds to the cost of production...
...only about 12 percent goes for labor...
...Here is what a good old-fashioned dialectician would call a "contradiction of capitalism...
...After the liberation, inequality set in as some exslaves or their children became undertakers, doctors, and bankers, while others dug ditches or assembled cars...
...Econometric studies that show unionized plants to be more productive than nonunion facilities help to refute the argument that union work rules constrict output...
Vol. 31 • September 1984 • No. 4
