August 1, 2010
Unions and the Obama Administration
Unions and the Obama Administration-Becker
Are the Democratic-controlled Congress and President Obama very much pro union? Unquestionably. Do the economic effects of unions on the welfare of workers as a whole justify that union bias? No. Has their pro-union orientation seriously retarded the recovery from the recession? Probably. The following discussion tries to justify these answers.
The pro-union orientation has been demonstrated in many ways. Posner gives a few examples, and I will add some more. The automobile industry would not have been bailed out so generously were it not for the political power of the United Auto Workers. The alternative would likely have been bankruptcy without a federal bailout, which I favored. Bankruptcy without government involvement would have cut health and other fringe benefits of autoworkers more sharply, and might have led to more plant closings in the industry. It would also, however, have led to a more robust recovery of the surviving American auto companies, and possibly even in the longer run raised employment in auto plants located not in the South because wages and fringe benefits would then have been lower at these plants.
An important example this past week offers another illustration of the pro union orientation. For the first time the US has cited for labor violations a country, Guatemala, that is a free trade partner with the US. That the American government has the presumption to interfere in the labor policies of another country is disturbing in itself. All commentators agree, however, that it was done at the urging of American unions. This was likely an attempt to reduce the competition of goods and services from Guatemala and especially from other free trade partners-such as Mexico-for goods made by unionized American companies.
Congress tried to pass, and President Obama supported, The Employee Free Choice Act to eliminate private elections for union certification. Fortunately, enough moderate Democrats and Republicans have been able to beat back these proposals, and they have been shelved, perhaps only temporarily.
Economists distinguish competitive from monopoly unions. A competitive union system, like Japan's, has unions at companies when the employees of these companies prefer to bargain collectively. However, competitive unionism does not allow a single union to control the majority of companies in the same industry, which is monopoly unionism. The US typically has monopoly unions, such as the steelworkers union, autoworkers union, or service workers union, but a long time ago the Clayton Act of 1914 explicitly exempted unions from anti-trust laws under most circumstances.
Monopoly unions do tend to raise the earnings and fringe benefits of workers in the industries where they exist. This is seen from the ridiculously high fringe benefits that the United Auto Workers unions squeezed out of American auto companies during the days when they were profitable but not well managed. Higher union earnings come partly at the expense of the profits of the industries unionized, but also at the expense of lower employment than would have occurred with more competitive wages and other benefits. The prospective employees priced out of jobs in unionized sectors seek employment in other sectors, which lowers the earnings of workers in these latter sectors. The net effect is a misallocation of labor compared to an efficient allocation, and possibly even a reduction in the income received by workers as a whole, including workers in the non-union sectors.
During this recession, wages did fall for many workers, but mainly among non-union workers. A telling example is what happened at many state and local governments that are in serious fiscal difficulties. Since wages of their union workers have been set by contract, they were forced primarily to cut wages of administrative staff and other non-union employees. For example, the state of Illinois has the largest fiscal deficit as a percent of its budget of any state. It required many of its high level non-union employees to take 24 unpaid leave days, or about a 9% cut in their salaries, since the state government cannot touch the wages of their many unionized employees.
As Posner indicates, only about 7% of all non-government American workers are unionized, compared to over 35% of workers at federal, state, and local governments. During the past 40 years, the fraction of unionized civilian workers fell steeply-and not only in the United States- while the unionization of government workers fell only a little. It might seem unlikely that workers which comprise only about15% of the total labor force would have a major effect on the speed of the recovery from the recession.
The real threat to a robust recovery on the labor side has come from employer and entrepreneurial fears that once the economic environment improves, a Democratic Congress and administration will pass pro-union and other pro-worker legislation that will raise the cost of doing business and cut profits. In this way the obvious pro-union-pro-worker bias of the present government has contributed to a slower recovery, especially in labor markets. This helps explain the depressingly slow decline in unemployment rates and in the number of workers who have given up looking for jobs.
Unionism and Economic Recovery—Posner
A frequent and I think sound criticism of the Obama Administration's economic policy is that it supports programs that promote economic recovery from the severe recession that began in December 2007 and programs that retard that recovery, thus sending a mixed signal that by unsettling the business environment retards recovery. This mixed message is no surprise, however, because a President is a politician. Has there ever been a President who consistently pursued sound economic theory? Criticism of politicians must be tempered by recognition of political reality.
You don't have to be a conservative to think it a bad idea to promote unionism in an economy struggling to climb out of a deep economic hole; you can be a Keynesian. A principal goal of unions of course is to raise wages, though in doing so it causes employment to fall by raising the cost of labor relative to the cost of capital. Keynes emphasized (though the point was not original with him) that workers strongly resist cuts in their nominal wages, where "nominal" means the dollar amount of the wages and is contrasted with "real," which means the purchasing power of the wage. In an economic downturn, an employer who thinks it infeasible to reduce the nominal wages of his employees will have to lay off workers so that his costs of production are not excessive in relation to the diminished demand for his product. Therefore the higher the nominal wages of employees, the more unemployment will be generated by an economic downturn. Keynes thought moderate inflation should be part of a strategy of recovery from an economic downturn, because nominal wages tend to be sticky on the upside as well as on the downside (though less so), and so the employer's real wage bill would fall in an inflation, though only initially—until the workers caught on to the fall in the purchasing power of their wages and demanded a raise. (This theory of "profit inflation" is no longer accepted by most economists.)
Against all this it might be argued that if employers cut wages rather than laying off workers, the reduction in wages would reduce the amount of money that the workers could spend on consumption; and economic recovery depends on increased spending on consumption (plus investment). But the stickiness of wages, which makes employers prefer layoffs (with the result in the Great Depression, which involved severe deflation, that many workers who retained their jobs experienced a substantial increase in their real wage), is not primarily a result of unionism, or even of worker pressures. Employers don't like to make steep across-the-board wage reductions in an economic downturn, because the reductions frighten and distract the workers. Layoffs, in contrast, enable reductions in overhead as well as in wages and concentrate unhappiness on former workers (those who are laid off), whereas an across the board wage reduction demoralizes current workers.
Collective bargaining agreements, which are contracts between a union and an employer, usually forbid the employer to reduce wages during the contract's term (usually three years). But the main reason why unions make it more difficult to recover from a recession or depression is that by raising an employer's labor costs they cause the employer to lay off more workers in an economic downturn than if those costs were lower. Think of how the United Auto Workers had swollen the labor costs of the Detroit automakers, so that if the government had not stepped in and bailed out General Motors and Chrysler in the spring of 2009 the loss of employment as a result of the economic downturn would have been catastrophic. It is important to realize, moreover, that higher wages are often not the major source of higher labor costs in unionized firms. Benefits (such as health insurance) are very important—critically so in the collapse of GM and Chysler. And often the major source of higher labor costs in unionized firms is union-negotiated limitations on the employer's control over his labor force: the employer's freedom to assign tasks, to discipline unsatisfactory workers, and to determine the order of layoffs. Unions bureaucratize labor relations.
Almost at the bottom of the economic plunge—July 2009—the federal minimum wage rose, pursuant to legislation passed by the Democratic-controlled Congress in 2007, to $7.25 an hour. That is just the sort of thing one doesn't want to happen in a recession. Unions strongly support the minimum wage in order to reduce competition from nonunion workers, but raising the wage retards recovery by increasing sellers' labor costs.
Unions are weak in the private sector; only about 7 percent of private workers are unionized. But unions are powerful in the public sector—about 30 percent of public employees are unionized—and have contributed to the high wages of such employees. By swelling the labor costs of cities and states, these high wages have forced them to raise taxes and cut benefits in the midst of the most severe economic downturn since the Great Depression.
Even in the private sector, though unions are weak, employers are concerned that the pro-union policies of the Obama Administration will result in greater unionization and hence higher labor costs. This concern is a source of uncertainty, which slows economic activity. Under uncertainty consumers increase their savings (much of which may not get invested productively, at least without a considerable lag) and producers increase their cash balances.
The Administration is not uniformly pro-union. It rightly cares more about education than about unionism, and as a result has clashed with the teachers' unions; this is one of the Administration's most laudable endeavors. It has not pushed hard for (though it supports) enactment of the Employee Free Choice Act, which by abolishing the secret ballot in elections for collective bargaining representative and instituting compulsory arbitration of union-management disputes would significantly shift the balance of power from management to labor. It did condition the bailout of the Detroit automakers on preserving substantial, and completely unjustified, union benefits. The overall terms of the bailout weakened the union, but not as much as if the bankruptcy of the automakers had been allowed to proceed without government intervention.
The Administration has, however, under union pressure dragged on signing free-trade agreements that have been negotiated with South Korea and other countries. This would not retard our economic recovery if the net effect were to increase our exports relative to our imports, for exports increase domestic production and hence employment and imports tend to reduce it. But because of retaliation by foreign countries that want to increase their own exports and reduce imports, the effect of the Administration's foot dragging is simply to reduce the efficiency of the U.S. economy. Also allegedly under union pressure, the Administration delayed suspending (as it is empowered to do in an emergency) the Jones Act, which protects the U.S. maritime industry from foreign competition, to enable foreign vessels to assist in combating the oil leak in the Gulf of Mexico.
Worse, the Administration has required that all projects funded by the $787 (now $862) billion stimulus enacted in February 2009 comply with the Davis-Bacon Act, which requires payment of union wages. Recently the President signed an executive order requesting all federal agencies to consider requiring all federal construction contractors to sign labor agreements. And he has said silly things like "labor is not part of the problem. Labor is part of the solution." These are just words, but they worry business by creating the impression that the President is hostile to it, and they increase the uncertainty of an already uncertain business environment. The pro-union policies of the Roosevelt Administration, notably the National Labor Relations Act (the Wagner Act), are generally believed to have made the Great Depression worse than it would have been without those policies. The Obama Administration's pro-union policies will in all likelihood worsen our current economic situation.