Do Labor Unions Really Raise Wages?
By Walter Block
The US House of Representatives recently passed The Protecting the Right to Organize Act, known as the PRO Act by a 224 to 194 margin.
What are its provisions?
. It would pretty much “cancel” right to work laws now prevailing in 27 different states.
. It would further empower the National Labor Relations Board to exact fines on corporations for so-called “unfair practices.”
. It would require employers to give unions information about their employees’
. It would allow certification via “card check” rather than anonymous vote
. Anything else you can think of that will advantage organized labor is probably in there too.
But do not be afraid, let alone very afraid- at least not yet: it is unlikely in the extreme that this initiative will gather anything like the 60-40 support in the Senate needed to implement it as law.
Although it is never explicitly made clear in the bill, the underlying motivation on the part of its sponsors is to do good: to raise the compensation of American workers and improve working conditions.
This leads to the very important question: do labor unions actually have this effect? At the outset, this would appear to be a silly question. “Of course they do, just look at the statistics,” might be the quick response. And, indeed, unionized workers do earn more compared to those working in similar capacities who are unorganized. But this leaves open the objection that the former are more highly skilled than the latter, and that this is the source of the wage differential.
These deliberations lead in turn to the question of what determines wage levels in the first place. The theory seemingly animating the supporters of the PRO Act is, wait for it- employer generosity. Or, rather, the lack of it. The owners of firms, it is contended, are notoriously stingy when it comes to compensation. They need to be “poked” a bit into doing the right thing, and a strong labor union is precisely the remedy.
But does LeBron James really earn an astronomical salary due to the big-heartedness of the Los Angeles Lakers? Does the person who asks if you “want fries with that?” impecunious because his employer is parsimonious?
Of course not. Instead, productivity is the answer! This basketball star can sell tickets to watch him play, and attract advertisers who want to sell their wares. He adds a gargantuan amount to the bottom line of his employer. The burger seller adds value, too, but on a much more modest scale.
Economists have a simple proof that wages tend to equal productivity (actually, discounted marginal revenue product, but we can leave these complications to another day). Suppose someone adds $20 per hour to the bottom line, but is earning only $15. The employer is earning $5 per hour surplus from his labor (the Marxists would call this “exploitation”), but this is not sustainable. Someone else will offer $15.25 or so, and the bidding war for his services will take place. It will continue until $20 is reached (ignoring the transactions costs of finding him, convincing him to switch jobs, etc.) Nor can a wage of $22 per hour be sustained. When multiplied over numerous workers, it will spell bankruptcy for the hiring firm (assuming no bailouts).
So, does organized labor raise or lower the productivity of the rank and file? It seems difficult to adopt the former viewpoint. For the union will divert the workers’ focus on the job with organizing; there will be internecine fights between different labor organizations; there will be political proselytizing; there will be “make work” schemes designed to increase the demand for this factor of production. See the Sopranos television series for “no show” jobs. And above and beyond all of these everyday considerations, there will be walkouts, strikes, demonstrations for more and “better” labor legislation, all at the expense of productivity. There will be “runaway” shops, which seek greener pastures, leaving in their wake “rust belts.”
No, labor unions do not raise productivity; the very opposite is the case. They reduce real wages; they do not increase them.