Wednesday, 20 April 2016

On Trade Unions & How Shockingly Bad They Can Be For Those They Claim To Represent

A friend asked me: are trade unions an essential part of a successful economy, or a hindrance to progress?

Here was my response to him:

I think the importance of unions is overstated - it is not the case that businesses wouldn't have progressed this far without trade unions, although perhaps slightly less quickly in terms of valuable things like workers' rights, health and safety standards, working conditions, and so forth. Unions have done, and still do, some good, under certain conditions, particularly with regard to working conditions.

But I'm afraid they do an awful lot of unintended bad too, and I have a classic real life example of this, as my mother was once in charge of the union in her place of work (a large printing firm). She was a formidable figure in the workplace, so I'm told (I was quite young at the time), and is to this day a lovely, caring lady - but alas, the stories she told me went on to horrify me, as I pointed out to her how bad the union's actions were for the firm (consequently, the firm has now, unsurprisingly, ceased trading).

The main error of reasoning that beset my mother's union (and numerous other unions too) is in mistakenly setting up a stratification between what's good for 'The bosses' and what's good for 'The workers'. The reality is, for well run businesses, what's good for the bosses is also good for the workers, and what's good for the workers is also good for the bosses, because both have vested interest in the firm's success, so should pull in the same direction*.

The story I am now going to tell has very slight embellishments, but not in any way that changes the moral of the story, or the kernel of facts related to the form's trajectory. The firm had 100 machinists operating 10 printing machines. One day the bosses looked to acquire the services of consultants to see if 100 staff was too many. The union kicked up a fuss to the extent that pressure was put on the bosses to withdraw that proposal. The union argued that the consultants were potentially a threat to some of the jobs.

When I said to my mother that if the firm could run with, say, 90 machinists, then it would be better for everyone concerned if they let 10 workers go (even the 10 in the long run), my mother asserted that that would be to fail to protect the jobs of the 10 workers, and that was her union's sole purposes - to stand up for the rights and jobs of the workers.

Here's what she doesn't understand. If her firm has 10 too many workers then it is not operating at maximum efficiency. The 10 superfluous workers are not only not adding value, they are costing the firm money. But what their continual employment in the firm does is make them less competitive, which means that competing firms whose worker to value ratio is more optimal will seize the advantage, most notably in lower prices that they can pass on to their customers. In advantaging rival firms, what my mother's union was doing was disadvantaging her own firm's 100 machinists, and ultimately the whole firm too.

To add to their imprudence, my mother's union thought it would be good to create a rule that said temporary workers had to be offered at least one week's work if they were needed for any length of time. I said "What about if they just needed the temps for a day or two?". To which my mother replied "It wouldn't matter, we'd still keep them for a week. In fact they often had quiet spells that lasted several days with nothing to do".

I replied "Didn't it occur to your union that they were costing the firm unnecessary money, and that it would have been better to have scrapped the one week rule and just have temps in for time they are needed?". "No", she said, "That wouldn't be fair on the temps."

A few years later, my mother's firm went out of business. I certainly wouldn't go so far as to say that it was entirely the union that caused this - there were other factors too. But reading above, I hope you'll be able to agree that they didn't help the firm's finances, and spent a lot of time hindering their ability to be competitive, even though they didn't realise the harm they were doing in stifling efficiency.

The other danger of unions is that they are often trying to get better pay for their employees with scant regard for whether that sum is above the market value or not. If 90 workers have a market worth to a firm of £3500 per week, and their union demands they are paid £4000 per week, then in the long run it is going to be bad for everyone at the firm. Given that employees won't often know the real market value of their labour, it is always likely that they will distort pay levels detrimentally.

The other intangible effect of this is hurting other workers too. To illustrate this in simple terms, suppose there are six groups of workers: printing machinists, retail workers, building trade workers, clothing factory workers, agricultural workers and steel workers. Suppose that after union coercion, the steel workers weren't able to raise their wages, but agricultural workers raised theirs by 10%, clothing factory workers by 15%, building trade workers by 20%, retail workers also by 35%, and printing machinists by 50%.

Given that wage rises are passed on in the shape of price rises for the consumers, let's see how this benefits the groups. With the figures above there has been an average wage increase of 21.6%, so if we assume the same for prices (the figures won't exactly match for reasons too complex to go into here, but they'll be along similar lines) then as you can see, the benefits go to printing machinists and the retail workers, but building trade workers are now slightly worse off, clothing factory workers even more so, agricultural workers worse still, and steel workers worst off of all. Four of the six groups have been made worse off by the aggregate wage rises, and that's not even to mention the increased unemployment that would come from such demands for higher labour, and possible liquidations too if firms have competition from aboard who can be more competitive.

I’m not unsympathetic to many of the ways that union members like my friend are good people to have around, to ensure good, harmonious and safe working environments, because sometimes those voices apply necessary duress on bad senior staff. However, in order to ensure there is no bad to accompany the good work, the main thing that must be avoided at all times is distorting the natural market value of prices – that is, the equilibrium point at which supply is equal to demand. Prices are an incredible thing – they inform us of people’s wants and needs. They are information-carrying, like a democracy. If the price of oranges is more than the price of apples, it tells us all sorts of things about the supply and demand curves of both. If prices of DVDs are low, and getting lower, it tells us that there are newer more popular technologies on which to watch movies. If you find it hard to locate a pay phone on the street, it tells you that demand for them has all but vanished (even most elderly people have a mobile phone now).

As you probably know, a price ceiling is a form of legislation by the government that says the price of x must not go above their ceiling price. Bear in mind that the price of a good is nigh-on optimal if set by market forces. Therefore if the government's price ceiling is lower than the market value, demand will rise and supply will fall, creating a shortage. Rent controls are an example of a price ceiling. Property investors are less likely to invest in housing, which creates a shortage as rents can no long reach their market value.

A price floor is a form of legislation by the government that says the price of x must not go below their floor price. Therefore if the government's price floor is higher than the market value, demand will drop and supply will rise, creating a surplus. The minimum wage is an example of a price floor. Employers are less likely to hire staff, which means an increase in unemployment. If unions find themselves distorting the natural market clearing rate of prices, then they are doing a lot of harm (to everyone) that is probably invisible to them.

* If you're interested, I wrote a nice little ice cream analogy to convey that point, in this blog post)