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)
