Unions:
Social Benefactors or Gangs of Thugs?
DIGG THIS
Editor’s
Note: This debate over unions and wages took place in the pages
of the Maroon, the student newspaper of Loyola University
New Orleans between Walter Block of the economics department and
Boyd Blundell, of the religion department. This debate is in five
parts. The first four appeared in Maroon as follows: Block
on 9/8/06,
Blundell on 9/15/06,
Block on 9/22/06
and Blundell on 10/6/06.
The Maroon declined to publish Block’s follow up reply, but
we include this as the fifth entry in the debate, which appears
below. The sixth part of the series is the debate that took place
between Walter Block and Fr. David Boileau on this very topic. This
can be accessed here.
Newspaper coverage in the Maroon of this Block-Boileau debate
is shown below as part six, and can also be found here.
Part I
Unions
don't guarantee fair Employee Wages
Walter Block
9/8/06
According to
some, the reason we need unions is because without them employers
would grind employees into the ground. Were organized labor to disappear,
wages would plummet; workers would have to work on Sundays, tip
their hat to their bosses and suffer all sorts of other indignities
– including losing virtually all improvements in working conditions
made over the last century.
This is all
wrong. Wages and working conditions aren't set by firms. Rather,
they depend upon the productivity of labor. This can be defined
as the extra amount of revenue brought in by adding one more person
to the payroll. For example, if there were 1,000 workers creating
an item that sold for X dollars and then the 1,001st employee came
on board and the firm's sales rose to $X + $7, then the marginal
revenue productivity of the last person hired would be $7 per hour.
Wages can't
(long be) higher than this amount, or the company will lose money
on every worker it hires. For example, if compensation is $10, and
revenue taken in due to the efforts of the worker is $7, then the
firm loses $3 every hour the man is on the shop floor.
On the other
hand, a situation can't long endure where wages are lower than this
amount. For example, suppose pay was $2 per hour, while productivity
remained at the $7 level we are considering. Then, the employer
would earn a pure profit of $5 every hour. This can't last. Other
companies would have incentive to hire such a worker away from his
employer. Assuming that the productivity of the latter would be
the same $7 everywhere, a competitor could offer, say, $2.25. This
would be a substantial increase over and above the present salary
of $2 and yet would allow the newcomer to earn a profit of $7 –
$2.25 = $4.75. But if this would work, so would a bid of $2.50,
$2.75, $3.00, etc. Where would this process end? As near to $7 as
allowed by the costs of finding such "underpaid" workers and convincing
them to switch jobs for higher pay. This doesn't mean that under
free enterprise there will be no deviations from this amount. But
there is an inexorable tendency for wages to continually move in
the direction of this equilibration.
If wages were
really set by employers, why is it that employees such as Shaquille
O'Neal, Brad Pitt and Brittney Spears all earn mega bucks? Generosity?
No, the reason they do is because their productivity (ability to
fill seats in sports arenas, movie theaters, concerts) is very high.
If their present employers did not pay them in accordance with productivity
others would gladly jump in and do so.
When unions
artificially boost wages above this stipulated $7 productivity,
they look good in the short run. But in the long run they create
business failures and rust belts. It's impossible for any substantial
length of time to maintain wages above productivity levels.
What determines
the level of productivity and hence the wages? This is based on
how hard and how intelligently people work and the amount and sophistication
of the tools and capital equipment they are given by their employer
to work with. This, in turn, depends upon how much saving occurred
in the previous periods and even before that, how economically free
and law abiding is the populace. The more reliance on private property
rights and free enterprise, other things equal, the better in this
regard.
If organized
labor is really the only institution that stands between the workingman
and abject poverty, how is it that real wages have been increasing
while the rate of unionization has been declining over the last
half century? Why is it that some industries that have never come
within a million miles of unions (computers, banking, accounting)
pay very high wages, often in excess of that earned by the rank
and file? Given that they are at the mercy of the capitalist pigs,
should they not have been ground into the dust? How can it be that
the south, which is the least unionized part of the country, is
the fastest growing? What accounts for the fact that countries where
western style unionism is all but unknown (Hong Kong, Singapore,
Japan) there are economic powerhouses, with standards of living
envied in many places on the globe?
Walter Block is a professor of business administration and Wirth
chairman of economics.
Part II
Block's
stance on unions not even wrong
Boyd Blundell
9/15/06
In physics,
when a theory fails to be verified in experiments or is found to
have errors, it is considered wrong. But if the theory is so incoherent,
so disconnected from reality that no sense can be made of it, physicists
say that it is not even wrong. Such a theory doesn't deserve to
be judged alongside real theories.
Walter Block's
column last week on unions and wages is not even wrong.
The essay has
more fundamental errors than paragraphs, so only the most offensive
can be addressed. The first paragraph sets up a strawman, the mysterious
"some" who think that were unions to disappear, working conditions
would revert to the horrors of the 19th century industrial factories.
Let's be clear:
nobody says this. It's a figment of Block's imagination. The reason
nobody says this is that the gains in working conditions and wages
that were made by unions have now been codified in law. It is the
laws that guarantee basic workplace safety, minimum wages and so
on. Where these laws vary, so do working conditions.
The one thing
Block's "some" do in fact say is that wages would drop if unions
disappeared. He thinks this is all wrong, that there is an "inexorable
tendency" toward an equilibrium between wages and productivity.
He argues that a situation in which a worker is paid $5 an hour
less than his productivity "can't last," because such a productive
worker could be hired away.
Now it pains
me to have to instruct the eminent Dr. Block on such a basic fact
of economics, but wages are driven primarily by bargaining power
as dictated by supply and demand; productivity is virtually irrelevant
(except as a soft ceiling). If an owner needs five workers but there
are five hundred workers who need work, the owner will offer the
lowest possible wages needed to attract five suitable workers in
order to maximize profits. The more workers available, the lower
that wage will be. If there are more workers than work, wages tend
to go down; more work than workers, wages tend to go up.
What unions
provide in all this is collective bargaining. Workers, especially
lower skilled workers, generally need their jobs more than the company
needs them, so in negotiating wages and benefits, the company has
more leverage. Companies can, and do, punish individuals who ask
for wage and workplace improvements, which keeps wages down. But
if the workers bargain collectively, they gain leverage, because
the company can ill afford to lose all of them at once. The more
leverage the workers gain, the better they can do in the free negotiation
of contracts. It's called capitalism.
Block's citation
of stars like Shaq and Brad Pitt, who are in no way representative,
only goes to prove this. Shaq and Pitt have uncommon leverage (their
skills are in great demand), and yet both are still members of powerful
unions (NBAPA and SAG). Why? Because they are aware that their equally
productive forbears were not nearly as well compensated for or secure
in their work because they could not bargain collectively.
Then things
get truly bizarre. Block asks about the decline of union power and
the rise of real wages over the past fifty years, ignoring both
the strengthening of wage laws and the disconnect between the median
real wage and corporate profitability. He then asks (somewhat incoherently)
about how some non-unionized industries nonetheless pay very well.
Answer: the workers' skills are in demand, so they have more leverage.
He then asks
why the South, "the least unionized part of the country, is the
fastest growing?" This is just confusing. The topic under discussion
is wages, which means Block is claiming the South is the fastest
growing in wages. That's simply false. There is actually a decline
in median real wages in the South over the last six years, and the
South is doing worse than any other region. The citing of Singapore
is both false (they do have unions) and misleading (only poor countries
envy it).
The ludicrous
denial of the connection between unions and wages does not merit
the response I've given it. It's like arguing against the Flat-Earth
hypothesis. But some unsuspecting student might be fooled by Dr.
Block's credentials into taking this position seriously. I think
he underestimates our students' intelligence, but we can't risk
it.
Boyd Blundell
is an assistant professor in the religious studies department.
Part III
Blundell's argument misses point
9/22/06
Dear Editor:
I am sorry
to learn that my column "Unions Don't Guarantee Fair Employee Wages,"
in The Maroon's Sept. 8 issue, was "so incoherent" that it didn't
even rise to the level of being wrong, in the view of Professor
Boyd Blundell who responded in the Sept. 15 issues of The Maroon.
This professor
of religious studies charges that I am guilty of a "straw man" argument;
but there are indeed "some" who think that without unions, and the
labor legislation they have engendered, we would now revert back
to the horrors of 19th century industrial factory wages and working
conditions. But many people believe this fallacy. Blundell himself
is a case in point.
He opines that
our relatively high wage levels (including working conditions, safety,
etc.), are guaranteed by being codified in law. If so, why do not
the governments of economically backward countries such as North
Korea, Cuba, Chad, etc., immediately place laws on their books ensuring
the same kind of benefits? Is it really so "incoherent" to claim
they cannot do so since real wage levels stem not from government
edict but rather from how hard and smart employees work, and with
the cooperation of how much and of what quality of capital goods,
and that this in turn depends upon the level of economic freedom
prevailing in a country?
Prof. Blundell
maintains that worker "productivity is virtually irrelevant" to
the setting of labor's compensation. Rather, it is driven by "bargaining
power." But the latter depends almost entirely on the former. He
thinks it is possible that there can be "more workers than work."
But if so there would be either be no scarcity (and hence no need
for any labor in the first place), or, due to government setting
artificially high wages, thus creating this very unemployment. Blundell
is evidently thinking of the Great Depression; but this was caused
by government meddling, not capitalism.
My faculty
colleague misunderstands the institutions of capitalism. Yes, they
are compatible with unionized orchestrated mass quits, or threats
thereof, but certainly not with threatening picketers, beating up
scabs or modern labor legislation.
The stratospheric
salaries paid to Shaq and Brad Pitt are not at all a result of their
union membership. Other equally unionized actors and athletes earn
a fraction of their pay. Presumably, it is "a flat earth hypothesis"
on my part that these stars are very productive and thus can attract
masses of fans, while their lesser-known and lesser-able colleagues
are unable to do so. Computer nerds, bankers, lawyers, stockbrokers
and financial advisors earn high salaries without benefit of unions.
Yes, they have "bargaining power," but this is due to their productivity.
Professor Blundell
concedes that unions are not necessary since numerous industries
without them "pay very well." But this was pretty much my entire
point in the article he so derisively dismisses. He misreads me
as saying that the South is the fastest growing "in wages." I said,
"fastest growing," period. This is because for the past few decades
industries have been running away from the heavily unionized rust
belt Northeast, and bringing their jobs to the South.
Father David
Boileau and I shall be debating these issues on Tuesday, Oct. 3,
in Miller Hall, room 208 (pizza served) during the window. Boyd
and the entire Loyola community are invited to attend.
Sincerely,
Walter
Block, Ph.D.
Part IV
Block's
argument still off point
10/6/06
Dear Editor,
In Greek mythology,
the Hydra was a monster who grew two new heads every time the hero
cut one off. Eventually, no matter how many heads the hero cut off,
he eventually tired, and the Hydra won.
I'm starting
to feel that no matter how many points I refute, new unrelated points
(Chad?!) will appear until I too am exhausted, and Walter Block's
Hydra strategy of argumentation will succeed.
I will try
to conserve my energy by concentrating on the original issue. I
am continuing primarily because I think that this university's commitment
to critical thinking is important, and that it is good for the students
to see this in action.
Professor Block
claims that "the stratospheric salaries paid to Shaq and Brad Pitt
are not at all a result of their union membership," but rather their
productivity. It is worth noting first that the example is not an
honest one. Block was originally making a point about the productivity
and wages of the average "worker" on the "shop floor" and then responded
to an imaginary challenge by appealing to the very top performers
in labor markets that have nothing to do with a shop floor.
So let's talk
about professional athletes. Professional athletes generally have
a unique set of skills that are very valuable to their employers
but are not transferable to other jobs. A quality NFL player now
makes millions of dollars a year. The questions is, what would that
player do if he did not play NFL football? His unique skills do
not make him productive at an elite level in any other job.
This is the
dilemma that faced each player individually before unionization.
The owners employing them knew those players had no options and
thus offered them compensation that was only a small fraction of
their productivity. If a player refused, the owner faced only a
small decline in quality, as there were other players almost as
good with similarly limited options. (This is what is meant by having
"more workers than work.") The player, on the other hand, faced
a massive plunge because he had no other marketable skills. All
the bargaining power was with the owner.
Note that,
unlike Block, I am not simply proposing theories – this is what
actually happened. NFL players were, for example, forbidden to have
agents, required to pay for their own equipment, and not paid when
injured. Nor was this peculiar to football. In the National Hockey
League, injured players were even forced to work the concession
stands and parking lots during games, and the most productive player
in NHL history, Gordie Howe, retired with a pension of $800 a month.
Only when the players in the major professional sports organized
to bargain collectively did any of these conditions begin to change.
Productivity did not change; bargaining power did.
Remarkably
similar stories can be told regarding the relationship between movie
studios and actors, which led to the formation of the Screen Actors
Guild. So Professor Block's central claim that compensation "depends
almost entirely" on productivity is demonstrably false, even using
the unreasonable examples he chose.
If we actually
look at the average worker on the "shop floor," the point only becomes
more painfully obvious. Professor Block wishes a formal debate with
me on this issue, I am, in the spirit of modeling critical thinking,
at his disposal.
Sincerely,
Boyd
Blundell, Ph.D.
Assistant
Professor
Religious
Studies
Part V
Block,
Walter. "Blundellian Economics"
It is a
pleasure to once again dialogue with Professor Boyd Blundell on
the economics of wages, unions, productivity, government intervention
and free enterprise. But why the gratuitous nastiness? First (9/15/06)
he claims my analysis does not even rise to the level of error.
More recently (10/6/06) he charges me with being a Hydra headed
monster. Maybe this is the way they do things over at the department
of religious studies, but I find it non-conducive to the search
for truth, presumably our mutual goal in this endeavor.
The issue
that divides us is how to explain and account for the existing pattern
of wage payments. According to introductory economic textbooks,
this depends, basically, on marginal revenue productivity (MRP):
on how much the additional worker contributes to total productivity.
This sets an upper bound. You can’t get blood out of a stone. If
the workers, together, are paid more than what they all produce,
the employer loses money and must eventually be forced into bankruptcy.
This is
also the lower bound, but with three exceptions. Why will a situation
not long endure where a worker who produces, say, $15 per hour is
nevertheless paid, only, $5, for example? This is because a pure
profit of $10 would be earned by the firm on his labor, and this
profit opportunity would be like a magnet, attracting other companies
to get in on this good thing. How could they do so? Someone else
will offer $5.01, and "exploit" this employee to the tune
of $9.99. But then another will offer $5.02, and profit from his
labor by $9.98. Where will this process end? Ultimately, in equilibrium,
there are zero profits and the wage will thus rise to $15.
But this
assumes, first exception mentioned above, that there are no transactions
costs involved; that workers paid less than their MRP can be found
easily, will change jobs to earn even one cent per hour more, there
are no personal losses from job switching to either side, the wage
contracts can be written costlessly, etc. In the real world, when
the wage in our example gets very close to $15 the bidding will
tail off. For instance, it may not be worthwhile for a company to
search for those with this skill set earning $14.90, unless, perhaps,
there are a lot of them out there. Plus, productivity levels are
continually changing, pay scales are based on estimates, so there
is little reason to expect exactitude. However, if wages and productivity
levels diverge, the forces mentioned above will be brought to bear
to reduce incipient gaps between them, in either direction.
The second
exception is that the MRP of the worker holds true in at least one
other, and presumably many other venues. (The third involves interest
rates and discounting, and is too complicated to be explained given
space limitations.) We implicitly assume that a carpenter, for example,
who can produce $15 worth of services for firm A, can also do so
for B, C, D… Some introductory microeconomic and labor economics
texts, but all intermediate ones, will mention that if this is not
the case the rule of wage equals MRP will have to be modified. Now,
the economic axiom will be that wages will equal productivity in
the second best alternative, or some such. Why? Well, suppose that
the employee can produce $15 for firm A, but, due to some sort of
heterogeneity, can account for only $10 worth of goods at firms
B, C, D… We can readily see why wages in such a case will be bid
up from an initial $5, should they start there, to $10. But no one,
apart from A, would pay him any more, and thus A would have no incentive
to go any higher, to match these other non-forthcoming offers. In
such a case, economic theory maintains that the wage will be indeterminate;
it will lie somewhere between $10 and $15. A MRP of $10 will bring
wages up to that level in equilibrium; the rest will be determined
by Prof. Blundell’s favorite explanation: bargaining power. But
don’t think even in such a case that the wage will not rise above
$10. Remember, firm A benefits by $15 by hiring such a person. If
they pay him $12 for example, they still earn a pure profit of $3.
If they do not hire him at all, they lose this opportunity.
But this
example is extremely rare in the real world. It certainly does not
apply to Shaq and Brad Pitt. There are numerous firms for which
these two can place rear ends in seats at about the same rate. Shaq’s
productivity would be roughly the same for the Knicks, the Lakers
(his previous team), the Hornets or his present team, the Heat.
Apart from that he could play in a European, Asian or South American
league, with only a slight reduction in (second best) MRP, and hence
wages. If unlikely in the extreme, all of these firms tried to pay
Shaq and his fellow athletes far less than that, they could always
borrow a leaf from the old American Basketball Association, and
set up their own new league in competition with the NBA and all
these others.
Let us
get back down out of the stratosphere and into the realm of the
more ordinary worker, the carpenter. Can the union help him raise
his wage above his assumed MRP of $15, and still remain within the
bounds of morality? No. If they were but to limit themselves to
a mass quit, and/or the threat thereof, then the answer would be
Yes. For there are serious transactions costs in replacing, say,
500 workers, all at one fell swoop. There is thus a big of bargaining
power, between, perhaps, the $14.90 the market might otherwise settle
at, and the $15. (This gap would be due to the fact that the process
necessary to raise the wage to the full $15 do not come for free.)
But the
union does more, far more, than restrict itself to mass quit threats.
In addition it attempts to preclude competitors from bidding for
these jobs. It restricts entry by beating up scabs (a blue collar
technique) and getting the government to do their dirty work for
them via labor legislation (white collar criminality). Organized
labor cannot justify these barbaric practices by claiming ownership
over these jobs. Rather, employment is the embodiment of an agreement
between employer and employee. It can be owned by neither.
What of
the argument that productivity plays no role in wage determination
because the process of bidding up wages to productivity levels ($15
in our case) will be short-circuited by unemployment? This is predicated
on the "lump of labor" fallacy. Here, there is only so
much work to be done in an economy, and there are too many willing
workers to do it all. No. Employment opportunities stem from the
primordial fact of scarcity: we always want more than we have. If
I invent a cure for all tooth problems and thereby unemploy the
nation’s dentists I am a hero, not a villain. I free up thousands
of highly skilled people to undertake other tasks that before my
"invention" simply could not be done.
From whence
then springs the unemployment we see in the world, then? It stems
from subsidizing unemployment (the unemployment insurance system)
and from artificially boosting wages above MRP levels: nefarious
minimum wage legislation, which attacks low productivity workers
such as teen aged black males, and, you guessed it, unions which
also compel higher than productivity wages levels, and create havoc
in the form of rust belts.
The third
exception stems from the fact that some employees work in a sector
of the economy producing goods which will not reach the final consumer
for many years (basic or heavy industry), and others create items
which will reach him relatively quickly (for example, retail markets).
If they are to receive the same wages, the marginal productivity
must be higher in the former cases than in the latter, due to discounting.
Thus, the real theory is based not on marginal revenue productivity
(MRP) but rather on discounted marginal revenue productivity
(DMRP). For more on this rather complex issue, which elementary
treatments often, with good reason, ignore, see Block, Walter. 1990.
"The Discounted Marginal Value Product – Marginal Value Product
Controversy: A Note," Review of Austrian Economics, Vol.
IV, pp. 199–207, which is available here.
Prof. Blundell
has expressed interest in a formal debate on these matters. I am
happy to comply. The economics club (motto: free pizza and laissez
faire capitalism) is certainly interested in arranging a meeting
for this purpose.
Part VI
Economics,
ethics debated
Alethia
Picciola
10/6/06
Loyola professors
the Rev. David Boileau, S.J., and Walter Block on Tuesday afternoon
brought to life the university's ideals of thinking critically while
debating acting justly in terms of economic and political policies.
At the economics
club meeting both Block and Boileau agreed that everyone is generous
at heart and that no one really wants people to starve. They had
very different ideas, however, about employee and employer relationships,
as well as how to solve the problem of poverty.
Block, an economics
professor, argued that "unions are just a criminal gang," when on-strike
workers interfere with the rights of potential workers either by
physical violence or by getting laws passed that force their employers
to retain existing workers.
"The only way
we should deal with each other is on a voluntary basis," said Block.
He compared involuntary interaction at its worst with slavery, referring
to the role of a boss who is forced to continually associate with
his existing workers who cannot quit their jobs.
Boileau, who
teaches philosophy, focused more on the ethical side than on economics.
He said that Block's point of view describes a man who is outside
of his environment.
The positive
outcome of unions is that they provide equity and safety to its
employees, traits that don't come cheap, Boileau said.
He also spoke
at length about the concept of corporate responsibility. He said
that while employees have a responsibility to their employer to
produce goods as quickly and efficiently as possible, the employer
has a responsibility to his workers to provide them with living
wages.
Loyola wasn't
off limits as Boileau questioned the ethics of the university.
"We're supposed
to be a social justice institution. We had buses out here (earlier
this year) taking kids to Wal-Mart. Those sandals you got on, buddy,
were built by a Chinese girl for $1 an hour," he said to a student
attending the meeting.
Not having
enough money to pay living wages was a problem for the unions to
solve, said Boileau. "It's an economics problem, it's a political
problem, it's no longer a union problem."
The long-debated
question of who product capital belongs to came up several times
during the debate, as well.
Boileau argued
that the capital belongs not only to the employers, but also to
the employees. If the employee is making the product, the employer
has a moral responsibility to give that employee a living wage,
Boileau said.
Block disagreed,
saying that "any worker can get up on his hind legs and declare
himself a boss," by saving money and hiring an employee. The employers
own the capital because they are the ones making investments and
taking risks on products, Block said.
 Employer
responsibility was also addressed at the debate in addition to owner
responsibilities. "The living wage comes from productivity, not
from the generosity of the employer," Block said.
Wages cannot
go up, though, unless productivity goes up, Block said. One way
to raise productivity is to have high-quality capital equipment,
which, according to Block, is achieved through the freedom of companies
to obtain capital from whomever they can.
November
10, 2006
Dr.
Block [send him mail] is a
professor of economics at Loyola University New Orleans. He is the
author of Defending
the Undefendable. Boyd Blundell [send
him mail] is a professor of religion at Loyola University New
Orleans.
Copyright
© 2006 LewRockwell.com
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