Unions: Social Benefactors or Gangs of Thugs?

by Walter Block by Walter Block


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.