Sunday, August 1, 2010

Becker, Posner Give Unions a Much-Deserved Beatdown

In their latest blog series, U. Chicago's Gary Becker and Richard Posner explain the effect of American labor unions on the US economy, and boy is it ugly.  Be sure to read the both entries in full - they're well worth your time.  But here are a few of my favorite excerpts.  First up is Becker:
Are the Democratic-controlled Congress and President Obama very much pro union? Unquestionably. Do the economic effects of unions on the welfare of workers as a whole justify that union bias? No. Has their pro-union orientation seriously retarded the recovery from the recession? Probably. ...

An important example this past week offers another illustration of the pro union orientation. For the first time the US has cited for labor violations a country, Guatemala, that is a free trade partner with the US. That the American government has the presumption to interfere in the labor policies of another country is disturbing in itself. All commentators agree, however, that it was done at the urging of American unions. This was likely an attempt to reduce the competition of goods and services from Guatemala and especially from other free trade partners-such as Mexico-for goods made by unionized American companies....

Economists distinguish competitive from monopoly unions. A competitive union system, like Japan’s, has unions at companies when the employees of these companies prefer to bargain collectively. However, competitive unionism does not allow a single union to control the majority of companies in the same industry, which is monopoly unionism. The US typically has monopoly unions, such as the steelworkers union, autoworkers union, or service workers union, but a long time ago the Clayton Act of 1914 explicitly exempted unions from anti-trust laws under most circumstances.

Monopoly unions do tend to raise the earnings and fringe benefits of workers in the industries where they exist. This is seen from the ridiculously high fringe benefits that the United Auto Workers unions squeezed out of American auto companies during the days when they were profitable but not well managed. Higher union earnings come partly at the expense of the profits of the industries unionized, but also at the expense of lower employment than would have occurred with more competitive wages and other benefits. The prospective employees priced out of jobs in unionized sectors seek employment in other sectors, which lowers the earnings of workers in these latter sectors. The net effect is a misallocation of labor compared to an efficient allocation, and possibly even a reduction in the income received by workers as a whole, including workers in the non-union sectors.
Now Posner:
Unions are weak in the private sector; only about 7 percent of private workers are unionized. But unions are powerful in the public sector—about 30 percent of public employees are unionized—and have contributed to the high wages of such employees. By swelling the labor costs of cities and states, these high wages have forced them to raise taxes and cut benefits in the midst of the most severe economic downturn since the Great Depression.

Even in the private sector, though unions are weak, employers are concerned that the pro-union policies of the Obama Administration will result in greater unionization and hence higher labor costs. This concern is a source of uncertainty, which slows economic activity. Under uncertainty consumers increase their savings (much of which may not get invested productively, at least without a considerable lag) and producers increase their cash balances....

The Administration has... under union pressure dragged on signing free-trade agreements that have been negotiated with South Korea and other countries. This would not retard our economic recovery if the net effect were to increase our exports relative to our imports, for exports increase domestic production and hence employment and imports tend to reduce it. But because of retaliation by foreign countries that want to increase their own exports and reduce imports, the effect of the Administration’s foot dragging is simply to reduce the efficiency of the U.S. economy. Also allegedly under union pressure, the Administration delayed suspending (as it is empowered to do in an emergency) the Jones Act, which protects the U.S. maritime industry from foreign competition, to enable foreign vessels to assist in combating the oil leak in the Gulf of Mexico.

Worse, the Administration has required that all projects funded by the $787 (now $862) billion stimulus enacted in February 2009 comply with the Davis-Bacon Act, which requires payment of union wages. Recently the President signed an executive order requesting all federal agencies to consider requiring all federal construction contractors to sign labor agreements. And he has said silly things like “labor is not part of the problem. Labor is part of the solution.” These are just words, but they worry business by creating the impression that the President is hostile to it, and they increase the uncertainty of an already uncertain business environment. The pro-union policies of the Roosevelt Administration, notably the National Labor Relations Act (the Wagner Act), are generally believed to have made the Great Depression worse than it would have been without those policies. The Obama Administration’s pro-union policies will in all likelihood worsen our current economic situation.
I'd only add that, when discussing union influence on the Stimulus*, Posner also should have mentioned the union-backed "Buy American" provisions, which prohibit the use of (most) imported materials for Stimulus*-funded projects.  Buy American, of course, has been a debacle for a load of previously-discussed reasons, but here I'd just add that, like the Davis-Bacon rules, Buy American has raised project costs by limiting (or eliminating) competition among materials suppliers (thus leading to higher steel, lumber, fiber optic, etc. prices).  In short, the American taxpayer gets less bang (e.g., bridges, roads, rail lines, etc.) for his taxpayer buck.  Of course, I'd prefer that our government not subsidize any of this stuff, but if we're going to do it, we might as well do it as efficiently and cost-effectively as possible.

(I know, I know, stop laughing.)

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