Unionism and Economic Recovery—Posner

A frequent and I think sound criticism of the Obama Administration’s economic policy is that it supports programs that promote economic recovery from the severe recession that began in December 2007 and programs that retard that recovery, thus sending a mixed signal that by unsettling the business environment retards recovery. This mixed message is no surprise, however, because a President is a politician. Has there ever been a President who consistently pursued sound economic theory? Criticism of politicians must be tempered by recognition of political reality.

 

You don’t have to be a conservative to think it a bad idea to promote unionism in an economy struggling to climb out of a deep economic hole; you can be a Keynesian. A principal goal of unions of course is to raise wages, though in doing so it causes employment to fall by raising the cost of labor relative to the cost of capital. Keynes emphasized (though the point was not original with him) that workers strongly resist cuts in their nominal wages, where “nominal” means the dollar amount of the wages and is contrasted with “real,” which means the purchasing power of the wage. In an economic downturn, an employer who thinks it infeasible to reduce the nominal wages of his employees will have to lay off workers so that his costs of production are not excessive in relation to the diminished demand for his product. Therefore the higher the nominal wages of employees, the more unemployment will be generated by an economic downturn. Keynes thought moderate inflation should be part of a strategy of recovery from an economic downturn, because nominal wages tend to be sticky on the upside as well as on the downside (though less so), and so the employer’s real wage bill would fall in an inflation, though only initially—until the workers caught on to the fall in the purchasing power of their wages and demanded a raise. (This theory of “profit inflation” is no longer accepted by most economists.)

 

Against all this it might be argued that if employers cut wages rather than laying off workers, the reduction in wages would reduce the amount of money that the workers could spend on consumption; and economic recovery depends on increased spending on consumption (plus investment). But the stickiness of wages, which makes employers prefer layoffs (with the result in the Great Depression, which involved severe deflation, that many workers who retained their jobs experienced a substantial increase in their real wage), is not primarily a result of unionism, or even of worker pressures. Employers don’t like to make steep across-the-board wage reductions in an economic downturn, because the reductions frighten and distract the workers. Layoffs, in contrast, enable reductions in overhead as well as in wages and concentrate unhappiness on former workers (those who are laid off), whereas an across the board wage reduction demoralizes current workers.

 

Collective bargaining agreements, which are contracts between a union and an employer, usually forbid the employer to reduce wages during the contract’s term (usually three years). But the main reason why unions make it more difficult to recover from a recession or depression is that by raising an employer’s labor costs they cause the employer to lay off more workers in an economic downturn than if those costs were lower. Think of how the United Auto Workers had swollen the labor costs of the Detroit automakers, so that if the government had not stepped in and bailed out General Motors and Chrysler in the spring of 2009 the loss of employment as a result of the economic downturn would have been catastrophic. It is important to realize, moreover, that higher wages are often not the major source of higher labor costs in unionized firms. Benefits (such as health insurance) are very important—critically so in the collapse of GM and Chysler. And often the major source of higher labor costs in unionized firms is union-negotiated limitations on the employer’s control over his labor force: the employer’s freedom to assign tasks, to discipline unsatisfactory workers, and to determine the order of layoffs. Unions bureaucratize labor relations.

 

Almost at the bottom of the economic plunge—July 2009—the federal minimum wage rose, pursuant to legislation passed by the Democratic-controlled Congress in 2007, to $7.25 an hour. That is just the sort of thing one doesn’t want to happen in a recession. Unions strongly support the minimum wage in order to reduce competition from nonunion workers, but raising the wage retards recovery by increasing sellers’ labor costs.

 

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 is not uniformly pro-union. It rightly cares more about education than about unionism, and as a result has clashed with the teachers’ unions; this is one of the Administration’s most laudable endeavors. It has not pushed hard for (though it supports) enactment of the Employee Free Choice Act, which by abolishing the secret ballot in elections for collective bargaining representative and instituting compulsory arbitration of union-management disputes would significantly shift the balance of power from management to labor. It did condition the bailout of the Detroit automakers on preserving substantial, and completely unjustified, union benefits. The overall terms of the bailout weakened the union, but not as much as if the bankruptcy of the automakers had been allowed to proceed without government intervention.

 

The Administration has, however, 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.

Comments

[IntuitiveEconomics]

In layman’s terms:

A country’s economic prosperity depends on the total aggregate production of its population. That means that in order to increase prosperity a country must produce more. There is no long, even medium term escape from this reality, like there is no escape from the principle of conservation of energy.

That means that people must either work harder or smarter (i.e. produce higher value goods with less work). But working smarter is not panacea. It too requires mental effort or the effort of some other people who will squeeze their brains and discover something that nobody else has discovered before and then commercialize it.

So the bottom line is that any policy that discourages people from working warder or squeezing their brains will degrade the raw productivity potential of a country. Does unionism encourage people to work harder or squeeze their brains to discover and commercialize new things? You decide.

[Hyena]

The Jones Act was inapplicable in the case of the Deepwater Horizon disaster because it covers cabotage and nothing about the clean up involves that.

In any case, unions have probably been a non-issue in the recovery. There is a lack of household liquidity and deep damage to consumer credit quality. I would be surprised if the economic recovery were being hampered by fears of unionization rather than the more pressing and much larger worry that sales will not be adequate to justify further capacity.

All of these worries happen on long time lines while deflationary pressure in the economy undercuts both liquidity and solvency right now. Moreover, many of these worries, especially those favored by conservatives, become threats largely outside of the time horizons of business and certainly beyond the horizons of their creditors re investments.

[Drew]

Unionism and Economic recovery. Probably the first and last time I see those words go hand in hand. Our prosperity does not so much depend on our ability the produce product but to produce a sales of service, or debt or anything which can create and influx of funds in America. Since we have proven were not willing to work much harder we are going to have to learn to work smarter. I don't think this is something that unionism creates. In a union people tend to feel helpless and unimportant as they are just one person in a group of many. I believe unionism encourages people to do the bare minimum just to stay employed. People need to feel that pressure that the must think or they will get left behind.

[Mitchell]

"It has not pushed hard for (though it supports) enactment of the Employee Free Choice Act, which by abolishing the secret ballot in elections for collective bargaining representative and instituting compulsory arbitration of union-management disputes would significantly shift the balance of power from management to labor."

You're behind on the legislative track of the Employee Free Choice Act. In July 2009, the card-check provision was dropped from the EFCA. For the record, the provision merely said that as soon as 50% of employees have signed cards indicating they want a union, the employer must recognize the union. While that certainly does shift the balance of power, card-check shifted the balance to a more even and fair level by eliminating the campaign process when employers frequently committed unfair labor practices, expressed strong anti-union animus and generally intimidated employees into rejecting a union.

http://www.nytimes.com/2009/07/17/business/17union.html?_r=2&hpw

[MAV]

I suppose the 7th Circuit doesn't get too many Jones Act cases due to geography and the relative dearth of foreign flagged vessels operating on the Great Lakes, which is why it's being misapplied here.

[Jim]

We need a union of nonunion members to protect us from the unions.

[Brian Davis, Austin, TX]

The Congress is going to turn over this fall. The President, urged by his handlers to pitch a bipartisanship theme, has dropped the unions into the grease. In the private sector it's over. The only places where labor unions are still powerful are public sector (government) employment and the nationalized U.S. auto industry. The former comes with a "captive" market of "customers" (the taxpayers) and some measure of job tenure with or without a union. The politicians simply lack the guts to go to battle against SEIU, AFSCME, and the federal employee unions like Postal and NTEU. The latter, you have a choice. You don't have to give your personal transportation dollars to the Detroit 3.

[Stephen Carter]

I am expressing no view on the main point of the post, but the Jones Act debate in the comments is fascinating. Not every question has a categorical answer. The Jones Act question is a good example. Certainly a number of news accounts have insisted that the Jones Act does not apply to the Gulf cleanup, but several others have featured owners of foreign vessels fretting about whether the Jones Act would bar them from taking part in the work -- this one, for instance: http://www.nola.com/news/gulf-oil-spill/index.ssf/2010/06/huge_oil-skimming_ship_makes_v.html

Does the Jones Act apply to the Gulf cleanup? My reading of Admiral Allen's quote in the Times is that no one has sought a waiver -- not that no waivers are necessary. The language of the statute is deliciously confusing. Yes, as one commenter pointed out, the Act is theoretically limited to cabotage. By its terms, however, the act applies to the transport of "merchandise." And what is "merchandise"? Consider this gem, from the last section of the Act:

"Provided further, That for purposes of this section, the term 'merchandise' includes valueless material:

"Provided further, That this section applies to the transportation of valueless material or any dredged material regardless of whether it has commercial value, from a point or place in the United States or a point or place on the high seas within the Exclusive Economic Zone as defined in the Presidential Proclamation of March 10, 1983, to another point or place in the United States or a point or place on the high seas within that Exclusive Economic Zone ..."

So, valueless material and dredged material turn out to be merchandise. Are the ships involved in the cleanup dredging, or carrying something without value (skimmed oil, say)? One would think so. Does the Act then apply? I am not sure anyone really knows.

[sdggf]

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[Seymour]

Research Shows Controversial Illness is Real and Treatable

CHARLESTON, S.C., July 27 /PRNewswire/ -- Today, Policyholders of America (POA) released a consensus statement written by treating physicians and researchers in the field on the mechanism and treatment of illness found in people sickened by exposure to water-damaged buildings. This illness has been the subject of heated debate that has resulted in harsh allegations being lobbed at patients by experts hired by industry to cast doubt on the legitimacy of the illness. Today however, so-called "Sick Building Syndrome" is now unveiled to be very real; it's a chronic inflammatory illness that is easily identified with available lab testing and treatable using FDA-approved medications. The research paper is the first in the field written by physicians with experience treating the illness. Thorough and rigorous, the paper references governmental agency opinions, current published literature and an extensive review of patient data that has made this subject a political and legal hot potato obstructing patient care.

Nearly six months ago, a distinguished and credentialed panel of medical doctors and researchers, all from outside of POA's membership, were assembled and charged with developing a consensus statement on the diagnosis and treatment of a growing public health problem across America: illness acquired from water-damaged buildings. The consensus statement was then peer-reviewed by other medical doctors and researchers. The research paper is being released to help physicians and their patients understand the mechanisms, symptoms, diagnosis and treatment protocols available for sickened patients.

After reviewing hundreds of peer reviewed studies, analyzing hard data from research conducted on thousands of patients, and incorporating published results of treatment of thousands of patients, the authors embarked on this massive assignment with eyes wide open -- knowing that if the resulting research did not lessen liability of the powerful stakeholders involved, industry would likely attempt to discredit the findings.

With the research now concluded, the mysterious illness now has a name: Chronic Inflammatory Response Syndrome or "CIRS", and when the cause of the illness can be directly linked to a water-damaged building, or ("WDB"), it is called "CIRS-WDB".

Says Co-Author, Ritchie Shoemaker, MD, of Pocomoke, Maryland, "This statement builds consensus by debunking false ideas about illness from water-damaged buildings and establishes the basis by which practicing physicians can assess the complex illnesses these patients experience. We don't have to guess what might be wrong when we have the labs to prove what is abnormal. Patients don't have to suffer any longer after being given incorrect diagnoses such as allergy, stress or depression."

Co-authors included Laura Mark MD from Williamsburg, Virginia; Scott McMahon MD from Roswell, New Mexico; Jack Thrasher PhD of Oakland, California and Carl Grimes HHS, CIEC, President of the Indoor Air Quality Association, from Denver, Colorado.

The 161-page research paper can be found, in its entirety, at: http://www.policyholdersofamerica.org/doc/CIRS_PEER_REVIEWED_PAPER.pdf

A layperson's summary of the research paper follows:

•CIRS-WDB is a multisystem, multi-symptom illness acquired following exposure to the interior environment of WDB. It exists as a recognizable syndrome that is identifiable and treatable;
•CIRS-WDB is identified as immunologic in origin, with differential inflammatory responses seen according to (i) genetic susceptibility and (ii) unique aspects of host innate immune responses.
•CIRS-WDB consistently involves loss of normal control of inflammation and the resulting "inflammation gone wild."
•Treatment of human illness that is acquired following exposure to the interior environment of WDB involves a series of steps, each correcting the physiologic problems one by one.
•CIRS-WDB can be readily identified by current methods of clinical diagnoses. This process of diagnosis is supported by (i) identification of unique subsets ("clusters") of symptoms found in epidemiologic cohorts of affected patients; (ii) identification of unique groupings of biomarkers, such as genetic markers, neuropeptides, inflammatory markers, and autoimmune findings.
•Patients with CIRS-WDB are often given incorrect diagnoses such as depression, stress, allergy, fibromyalgia, Post Traumatic Stress Disorder, and somatization. Those conditions, when actually present, will not improve with therapies employed in CIRS-WDB.
•CIRS-WDB is acquired primarily from inhalation of microbial products that are contaminants found in the complex mixture of WDB.
•Re-exposure of previously affected patients will bring about immunological host responses that are enhanced in their rapidity of onset and magnitude, such that these patients are "sicker, quicker."

Melinda Ballard, POA's president said, "About 25% of our members have experienced health effects after exposure to toxigenic mold and other organisms in their homes and of those, the vast majority put on the treatment protocol outlined in this paper have reported back to us that their symptoms have either subsided or vanished altogether. While our experience with these members is purely anecdotal, this research paper is not; the findings are irrefutable. Most importantly, the rigorous science in the paper offers hope to so many who are in desperate need of an effective and inexpensive treatment.

POA is a nonprofit educational organization that, at no charge, helps policyholders receive adequate payment when a property insurance claim is filed. Since it was founded in 2001, more than 2.5 million people have joined, an unfortunate reflection on the manner in which claims are often handled by insurance companies. Its web address is: www.policyholdersofamerica.org. POA is a member of ACHEMMIC (the Action Committee on the Health Effects of Mold, Microbes and Indoor Contaminants), a group of scientists, researchers, physicians, indoor air quality experts, environmental engineers, industrial hygienists, structural engineers, teachers and advocates working to advance the understanding of the health effects of mold, microbes and indoor contaminants. ACHEMMIC's website is www.achemmic.com.

[NEH]

What ever has come before in regards to "Unionism and Economic Recovery" is beyond me. Perhaps that's why our Economy can't seem to get itself out this rut. Other Nations have seemed to do a better job. As the research firm, Oxford Economics, concluded in a report, "Although one might expect that the cross-country variations in labor market performances would be related to differences in the depth of the recession, this is not the case. Japan experienced the greatest output losses among the G7 Economies, equivalent to 8.7% of GDP, while the U.S. was one of the best performing Economies with output declining 3.3% of GDP.

Yet, the downturn, caused unemployment to spike 5.3% in the U.S. to 10.1%, but it just rose 1.7% points to a peak of 5.6% in Japan". Other countries also show much sharper job recoveries. Germany has recovered almost all of the jobs it lost during the downturn and Canada has picked up 97%. Meanwhile, the U.S. is bracing for more job losses and the lack of provisions like Health Care insurance for the unemployed makes the suffering that much worse. But the Economic Pundits keep beating around the same old bush". And nothing gets done and the Unions get blamed even though they only represent approx. 5% of the private work force. Something rotten in Denmark?

Instead of trying to asses blame, perhaps we all ought to be listening to the Yale Economist Robert Shiller. Who's level headed solution is quite simple and elegant. "The U.S. Government should simply hire workers directly for public services, much as it did during the Great Depression". Another factor working against recovery is the current "Police Action" in Afaganistan and Iraq. Putting a million Americans back to work at 30 thousand a year, would cost approx. the same as what Congress put aside last month to send 30,000 extra troops to Afganistan at approx. a little more than 1 mill. per trooper. This translates into 33 workers at home or 1 trooper in Afganistan. It's just the equivalancy of "guns or butter". This cost only represents 0.2% of the National Dept. and only 4% of the Stimulus Package.

If common sense were a common commodity, the world would be a Utopia. Unfortunatly it's not. So the U.S. will have to put up with being the sick man of the G7. Unless of course, Management and the Financial Sector can quit acting like a duck that has been hit over the head (and is stunned and cowering in fear) and get back to putting the Economy and Employment back on track like the rest of the G7 Nations.

[Design Vibe]

Another great article, really interesting read. Thanks for sharing!

[make money from home]

Very informative. Well this article is based on reality, and I really appreciate that this was shared online so to people to understand. We are experiencing economic crisis, we can't blame on that we couldn't get a higher salary, infact it has lower down. But this shouldn't be happening, there should be a better act done for this, to avoid aswell the union build ups.

[David Jones]

Another great article. Sadly unionised public sector workers are causing my home country, Ireland, terrible trouble. Our fiscal situation is the worst in Europe, and although our per capita sovereign debt is comparable to the UK and elsewhere if we fail to tackle current expenditure now Ireland will be the new Greece within three years. Sadly what is unfolding is a classic example of unions failing to see the bigger picture, in that a small wage cut now will secure jobs and prosperity in the future.

I would just mention that unions and Government were unable to conclude another wage deal this year, meaning the wheels of industrial action over pay cuts are in motion. This coupled with a very high minimum wage means recovery is negligible in Ireland. (Why would you hire somebody whose skills aren't worth the wage you are paying them??)

[Joshua Norman]

Were the unions responsible for the following:
1. The tech bust
2. The telecom bust
3. Enron
4. Accounting Fraud
5. Commodity Price Speculation & Manipulation
6. The housing bust
7. The mortgage crisis
8. Two major bear markets in the last 10 years
9. Overleveraged Financial institution failures
10. The corporate buyout boom and bust
11. Money market mutual funds breaking the buck
12. Predatory trade policies of our "trading partners"
13. Outsourcing of American jobs to the Third World
14. Shitty, toxic waste alphabet soup securities

[Isaac Morris]

Yes the unions have been largely responsible for Outsourcing of American jobs to the Third World, and have made all of the other problems far worse than they needed to be.

That is the problem with powerful, privileged, mob-connected groups such as the unions. They can buy as many friends in public office as they need, and stay beneath the radar for the most part.

Less informed persons fall into the trap that Joshua Norman falls into, assuming that unions are benign and not mob-connected (Chicago way) at all.

[James Walker]

I have two thoughts. First, there is an assumption that labor and employers have equal market power in a Neoclassical sense (for the private sector at least) and that 'pro-union' policies will shift the advantage. Given the recovery in corporate profits, I have doubts. Second, it seems to me that excess capacity is more a factor holding back the recovery in employment than fears of pro-union policies.

[James Walker]

I have two thoughts. First, there is an assumption that labor and employers have equal market power in a Neoclassical sense (for the private sector at least) and that 'pro-union' policies will shift the advantage. Given the recovery in corporate profits, I have doubts. Second, it seems to me that excess capacity is more a factor holding back the recovery in employment than fears of pro-union policies.

[NEH]

Isaac, I think you've been watching far to many movies with their use of "Artistic License" as truth and listening to far to many "New Age Free Marketers" (there is a propaganda war going on in the Commercial/Industrial world regarding Labor & Management and the desire for power & control). The phenomenon is known as Global Labor Arbitrage. Look it up on Wikipedia then come back and tell us all about it.

[Isaac Morris]

I have a better idea, neh. I suggest you visit the website Pension Tsunami, and get a better grip on the real world disaster playing out.
The post mortem on this disaster of out-of-control public sector unionism is likely to possess all the makings of a true paradigm change.
Tenured jesters in their castles of ivory sands may soon learn the meaning of hard times.
Contracts have already been marginalized by judicial fiat. How will the fools feel when their own absurdist contracts are negated? It will be a captivating play to observe.

http://www.pensiontsunami.com

[Joshua Norman]

@Isaac:

Yes, but don't forget that it was the guys on Wall Street managing the asset side of the public pensions.

There is a difference between private sector unions and government unions. Unions were created to prevent profit-minded employers from exploiting workers and to win workers a share of business profits. However, neither of these purposes makes sense in government. As former AFL-CIO President George Meany wrote, "It is impossible to bargain collectively with the government."

Collective bargaining gives government employees the power to tell voters how to spend their tax dollars instead of the other way around. That is why early labor leaders rejected it as undemocratic. As recently as 1959 the AFL-CIO Executive Council stated that "government workers have no right [to collectively bargain] beyond the authority to petition Congress--a right available to every citizen."

[NEH]

Isaac, The request was for a quick report on the phenomenon of "Global Labor Arbitrage" not some non-sequitor about pensions or 401K's that were torpedeod by a bunch of "Wall Street" meatheads. Once again trying to shift the blame to an innocent party?

[Joshua Norman]

NEH:

Isaac believes that unions are responsible for all things wrong with this country. I think he truly believes in his heart that the world is flat and the unions flattened it.

He so hates unions and working people in this counry that he truly believes the following:
1. Unions forced people to buy stock in worthless internet companies.
2. Unions forced telecom companies to spend recklessly to build out thei
3. Unions forced Ken Lay, Jeff Skilling & Andy Fastow to commit fraud at Enron
4. Unions forced companies to issue fraudulent financial statements and misleading equity research reports
5. Unions forced up the cost of oil by a factor of five in spite of the fact that only the Asian & Latin America countries showed demand growth
6. Unions forced people to flip houses like day traders
7. Unions forced banks to lend money to people with no income, no jobs & no assets.
8. Unions forced stock prices down twice during the decade
9. Unions forced financial institutions to lever up to 40-1 assets to equity
10. Unions forced private equity companies to borrow like Wimpy and bid crazy prices for businesses with no real competitive advantage.
11. Unions forced money market funds to buy Lehman Commercial Paper.
12. Unions forced our "trading partners" to subsidize their exports and tariff imports
13. Unions demanded CEOs to outsource American jobs to the Turd World
14. Unions forced financial institutions to sell shitty deal CDOs, CMOs, ABS & other securities to institutions.