Unions and the Obama Administration-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. The following discussion tries to justify these answers.

The pro-union orientation has been demonstrated in many ways. Posner gives a few examples, and I will add some more. The automobile industry would not have been bailed out so generously were it not for the political power of the United Auto Workers. The alternative would likely have been bankruptcy without a federal bailout, which I favored. Bankruptcy without government involvement would have cut health and other fringe benefits of autoworkers more sharply, and might have led to more plant closings in the industry. It would also, however, have led to a more robust recovery of the surviving American auto companies, and possibly even in the longer run raised employment in auto plants located not in the South because wages and fringe benefits would then have been lower at these plants.

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.

Congress tried to pass, and President Obama supported, The Employee Free Choice Act to eliminate private elections for union certification. Fortunately, enough moderate Democrats and Republicans have been able to beat back these proposals, and they have been shelved, perhaps only temporarily.

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.

During this recession, wages did fall for many workers, but mainly among non-union workers. A telling example is what happened at many state and local governments that are in serious fiscal difficulties. Since wages of their union workers have been set by contract, they were forced primarily to cut wages of administrative staff and other non-union employees. For example, the state of Illinois has the largest fiscal deficit as a percent of its budget of any state. It required many of its high level non-union employees to take 24 unpaid leave days, or about a 9% cut in their salaries, since the state government cannot touch the wages of their many unionized employees.

As Posner indicates, only about 7% of all non-government American workers are unionized, compared to over 35% of workers at federal, state, and local governments. During the past 40 years, the fraction of unionized civilian workers fell steeply-and not only in the United States- while the unionization of government workers fell only a little. It might seem unlikely that workers which comprise only about15% of the total labor force would have a major effect on the speed of the recovery from the recession. 

The real threat to a robust recovery on the labor side has come from employer and entrepreneurial fears that once the economic environment improves, a Democratic Congress and administration will pass pro-union and other pro-worker legislation that will raise the cost of doing business and cut profits. In this way the obvious pro-union-pro-worker bias of the present government has contributed to a slower recovery, especially in labor markets. This helps explain the depressingly slow decline in unemployment rates and in the number of workers who have given up looking for jobs.

 

 

Comments

[Baxter]

Unionism boost. Sounds like a rational approach to increase national output and address America’s global economic decline. I think it’s a major component of the more general economic theory of “Prosperity Through Decreased Incentives to Produce”.

[M.S.]

As Mr. Posner suggests, Nominal Wages are sticky. But there is something stickier. The belief that:

“Sooner or later, someone smarter, or someone more competent, or someone harder working will be either convinced or coerced into working to increase my standard of living through government transfers which I will vote for in the next election”.

Hope springs eternal. And the relative wealth position of the United States compared to the rest of the world continues to slide.

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

[Jeffrey]

Not a disagreement, but a clarification: "pro-worker" and "pro-union" are significantly different. Some of us are the former, but not the latter.

[Pingry]

"Has their pro-union orientation seriously retarded the recovery from the recession? Probably"

Hmmm.....you say "probably" and I interpret that to mean that you are unsure but commensurate with your ideological beliefs, you believe that it is "probably" retarding the recovery. Please, supply some evidence of this because those of us who are moderate demand it.

Also,

"The real threat to a robust recovery on the labor side has come from employer and entrepreneurial fears that once the economic environment improves, a Democratic Congress and administration will pass pro-union and other pro-worker legislation that will raise the cost of doing business and cut profits."

Again, where the hell is all of the evidence of this fear?

You wouldn't be making grand statements consistent with your ideology, Krugman style, which confirms your opposing worldview, now would you?

I just love how market fundamentalists are so convenient with their profound theories of how the economy works despite any evidence.

Instead of coming to terms with epic market failures like a catastrophic financial crisis and deep recession (and jobless recovery for that matter) that instead there is incessant chatter emanating from them about "anti-business policies" and "pro-union sentiment"?

Way to be an apologist for failure!

"Ummm....yeah, they would just start hiring again if there were less anti-business talk (however the hell that is defined and measured) out there."

I mean, it's never the market's fault.

"What? Painfully elevated unemployment for years? Nah, it's not the markets fault. Too damn bad pal, maybe if you were nicer to businesses and took a tough stance on unions they would spend and hire."

I think this political cartoon best sums it up:

"There, there it is again—the invisible hand of the marketplace giving us the finger."
(One poor man to another as they stand.)

http://www.cartoonbank.com/1998/there-there-it-is-again-the-invisible-hand-of-the-marketplace-giving-us-the-finger/invt/117177/

--Pingry

[AndrewBW]

You know, if we eliminate wages completely profits will go through the roof.

[Greg King]

Dr. Becker, do you have any evidence to cite that it is worries about possible pro-union moves by the government at some point in the future is causing companies not to hire now? Or that this will become the biggest threat to a robust recovery on the labor side? It seems, for example, like uncertainty over health care might play a part. There seem to be a lot of factors other than fear about "possible pro-union or pro-worker" actions on the part of the administration or congress.

It also seems far fetched that companies will hire more workers if they can only further depress wages and benefits. This column by Bob Herbert (http://www.nytimes.com/2010/07/31/opinion/31herbert.html?_r=1) cites work by Andrew Sum at Northeastern showing that American corporations have more cash on hand as a percentage of GDP than at any time in the past fifty years. Payrolls have been cut by more than twice as much as output has fallen in the recession. Profits are up considerably (more than half a trillion) in 2010 while payroll is down more than a hundred billion. Essentially companies are getting more work out of fewer employees, or the same number of employees being paid less. So why would the fact that you could pay workers less without unions make them want to hire more people?

[Scott Free]

Union membership has been declining steadily for the last 40 (http://en.wikipedia.org/wiki/File:Union_Membership_and_Support.svg) years so employment so our manufacturing industries must be booming! Right? What bogeyman will the right flog when there are no unions left?

[DerekD]

"The real threat to a robust recovery on the labor side has come from employer and entrepreneurial fears that once the economic environment improves, a Democratic Congress and administration will pass pro-union and other pro-worker legislation that will raise the cost of doing business and cut profits."
___

You made an assertion.

Now why didn't you actually give any evidence at all to back this up?

Please do so immediately.

[ffxiv gil]

so nice a good article,thanks your Unique perspective.although i do not understand the political very much,but i really learn a lot from your article,and have some my own idea,i still believe one workd:In this world, nothing is certain but death and taxes.

[not tracking this]

Professor Becker,

Using your Nobel prize as a pulpit to make unsupported assertions outside of your field of expertise is irresponsible and you should know that.

[Eric Kades]

I read this as emanating from Professor Becker, so I direct this comment to him. I assume the audience would welcome Judge Posner's thoughts as well; perhaps you do not care to join in your co-blogger's unfounded assertions.

To reformulate what other have said, without benefit of anonymity:

As a fellow academic, I ask what empirical evidence you have that this particular causal chain, in our enormous economy, explains even a modest part of the slow recovery? Your fellow Nobelist Paul Krugman, a bona fide macroeconomist, has argued from day one that the stimulus package was far too small -- about 1/3 of that necessary based on relatively simple calculations. There is significant statistical evidence to support the efficacy of fiscal policy (e.g. the empirical work of outgoing CEA director Christine Romer, sometimes labeled a monetarist, which I assume retains positive connotations in Hyde Park). This is called evidence, evidence that insufficient aggregate demand explains, entirely, the weak recovery.

Where is *your* evidence, your hard empirical evidence, that the expectation of future labor law revisions is inhibiting investment? Or are your anti-union priors so strong that no amount of evidence (or lack of evidence) would change your posterior distribution of outcomes? That is religion, not science.

Prof Eric Kades
William & Mary Law School

[Ignacio]

For those who want evidence should go to http://www.heritage.org and plot the relationship between Labor Freedom and GDP per capita.

Unions are just a way to reduce freedom for those who want to work and negotiate wages and for those who want to hire.

[OnePlusOne]

There is little evidence that support for unions alone, has a catastrophic effect on the economy.

However, support for unions is indicative of an overall drive towards socialist policies which taken all together demonstrably and severely cripple the overall correlation between personal productivity and personal reward. With decreased incentives to produce, overall production falls, and the economy, wealth and once enviable prosperity of America will simply go down the toilet.

America discovers socialism and central planning. That ought to have the rest of the world laughing…

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[Pandora Bracelet]

No matter Obama will how to administrate the Unions ,I will support he!!!

[jrf]

You comment:

"The real threat to a robust recovery on the labor side has come from employer and entrepreneurial fears that once the economic environment improves, a Democratic Congress and administration will pass pro-union and other pro-worker legislation that will raise the cost of doing business and cut profits. In this way the obvious pro-union-pro-worker bias of the present government has contributed to a slower recovery, especially in labor markets"


Such a conclusory comment. Would likely earn you a incomplete grade, no Professor? Economists at JPMorgan recently took a look at NFIB data to see if small business surveys had picked up anything related to hiring reluctance related to regulation. They found that weak demand, rather than the political climate, is responsible for firms’ reluctance to expand. Specifically, taxes and regulation accounted for only 12% of the deterioration in firms’ assessment of the climate for expansion. The NFIB surveys around 2,000 firms out of 5 million, so there’s room for sampling error. Clearly, the U.S. is facing is a demand problem, more than a regulatory one. But now that I have found evidence disproving you statement, please show me some kind of evidence in support of your statement.

[FreeComeptitiveMarket]

I think the article is silly. I am a business owner and I am not hiring because i do not see demand to hire not because I am afraid of unions. Furthermore, profits do not go down in unionization, but rather prices go up. Profit margins may actually increase. Corporations have more than one cost, they have product cots, labor cots, and shipping, RD and advertising cots. If one goes up the others will come down and/or price will go up. Stop BSing the American people, let us balance the extreme crony capitalism with a balanced social and capital market space.

[mp3 dinle]

I think the article is silly. I am a business owner and I am not hiring because i do not see demand to hire not because I am afraid of unions

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