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Introduction to
Economics
Lesson 11 / 08
UNIONS
Throughout
most of the C20, unions played a major, perhaps dominant, role in the
workings of the Australian labour market.
However the last few decades has seen a significant decline in
their power, membership and influence, such that today many commentators
question their ongoing viability and relevance.
WHAT IS A
UNION ?
A union, more
precisely a trade or labour union, is a continuing organization of
workers, formed for their mutual benefit and protection.
Like corporations, they are often endowed with legal personalty,
enabling them to possess property, to sue and be sued in their own name,
and otherwise to be recognized legally, much as a natural person.
Traditionally
unions have offered a range of benefits to their members such as
training, insurance, welfare assistance, accreditation and social
interaction. Provision of
many such activities have been overtaken or rendered unnecessary by the
growth in the general welfare activities of the state.
The principal activities of unions however have been, and remain,
to act as a labour cartel with respect to employers, and to agitate with
respect to governments for increased rights and privileges for their
members.
The nature
and significance of unions varies greatly between countries, depending
on the culture and political circumstances of the country in which they
operate. Although international unions do exist, unions have
traditionally been focused nationally or, even less ambitiously, within
part of a country, such as within a state, a locality, or even just a
particular factory or workshop. In Anglo-Saxon countries, unions
generally have tended to play, at least until recently, a major role in
the economic and political activities of their respective nation.
There are
various types of unions, basically distinguished by the membership for
which they cater. Excluding
associations of professionals, such as lawyers, doctors, architects and
so forth, which arguably could be categorized as unions, they include
craft unions, industry unions and general unions.
Craft unions
aim to represent all members of a particular craft or trade such as
carpenters, plumbers, and firemen, regardless of the industry in which
they are employed, to the extent even, in some instances, of including
employers as well as employees. Conversely
industry unions seek to represent all workers employed in a particular
industry, such as entertainment, steel making or transport.
Finally there are general unions, which seek to represent all
workers or employees, based on their class as such, without regard to
industry or trade.
Apart from
their organization and membership, the types of unions tend to reflect
significant political and philosophical differences.
Craft unions are more individualistic, conservative and
defensively orientated. Industry
unions are more collectivist, expansionist and aggressive, whilst
general unions, being essentially class based, are seen as the most
radical, activist and politicized.
ECONOMICS
The
history, politics and philosophy of unions are each major areas of
study. The focus of this
lecture, however, is on economics. The popular viewpoint of unions is
that they have had, and continue to have, a positive economic effect.
Most economists however, at least most market economists, are
likely to regard unions as having a negative economic effect.
Perhaps the
single most important area of union economic activity is that of the
fixing of wages. The widely accepted view is that the relatively high
level of wages enjoyed generally in most industrialized countries is a
result of union action. Moreover, that such raised level of wages has come at no cost
to wage earners or to the economy generally, but has occurred merely by
a more equitable and beneficial reduction in the profit margin of
employers.
Economics
suggests that this popular viewpoint is a myth.
To economists generally, labour is a commodity, able to be bought
and sold in a market. It is
perhaps the most important commodity of all since it is the one asset
that everyone [or virtually everyone] possesses and is able to sell.
In economic
terms, what determines the level of wages is the marginal productivity
of labour. That is to say,
a person will earn from his labour almost, but not quite, precisely, the
value of what his labour produces, since it will pay an employer to
provide the worker with such a wage, enabling the employer thereafter to
achieve a profit from the marginal residue of such worker’s
productivity. Competition
from employers, or potential employers, in the labour market, thus tends
to cause such a marginal or natural wage to ensue.
What
distinguishes, and causes, the relatively much greater wages paid for
labour in advanced economies is the much greater amount of capital
available in such economies to its workers.
It is the amount of capital available which provides the tools
for the job, thereby enabling the productivity or output of workers in
advanced economies to far exceed those of less capitalized economies and
enables them to receive such higher wages.
All else being equal, the more capital invested, the higher the
wages received.
If, by
whatever means, a union is able to achieve remuneration for its workers
above the ‘natural wage’ then, if the employer is to remain in
business, it will be necessary, assuming minimum wage and / or anti
discrimination laws permit it, for the employer to balance such increase
by reducing the pay of his or her non-union workers to less than their
‘natural wage’. The
American economist, Milton Friedman suggests that unions have increased
the wages of about 10-15% of American employees by 10 –15% by reducing
the wages of the remainder by 4%. Union
gain is thus non-union pain.
Alternatively
the employer can reduce the size of his labour bill by dismissing the
less productive of his or her workers until the productivity of the
marginal worker again equals the ‘natural wage’. If the employer is
able instead to increase his or her prices thereby to maintain profit
margin then all else being equal, consumers will have less money to
spend with other producers, who will in turn reduce the number of their
workers. In either event,
the result for the economy as a whole is increased unemployment.
Economically
it is not feasible for the increase in wages above the ‘natural
wage’ to come long-term from the employer’s profit.
Normally, the profit margin represents only a very small
proportion of income; the vast bulk is wages.
Competition from other, or would-be entrepreneurs ensures that
profit margins tend towards the minimum level needed to cause an
employer to enter or remain in business.
Reducing the profit margin to pay above market wages will tend to
drive them out of business.
In any event,
it is from the profit margin that the employer will obtain the capital
needed, as indicated above, to increase or at least maintain the
existing wage level. Reduced
profit means less capitalization.
Decapitalization results in reduced productivity and reduced
wages for all.
It is
sometimes alleged that unions, by causing wages to rise above market
rates, cause inflation. This
is a myth; all else being equal, increased wages for some merely means
less wages or unemployment for others.
It does not of itself cause inflation.
However what tends to follow is that having thereby created
unemployment, unions insist on generous unemployment benefits being
provided by the state. In order to do this the state, rather than increasing taxes,
creates money. It is the
state’s creation of money, rather than above market wages that causes
inflation.
Causing above
market local wage rates leads unions to support protectionism in order
to prevent overseas competition. Unions
have also sought to prevent local employers from operating overseas,
unless they provide overseas employees with the same or similar wages or
conditions as they are required to pay at home.
Ostensibly this is to be fair to overseas workers.
Such purported justification, essentially unwelcome to overseas
workers, who are thereby deprived of much desired work, is manifestly
specious. Rather it
constitutes a sophisticated form of union protectionism.
Whilst the
above criticisms are significant, it is not to suggest that unions do
not have a proper or desirable economic role to play in providing
representation, training or support for their members.
David Sharp
12 August 2008
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