– August 24, 2020

Do workers in market economies need labor unions to ensure that they are paid fairly – that is, to ensure that they’re paid wages that reflect the market value of what they produce? Many people are confident that the answer is yes. And the ranks of people offering this answer are lately further swelling as they fill with populist conservatives such as Sen. Marco Rubio (R-FL) and those at Oren Cass’s American Compass.

The train of reasoning in support of labor unions is as simple as it is simplistic. And at its starting point is an implicit assumption that practically guarantees the conclusion that non-unionized workers are generally underpaid. This assumption is that the pool of workers desperate to be hired is generally always so large that employers need not compete for workers. Anxious to get work, most people settle for jobs at exploitatively low wages rather than be unemployed.

With competition among employers for workers so muted, “labor” is powerless against “capitalists.” No individual worker has any bargaining power. The solution (so goes the reasoning) is for many workers to act as one – to act in unison – to unionize and bargain with employers collectively. If large numbers of workers can credibly threaten to withhold their services from capitalist firms, the owners of these firms will have no choice but to raise workers’ wages to fair levels.

Such a lovely story! Good but individually powerless guys and gals, once put upon by heartless capitalists, cast aside their individuality in the workplace by uniting as brothers and sisters to secure what is rightfully theirs from bad guys and gals.

This explanation of wage determination is an example of what Deirdre McCloskey calls the “lawyerly” approach to economics – meaning, those who peddle it fail to appreciate the reality, power, and nuance of competitive market forces. It’s no surprise that most of the conservative populists and economic nationalists who are now keen on labor unions are lawyers rather than economists.

American Labor Markets Are Competitive

Economists’ understanding of labor markets is very different. They recognize that, in a market economy, underpaid workers are like $100 bills lying on the sidewalk: When they exist, someone quickly scoops them up. While each employer would perhaps like to pay workers wages well below the value of workers’ productivity, each employer is also eager to earn the profit available by acquiring underpriced assets. If Alpha Corp. stubbornly refuses to pay its workers wages that reflect their productivity, it will soon find its workers bid away by Beta, Inc. and Omega Co. To avoid this unhappy fate, Alpha Corp. will start to pay its workers fairly.

But what does the empirical evidence say? Is competition for workers really so intense as economists theorize? Or is it as muted as lawyers suppose?

Because it’s notoriously easy to torture data into a confession of almost any crime, one must be especially careful in gathering, processing, and interpreting economic statistics. Still, in my judgment the data quite convincingly show that in the U.S. worker pay generally does indeed reflect worker productivity, just as economic theory says it will in competitive markets.

A few years ago Liya Palagashvili and I surveyed the data on the alleged “decoupling” of worker pay from worker productivity. We found that there is no such decoupling. As we wrote in the Wall Street Journal

[Harvard economist Martin] Feldstein and a number of other careful economists—including Richard Anderson of the St. Louis Federal Reserve Bank and Edward Lazear of the Stanford University Graduate School of Business—have compared worker pay (including the value of fringe benefits) with productivity using a consistent adjustment for inflation. They move in tandem. And in a study last year, João Paulo Pessoa and John Van Reenen of the London School of Economics compared worker compensation and productivity in both the United States and the United Kingdom from 1972-2010. There was no decoupling in either country.

And earlier this year, American Enterprise Institute economist Michael Strain – in his book The American Dream Is Not Dead (But Populism Could Kill It) – concluded that

The evidence supports the predictions of textbook microeconomics. And it contradicts the common narrative. The game isn’t rigged for typical workers. Workers do enjoy the fruits of their labor.

If in fact worker pay reflects worker productivity – as is the case – then labor markets are sufficiently competitive. Not only is there no need for government to artificially empower labor unions, any ‘success’ that labor unions would have at further raising worker pay would be downright harmful. Forcing wages above competitive market levels would cast some workers into un- or underemployment. In competitive markets, any pay increases that labor unions win for some workers necessarily come at the expense of other workers. And this outcome is not only economically harmful, it’s also unjust.

Economists typically get this reality. Lawyers too often don’t.

Asking Again: If You’re So Smart?

The lawyers, of course, will insist that economic theory is unreliable and that the data that support this theory are inferior to the contrary data that they present to justify their case for labor unions. Are we at an impasse?

No.

If these lawyers and other populists are correct that large numbers of American workers are underpaid, these lawyers and populists can prove the sincerity and legitimacy of their belief by starting new firms that employ these workers. What could be a better deal, both for these lawyers and for workers?

Paying wages that reflect worker productivity will enable these new firms to attract droves of workers (who allegedly are now underpaid). And these new firms will also in the process bankrupt the older, exploiting firms, thus clearing space in the market for these new firms to earn handsome profits. Everyone but intransigent and greedy capitalists wins.

Conclusion

Proponents of labor unions correctly insist that workers need bargaining power to ensure that they are paid fairly. But these proponents incorrectly believe that individual workers have no bargaining power. In nearly all cases in fact, each worker’s freedom to quit a job and to search for and to accept another job – combined with employers’ freedom to employ whomever they choose – gives to each worker the bargaining power necessary to keep his or her pay equal to the value of his or her productivity.

In short, the surest source of bargaining power for workers is not collective bargaining but, rather, other and better employment options. Therefore, if America really is filled with underpaid workers, before letting politicians and pundits who express this belief put other people’s money where their mouths are, let them put their money where their mouths are by launching new businesses that can profitably employ today’s underpaid workers. If these politicians and pundits are correct, they have nothing to lose and – along with American workers – everything to gain.

Donald J. Boudreaux

boudreaux

Donald J. Boudreaux is a senior fellow with American Institute for Economic Research and with the F.A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics at the Mercatus Center at George Mason University; a Mercatus Center Board Member; and a professor of economics and former economics-department chair at George Mason University. He is the author of the books The Essential Hayek, Globalization, Hypocrites and Half-Wits, and his articles appear in such publications as the Wall Street Journal, New York Times, US News & World Report as well as numerous scholarly journals. He writes a blog called Cafe Hayek and a regular column on economics for the Pittsburgh Tribune-Review. Boudreaux earned a PhD in economics from Auburn University and a law degree from the University of Virginia.

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