Unions and Money: Labor Unions Are Anti-Worker Because They Are Pro-Inflation

Freeman and Medoff have written a famous book, "What Do Unions Do?" in which they distinguish between the voice and monopoly faces of unions. The voice face gives employees an outlet to express dissatisfaction with management and to let management know what the employees want. The voice face includes collective bargaining, grievance procedures, and the elimination of employment at will (in part through progressive discipline rules that limit employers' right to fire employees). Freeman and Medoff argue that employee voice increases employee tenure with the firm, encourages more capable employees who are better trained and raises labor productivity.

In contrast the monopoly face of unionism is where unions raise wages by restricting employment. To concede higher wages to unions firms must restrict employment levels because of the laws of supply and demand. The higher wages cause firms to substitute capital investment and machinery for labor. In turn, the monopoly face causes a two-tier society in which elite workers working for large firms earn high wages, while "secondary sector" workers earn less.

Freeman and Medoff argue that the voice face is stronger than the monopoly face and that union wage gains of 5-30% are mostly due to employee voice, that is, due to lower turnover, more communication and better training.

However, Freeman and Medoff emphasize another piece of evidence: unionized firms are less profitable than non-union firms, and the difference is in the area of 15%. Since their book was written in the 1980s, firms have been increasingly motivated to move plants overseas to avoid the unions' effects on profits.

It is a specific characteristic of twentieth century American unionism that unions reduce efficiency. In Japan, unions are enterprise unions that are sometimes called "company unions" but not quite the same as the term "company union" would mean here. Enterprise unions contribute to firms' efficiency by providing employee voice but also encouraging more efficient production. In contrast, US unions are steadfastly opposed to helping firms, and are often anti-management. Also, they often insist on antiquated work rules that impede flexibility and innovation. This anti-management mentality is a problem that has hurt unions.

Unions have been co opted by left-wing ideology that holds that workers and management are enemies. Until about 40 years ago, American companies were the most dynamic in the world and American workers were the most successful. The two went together. This does not suggest that there is antagonism between labor and management, but rather that both benefit together.

What changed? CEOs, endowed with a rich cornucopia of stock options, have emphasized stock valuation to a greater degree, and so moved plants overseas. However, the situation is somewhat more complicated. Although I am unique in thinking this, I believe that the problem facing unions is due to monetary policy and the Fed.

In the 19th century unions opposed inflation. The Loco Focos in New York, the Workingmen's Parties of the 1830s, the Jacksonian Democrats all favored sound money and the gold standard. They opposed inflation. Inflation is harmful to workers because workers spend most of their wages. In contrast, inflation is helpful to capital because low interest rates, which are caused by the same thing that causes inflation, increasing money supply, boosts the present value of future earnings, hence the stock market, and makes firms more profitable because they can borrow for less.

That is, the Federal Reserve Bank increases the money supply (and has increased it by 68 times since 1913 when it was founded) and the increases in the money supply cause increases in the stock market that are greater than the increases in prices. Since 1913 the stock market has gone up 218 times while prices have increased 16 times.

In the 19th century, the working class was overwhelmingly opposed to inflation, and had the unions favored inflation they would have failed. What the low inflation environment did, though, was cause American firms to grow rapidly not because of financial gimmickry as they do now, but because of improvements in efficiency and innovation. Firms like Standard Oil made repeated breakthroughs in technology such as oil pipelines and were for their time extraordinarily efficient. American firms consolidated markets in areas like steel and meat as well in order to obtain efficiencies. Although there were labor conflicts, the conflicts were occurring in an environment in which hundreds of thousands of Europeans were immigrating here each year in order to work in those same companies. In other words, we had the best paid employees in the world while the labor supply was continually expanding because of immigration. No other economy in the history of the world had come close to expanding the welfare of the poor as did the American economy under laissez faire capitalism.

In the early 1930s, during a depression brought on by Fed policy, the unions switched their position on inflation. This was done at the same time as the National Labor Relations Act was passed and anti-free market legislation under the New Deal became dominant. The unions' new indifference to inflation was justified in terms of the Keynesian economics prevalent at that time (and today). However, this put the union workers at loggerheads with other workers. Relying on pro-union economists such as Freeman and Medoff, unions saw indexing as a way around inflation.

Economists claimed that inflation did not matter because union wages were indexed, but of course few workers' wages were indexed. Inflation exists to help capital at labor's expense, so there had to be two categories of workers, the unionized and the non-unionized. This was facilitated in part by the exclusion of white collar workers from unions. Since the economy was moving away from manufacturing toward services throughout the 20th century, this largely doomed unions by the millenium. Moreover, white collar workers tend to identify with management, which has generally been anti-union.

The result has been that the unions secured a niche for themselves, but were viewed as antagonistic to the needs of the majority of workers, who opposed inflation just as they did in the 19th century. The workers themselves disliked unions. This tension came to a head during the 1980 presidential election, when the union leadership backed the pro-inflation Democrats but the majority of blue collar workers, including most union workers, backed Ronald Reagan who claimed to oppose inflation. In fact, President Reagan did end the inflation of the 1970s, but then recommenced a new cycle of inflation under Alan Greenspan from which we have yet to emerge (and are only beginning to experience the ill effects).

In this cycle there was a surprise effect, namely, because executives were granted stock options and so motivated to cut costs, many union jobs were driven out of the country. Thus, unions backed the wrong horse. They backed the Fed, Keynesianism and inflation because they thought that they were best protected and would gain at the secondary sector workers' expense. But they did not anticipate that the stock market would become more buoyant (because of low interest rates). When combined with executive stock options, the buoyant stock market made executives more eager to combat unions. In other words, the availability of easy credit caused executives to focus less on innovation and efficiency as they did in the 19th century, and more on low-risk cost cutting by moving plants overseas.

The end result is that the American employee has been in bad shape since the 1980s, and unions have done nothing to help. If anything, unions have been an excellent friend to Wall Street at the expense of the poor during the past 70 years.