Are Unions’ Wage Hike Demands Really for Workers?

Unions can use the right to collective action, such as strikes, to raise wages above the market-clearing wage level, that is, the wage at which labor supply and demand are equal. Since workers’ incomes rise as a result, union-driven wage increases may be seen as actions taken on behalf of workers.

However, this leads to workers being laid off or experiencing falling wages. In response to higher wages, firms implicitly agree with unions to dismiss some workers in order to reduce losses.

Accordingly, firms effectively carry out layoffs by immediately dismissing some workers, or, even if they do not do so immediately, by not filling vacancies when they arise, reducing new hiring, or employing non-regular workers.

For workers laid off because of union-driven wage increases to escape unemployment, they must move to firms and industries where unions are not organized. The sectors to which they move generally pay lower wages than the sectors from which they were displaced. As they move, wages in non-union firms or industries fall even further because of the increased labor supply.

If this kind of movement occurs in a chain reaction, wage levels in other sectors become extremely low. In the extreme, in sectors where wages fall very sharply, workers give up jobs altogether, and firms reduce employment while paying wages at the subsistence minimum, thereby causing chronic unemployment.

From the above analysis, we can see that union-driven wage increases have the following effects on the labor market.

First, the workers who remain achieve higher wages at the cost of some workers being laid off.

Second, the workers who are laid off either remain unemployed or find employment at low wages in non-unionized sectors.

Third, wage levels in non-unionized sectors become miserably low, or permanent (or semi-permanent) unemployment occurs. Fourth, the more unions are established, the greater the tendency toward permanent (or semi-permanent) mass unemployment.

One might raise the following objection: labor unions fight fiercely against the dismissal of union members, so how can unions tolerate the dismissal of their own members?

First, as mentioned above, because layoffs do not occur immediately, workers may fail to recognize that wage increases are causing layoffs.

Second, because of union indoctrination, even when layoffs occur immediately, dismissed workers may come to believe that any action rejecting such layoffs is evil, and that by being dismissed themselves they are improving the incomes of the remaining workers, making them great warriors.

Third, unions persuade their members that if the company’s performance improves, the workers who were laid off will be rehired first.

In this way, because union members are indoctrinated by the union, and because many of them also think in a hit-or-miss way that it is enough so long as they themselves are not the ones laid off while enjoying a high wage level, unions can agree with management to dismiss some workers.

Meanwhile, there are claims that union-driven wage increases can raise wages without harming other workers. One is monopsony in the labor market, and the other is the efficiency wage hypothesis. Let us examine them in turn.

A labor market is said to be a monopsony when one firm is the sole employer of a certain kind of labor. In such a case, workers are in a weak position in determining working conditions, and monopsonistic exploitation occurs, reducing wages and employment.

The situations in which the labor market can become a monopsony are as follows.

First, when a type of labor is so highly specialized that it can be employed only by a specific firm. In other words, the services or skills provided by that labor cannot be used for any other purpose or by any other firm, and can be used only for one purpose or by one firm. However, most labor is not so specialized that it can be employed by only one firm. Workers possessing non-specialized labor can move to other firms and industries in consideration of wages and other factors. Therefore, there is no monopsony for such labor.

Some labor does have specialized characteristics. Accordingly, it may appear to be a monopsony. However, because firms cannot produce without specialized labor, wages for specialized labor are determined through negotiation between firms and workers, so layoffs or unemployment do not occur. Therefore, even the market for specialized labor cannot be regarded as a monopsony.

Second, monopsony may arise because of regional characteristics, such as when a firm provides the only employment opportunity in a small town. But even in such a case, if it is easy to move to another town, monopsony power cannot be exercised. If moving is difficult, monopsony power may be exercised. However, given today’s convenient transportation, people can work elsewhere even without relocating, so monopsony power cannot be exercised even if moving is difficult. Monopsony may have existed in the early stages of industrialization, when there were few jobs and transportation was inconvenient.

Thus, the current labor market is in almost all cases not a monopsony, and even if the market for specialized labor appears to resemble a monopsony, it is not actually a monopsony.

But if monopsony does arise in the real labor market, that is because the government creates barriers to entry. Monopsony can arise in the labor market because the government permits only a small number of firms to operate in a particular sector. Therefore, if monopsony is occurring in the labor market, it is not the fault of firms but the result of government regulation. In that case, the way to solve the monopsony problem is not to grant monopoly power to unions and create bilateral monopoly, but for the government to remove entry barriers.

Let us now examine the efficiency wage hypothesis, the other argument. The efficiency wage hypothesis holds that when wages rise, workers’ productivity rises as well, increasing profitability. The reason productivity improves when high wages are paid is that workers’ motivation is stimulated or turnover declines. Therefore, according to this logic, wage increases secured by labor unions improve productivity and profitability, so even if wages rise, they do not lead to layoffs or unemployment.

However, if this claim were correct, there would be no need for wage bargaining by labor unions. Employers would raise wages on their own in order to earn greater profits. Even in such a case, if unions engage in wage bargaining based on the right to collective action, such as strikes, wage levels would tend to rise above the level of wage increases proposed by firms, and as a result the layoffs and unemployment pointed out above would occur.

According to the results of the above analysis, union wage increases raise wages above the market-clearing wage, but as a result, the wage levels of many workers decline and a considerable number of workers lose their jobs.

Therefore, we can see that union-driven wage increases sacrifice the many for the sake of a few workers. If so, it is worth considering whether union wage increases can truly be said to be actions for the benefit of workers.

Seungmo Lee, economic commentator

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Original title: 노조의 임금인상 요구, 근로자 위한 것인가

Author: Seung-mo Lee

Date: 2019-12-13

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=press&pn=23&idx=22158