Unions and the Free Market
Okay, so, labour politics are a big deal in both Canada and the United States right now. The specific details of each situation are important, but there are some broad trends that need to be discussed seriously. Namely, trends in the way unions and their relationship to the labour market are being represented. Conservative politicians and a large swathe of the general public denounce public sector unions (basically the only unions) for demanding salaries and benefits higher than those found in the private sector (ie, in non-unionised jobs). These unreasonable demands are represented as distorting the labour market, crippling business, and ultimately doing damage to the broader economy.
This analysis can be very compelling, especially if you are watching unions insist on benefits far beyond what you personally happen to be enjoying. And unions aren't doing a good job articulating their own arguments. It seems self-evident that unionised workers earn more than they deserve when compared to non-unionised counterparts operating in the free market. This is because unionised workers do make more than they should, if you accept that the free market should be deciding what people should make. But I think a quick review of basic economic theory establishes fairly conclusively that we don't want the free market determining wages and benefits. Here's why.
Fundamentally, the free market is about supply and demand. Workers demand jobs and supply labour. Employers demand labour and supply jobs. When the need of the employers for labour is greater than the need of the workers for jobs, the workers hold the more valuable commodity (their labour) and can force the employers to compete with one another. When the need of the workers for jobs is greater than the need of the employers for labour, the employers hold the more valuable commodity (jobs) and can force workers to compete with one another. Either way, free market competition ensures that the group possessing the more valuable commodity (jobs or labour) is able to supply that commodity to the other group at a rate maximising the profit for the group possessing the valuable commodity. In this way, competition determines free market value. Here are some concrete examples.
After the black plague decimated the population of Europe in the middle ages, there were not enough workers remaining to fill all the jobs. As a result, employers were forced to compete with one another to attract workers. Each employer tried to offer potential workers a higher wage than the other employers, until they were offering the highest wages they could without destroying their own profitability. Because the supply of labour was scarce relative to the demand for labour, the price of labour went up. Workers benefited from the increased value of their labour. Employers suffered. Those who could afford labourers survived; those who could not afford labourers dwindled or collapsed.
A similar situation has characterised certain specialised industries for the past few decades. In these industries, mostly engineering or technology, the demand is for highly skilled workers, which are in short supply relative to the availability of jobs. As a result, workers in those fields are able to command high wages and benefits without any union support.
In situations, however, where the supply/demand relationship is reversed, the consequences are quite different. For instance, in the early days of the industrial revolution, many cities were flooded with unemployed workers seeking jobs. As a result -- exactly the inverse of the above situation -- employers had the advantage and workers were forced to compete. Workers that could offer the most labour for the lowest wages got jobs. The remaining workers, unable to purchase the expensive jobs with their devalued labour, starved.
In both cases, the free market reliably maximises profit by forcing competition based on relationships of abundance and scarcity. In the latter case, it was soon noticed that the free market's remorseless selection process was vicious toward those who could not, for whatever reason, compete successfully. In extreme cases, where competition for jobs was especially fierce, this meant mass suffering and death. As a result, it was generally agreed (after much wrangling) that we could afford to exchange some of our profits to avert mass suffering and death. We got wonderful things like the minimum wage, maximum work weeks, and workplace safety standards to serve as checks on worst nastiness of the free market. This moderately reduced the profits of employers but was generally good for workers, who were, after all, human beings.
That very long explanation takes us to unions. Unions, succinctly, are the result of all the workers getting together and asserting that a simple free market wage is unacceptable. Instead, they generally demand wages in proportion to the profitability of the employer.
This is, obviously, quite a wrench in the works of free market capitalism. Essentially, it is the workers collectively refusing to compete with each other when such competition would leave them enormously disadvantaged relative to the employer. When unions are successful, they reduce the profits of their employers and raise the wages of their members.
So let's start trying to be more directly relevant to right now. Many governments (including Canada's current Conservative government) view private corporations as the main engine of economic and job growth. The simple equation articulated by economic conservatives can essentially be summarised as "more corporate profits = more jobs." So the goal of these governments becomes the maximisation of corporate profits; corporate taxes are slashed, subsidies are given, and corporate regulations (as checks on the free market) are opposed or abolished.
This tactic is effective in increasing corporate profits and would be equally effective in decreasing the unemployment rate if the corporations were, in fact, using these profits to hire new workers. But they're not. They are hoarding it, usually by writing themselves enormous pay-cheques. This is because corporations, as free market agents, do not feel an essential mandate to create jobs; they feel an essential mandate to maximise profit. Creating new jobs in Canada and the United States is not, right now, an effective way to maximise profit. Let me explain!
Corporations, simplifying enormously, generate profit by providing a commodity (ie, a good or a service) to a market. The value of the commodity is determined by demand for it. If you're a corporation, you produce more jobs so that you can produce more commodities to make more profit. But if the market's demand for your commodity is already met in the maximum efficient way, you have no motivation to expand. The only thing that can happen to incentivise you to expand is the expansion of the market. If the market isn't expanding, you just sit back, having reached maximum efficiency, and collect your profits.
So giving more profits to corporations only produces jobs if producing jobs will allow corporations to produce still more profits. If there's no motivation for the corporation to produce more jobs, they will just absorb the profits.
There are two demographic things going on here which are relevant. The first is the vast, vast resource of unskilled labour now available in India and China, where there are basically no regulations on the free market. That means that, in those cases where a corporation can increase profits by increasing jobs, they will increase jobs in China or India, where they can pay extremely low wages. The second demographic thing is the static or declining consuming power of the North American market. Because North American labour has been effectively de-unionised over the past several decades, North American wages have frozen or declined in real terms. That means that the North American consumer market has frozen or is currently in decline. Without consumer growth, there is no growing demand for commodities, so there is no growing demand for jobs regardless of how much extra profit conservative governments give to corporations. With consumer market decline, employers are incentivised to lay off workers so that they don't over-produce commodities relative to demand. In those rare instances where employers are incentivised to expand services, the job creation occurs overseas.
In case you think that job creation overseas, by the way, increases consuming power overseas, think again. It does a little, but there is a sharp cap. Because there is a vast group of workers seeking jobs and no real floor on how little you can pay them, the consuming power of those workers will have a similarly low ceiling. This still creates some increased demand, especially for subsistence goods, but those populations will remain utterly impoverished until the number of available jobs exceeds the number of available workers, which is not anytime soon.
Hopefully you see where I am going. If you want to grow the economy, you need to grow the consumer base. Throwing money at corporations only creates jobs when the money allows the corporations to reach previously unreached markets. Otherwise, the corporations just keep the money.
The problem with our economy is clearly not that corporations don't have enough money to expand their services. The problem is that there is no significant unmet demand which corporations could be motivated to try to meet. This is because people do not have enough money to buy more than they are already buying.
Before you go further, you have to decide what you mean by "help the economy." If you mean "make the current super-rich even more super-rich," then the current approach works just fine. If you mean "reduce unemployment and raise the economic standard of living across the population," then the obvious thing you need to do is work to increase the population's consuming power. And the way you do that is by increasing the purchasing power of the population. As a government, one way to do this is by cutting taxes on the middle class, thereby giving them more money. But, based on the current fiscal situation of most governments, that would be a very dumb (albeit popular) move.
The other way you do it is by promoting unions. Without unions, corporations pay their workers free market wages (or as close to that as labour laws will allow). In circumstances where labour is cheap because of vast supply (like right now), that means that even very profitable companies can pay very low wages. But when you have unions, the workers insist that their wages be raised in proportion to the corporation's profitability. Corporate profits diminish (they weren't doing anything helpful with those profits anyway), but suddenly your population has more money and, thus, more consuming power. More consuming power means an expanded market; an expanded market means room for economic growth and more jobs.
So governments right now are doing exactly the wrong thing economically and large chunks of the population are, ridiculously, cheering them on. The remnants of the middle class may be able to survive for another generation or two by using their accumulated capital to acquire specialised education, thus making themselves more desirable commodities as workers. But as long as the free market has free rein, most of the population is going to see continuously less and lower-paying jobs, and eventually the effect of shrinking market demand will reduce the number of skilled jobs and squeeze out the remaining middle class.
tl;dr -- You're not going to get population-wide economic growth without a) more unions or b) the black plague.










