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The UAW's Gamble

October 17, 2007

Tags Free MarketsInterventionismMonopoly and Competition

At the time I write this, the United Autoworkers Union just ended a seven-hour strike against Chrysler — thus ending the walking off of jobs by workers and the restriction by threat of violence of those who would have tried to take their place.

Those are, after all, the two characteristics of a strike. You don't work, and you physically threaten those who want to. Unions are, as Rothbard noted, the only organization in society besides the government with the legal right to use coercive force on adults. Unions in the United States were given this right with the passage of the Norris-LaGuardia Act of 1932.

There was a time when such strikes would cause serious harm to companies. In the 1950s, the autoworkers faced a less competitive labor market, so strikes and their threat were things to be feared. Output could fall to zero, and the myriad of firms that support the automotive industry (unionized or not) would face shutdowns. Meanwhile, friction existed between employers and employees who otherwise would have strong incentives to compromise and cooperate, as is the norm in non-unionized sectors of the labor force.

But strikes were easier to pull off in those days. Public sentiment was more sympathetic to the union workers, and the percentage of union labor in the workforce was much higher. It was likely that you or many of your friends depended on union jobs to provide for families. Also, postwar America was largely immune from international competition for manufactured goods. This meant that if workers struck, they could often damage their firms without threatening them with bankruptcy.

Furthermore, union labor back then had skills that restricted competition from other workers. Given the tools and other forms of capital that existed at the time, workers making Ford Fairlanes required skill sets that simply aren't necessary for today's workers building Ford Explorers with modern robotic technologies. The increased skill requirements on their own would give workers bargaining power over their firms, notwithstanding the many legal protections unionized workers received.

Taken altogether, union labor enjoyed a heyday at this time. But its success incurred two significant costs that are ignored by union labor's partisans.

The first concerns the many unseen costs of union labor. On the surface, we see workers earning higher salaries through labor contracts arrived at collectively. But beneath it, there are workers who cannot find work because they either cannot join the union or because firms can afford less labor when they are restricted to union labor. At the same time, racism abounds because it can no longer be thwarted by market forces. Workers not favored by unions (or pro-union legislation) find it difficult to learn skills they would have gained on the job. By keeping such workers unskilled, organized labor protects existing workers by restricting possible entry into skilled labor markets.

The second cost is the redistribution of wealth that occurs when unions are strong. In the market economy, the benefits of productive activity are shared among three groups: the owners of capital, the laborers, and the consumers, with the benefits of the last group greatly exceeding those of the previous two. Unions, when successful, pervert this relationship by acquiring benefits from the owners of capital and the consumers. As a result, capital owners have fewer resources to invest for the satisfaction of future consumer needs, and industry in general has less capacity for innovation. Consumers suffer as well, when their consumption choices are reduced and when they pay higher prices reflecting increased scarcity.

Today's marketplace, in contrast, is more competitive, both in the labor and the goods markets, and such competition is the bane of union power. Competitive markets mean that massive strikes can now prove fatal to employers and employees, which explains why the UAW Chrysler strike was so short-lived. With competition rendering strikes ineffective, the strike option can only be effective for teachers, government employees, and other professions that function in less competitive environments.

What's more, technology today requires workers with strong work ethics (and not necessarily hard-to-acquire skills), something that is not in short supply and means that automobile plants no longer need to congregate in specific geographic locations near labor pools and agglomerations. Indeed, an increased competitive atmosphere causes automobile firms that do not eschew union labor to pay a significant market price.

All this happens because in the end, economic forces reflect the constant consumer desire for more products and lower prices. Protected markets may circumvent these desires in the short run, but in the long run they trump even the most successful labor cartels. We see this happening when another Detroit factory is shuttered while new ones open in places foreign to Detroit culture, whether in southern Alabama or southern China.

This illustrates the risk that the UAW invited by striking against Chrysler. The union may be emboldened by the deal it received last month from General Motors, including stock ownership that could result in union control of the company. But Chrysler, in contrast, is no longer publicly traded and may be less able to offer benefits to the union in exchange for the union's assumption of legacy costs.

The extent those costs harm the domestic auto industry illustrates what happens to industries in which worker benefits exceed worker productivity. No market participant consistently gambles with economic law and wins, and the UAW has been gambling for a long time.


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