Organized Crime

Ludwig von Mises wrote in his treatise, Human Action, that the main ideological foundation of labor unionism, and of government labor policy that is based on it, consists of such “garbled ideas” as the myth that employers have “superior bargaining power” over workers.

In labor markets competition among entrepreneurs assures that there is a close association between worker compensation and the marginal productivity of labor. More precisely, compensation is determined by the workers’ “marginal revenue product,” which is the multiple of marginal physical product—how many physical goods or services the worker produces in a given time period—and the final price paid by consumers for those articles.

Workers therefore become more valuable to employers if their marginal productivity increases, which is caused by capital investment by employers (which makes labor more productive and hence more valuable), technological improvements which are usually the result of employer investments in research and development, and improved human capital, which is the result of education, training, experience, and learning of all sorts.

Workers also become more valuable to employers if say, consumer demand is strong, which drives up the price of the good or service they work at producing. This increases their marginal revenue product as well, since the demand for labor is a “derived demand,” being derived from the consumer demand for the goods and services that the labor is used to produce.

If an employer attempts to exploit some or all of his employees, in a competitive, capitalistic labor market he will merely create a profit opportunity for his rivals, thereby harming his own business. If an employee’s marginal revenue product is say, $500 per week but he or she is paid only $200 per week, then it will pay competing entrepreneurs to hire that worker away for $300, then for $400, or higher, because they will still be earning a profit by doing so. As Mises wrote in Human Action, “There will be people eager to take advantage of the margin between the prevailing wage rate and the marginal productivity of labor. Their demand for labor will bring wage rates back to the height conditioned by labor’s marginal productivity.”

Even if some employers do exploit their employees by paying them less than their marginal revenue product, it is not at all clear that this would primarily benefit the employer, if it benefited them at all. Product market competition may well force them to pass on these cost savings to consumers in the form of lower prices, which would actually benefit wage earners by increasing their real wages.

The only conceivable way that the exploitation of workers could work is if there was a universal cartel of employers that operated an ironclad cartel void of cheating by cartel members, whereby all the employers agreed to pay exploitative wages. The only known instance of such a scenario—and of universal worker exploitation—was socialism, where the state was the monopoly employer. It has never occurred—and could not ever occur—under capitalism because of the well-known cheating proclivities of cartel members. “It has been demonstrated that at no time and at no place in the unhampered market economy can the existence of such cartels be discovered,” Mises wrote in Human Action.

Proponents of the “capitalists have superior bargaining power” fable also embrace the fallacy that “labor” is homogenous. Mises explained the significance of this as well:

What is sold and bought on the labor market is not “labor in general,” but definite specific labor suitable to render definite services. Each entrepreneur is in search of workers who are fitted to accomplish those specific tasks which he needs for the execution of his plans. He must withdraw these specialists from the employments in which they happen to work at the moment. The only means he has to achieve this is to offer them higher pay. Every innovation which an entrepreneur plans . . . requires the employment of workers hitherto engaged somewhere else.

In reality, union representation often harms many workers, contrary to the assertions of the “superior bargaining power” fallacy. For one thing, unions can only benefit some of their members—the ones who are not priced out of their jobs by above-market, unionized wage rates. Other union members, typically those with the least job experience and seniority, will lose their jobs. As they seek work in other areas, including the non-union work force, they will tend to depress wages there. In general, virtually all gains by unionized workers come at the expense of non-union workers.

A general consequence of unionization is a reduction in the dispersion of wages as the wages paid to the most productive workers are dragged down toward the median while the wages of the least productive workers are pushed up in excess of their marginal productivity levels. Unionization therefore penalizes the hardest-working and the most ambitious while subsidizing the less productive and ambitious workers. This is one among many reasons why employers sometimes go to great lengths to avoid unionization: rewarding mediocrity and penalizing superior work performance is a recipe for business failure.