Unions have a long and storied history in the United States. They have been around almost since the founding of our country, but have gained most of their political power over the last century. The effects of unionization have a profound impact on our economic well-being, including our standard of living, relative wages and unemployment rates. Unions are one of the reasons for our current recession and I believe that they will continue to hinder our recovery efforts in the years ahead.
Our macroeconomic situation in the United States is extremely complex, so it is difficult, if not impossible, to define exactly how labor unions affect it. Economists’ opinions on this topic vary wildly whether they originate from the political right or left, and entire books have been written about this topic. Therefore, it is important to note that unions are not the direct cause of our current recession. They only play one of many roles in our recent economic downturn.
To examine this topic we will have to take a look at the purpose of unions and their history in the United States. Once we have a general idea of how unions came to hold so much power we can look at the economic effects of collective bargaining.
Unions have been around for a long time, dating back to the founding of our country. In the early years of the U.S., unions were small, industry driven organizations. There may have been trade unions for agricultural workers, carpenters or farmers, but these organizations were largely informal, community oriented and industry specific. These early unions in the U.S. had two purposes: “The first was to pursue a policy of restrictionism; that is, to control the supply of labor. The second was to work toward the establishment of minimum wage and working standards for the entire work force” (Miernyk 65).
In the 1800’s these unions slowly grew to be a bit larger, but it was two major events in the 1900’s that brought unions into power and gave them so much political influence. The first event took place in 1933 and opened the floodgates for the growth of union membership. Our country was in the midst of the Great Depression and desperate for economic recovery. It was out of this desperation that the “New Deal” Congress passed the National Industrial Recovery Act of 1933.
“There was one provision of the NIRA which was to play an important part in subsequent legislation for the encouragement of union growth. This was the
famous Section 7 (a) which required ‘that employees shall have the right to organize and bargain collectively through representatives of their own choosing, and shall be free from the interference, restraint, or coercion of employers of
labor, or their agents.’ The law went on to specify that no worker or no one seeking employment would be required as a condition of employment to join a company union” (Miernyk 103).
Two years later the National Industrial Recovery Act was ruled unconstitutional by the Supreme Court, but by that time union membership had already grown by almost one-third, giving unions the first big boost in their rise to political power.
The second factor that brought unions into the forefront of the political spectrum was the merger of the AFL and CIO on February 9th, 1955. Prior to the merger these two organizations served as a sort of parent company to a large group of trade unions. This marked a time that produced one of the highest numbers of union employees in United States history. “At the point of merger, the combined membership of the AFL and CIO was less than 15,000,000 of the country’s 62 million workers” (Ginger 668). While this number may be downplayed in the text of this quotation it is important to understand that almost twenty-five percent of the nations labor force was being employed under union contracts. And with power in numbers the newly merged AFL-CIO became a political force that is still largely influential to this day.
While this mass unionization may seem beneficial to the ordinary American worker, just like any public policy, it has unintended economic consequences. One of its biggest and most harmful effects is the outsourcing of American jobs to foreign countries. A study conducted in 2004 says,
“In 2001 we found significant differences in the union status of companies shifting production from the U.S. to China, only 14 percent of which were unionized, and those shifting production to Mexico, 26 percent of which were unionized. In contrast, three years later, with private-sector union density now as low as 8 percent, we find that 29 percent of production shifts out of the U.S. are in unionized facilities, including 44 percent of firms moving jobs from the U.S to Mexico and 29 percent of firms moving jobs to China” (Wagner 79).
It is abundantly clear that above market labor costs decrease an entrepreneur’s incentive or even ability to produce a good or service in America, so to stay in business it is reasonable to think that the business owner may relocate his operations in search of lower cost labor.
Another point of contention that most critics have with labor unions are their excessive pension funds. Most companies have some sort of retirement account for their employees, whether it be an IRA, a 401K, or otherwise, but unlike the unions, their retirement accounts are privately funded by their employees. Unions, on the other hand, set aside a pension that their employees are entitled to collect on after a certain number of years, and the numbers are absolutely staggering. “America’s labor leaders manage a huge sum: over $350 billion in pension funds. Unfortunately, though, this sum is not nearly enough. Obligations exceed assets by at least $150 billion” (Wagner 46). And since most of the country’s current union members are government employees, it is not unreasonable to think that our tax dollars will end up bailing out these union pensions, especially in the light of the recent bank bailouts. The pensions offered by labor unions are grossly negligent in the area of fiscal responsibility and, “One of the saddest facts about the American labor movement is that the putative beneficiaries of union-run plans have been historically less likely to get a pension than workers who are beneficiaries of company-run plans” (Wagner 47).
Additionally, unions that push wages beyond the current market rate are a direct cause of unemployment. And while the political left has been a big supporter of unions over the decades it is ironic that this concept comes from President Barak Obama’s senior economic adviser Larry Summers. In The Concise Encyclopedia of Economics he writes, “Another cause of long-term unemployment is unionization. High union wages that exceed the competitive market rate are likely to cause job losses in the unionized sector of the economy. Also, those who lose high-wage union jobs are often reluctant to accept alternative low-wage employment (Pethokoukis).
We can see all of these factors at work in our current recession. You do not have to look any further than General Motors to see what collective bargaining can do to a company. At about this time last year General Motors went belly up in the largest bankruptcy filing to ever be recorded in the United States. While union supporters may argue otherwise, I believe that labor unions were the direct cause of General Motor’s bankruptcy. General Motors was paying wages well above the competitive market rate and managing a large amount of pension obligations to its retirees. They spent months trying to renegotiate union contracts as they continued to lay off workers in their factories, and in the end they could not reach an agreement with the unions and thus had to file bankruptcy only to be bailed out by the United States and Canadian governments. It is this, among other examples, that clearly show, “American trade unions have been too successful in winning wage increases for their members. Employers have therefore had a greater incentive to oppose unions” (Workers).
It is all this that only reinforces my opinion that labor unions should not have a place in the private market. They have gained too much power, harnessed too much influence, and put too high of a price floor on wages to help the American economy succeed. For decades the American government has regulated business operations through legislation and I think it is well time to regulate unions in the same manner. The market is supposed to set the wage rate, and saving for retirement is supposed to be a matter of personal responsibility. Unions have been far too intrusive, and while they are not the sole cause of the recession, we could stand to do a lot better without them.
Works Cited
Ginger, F. Ann and David Christiano, ed. The Cold War Against Labor. 3rd ed. Vol 2. Berkeley:
Meiklejohn Civil Liberties Institute, 1987. Print.
Miernyk, William H. The Economics of Labor and Collective Bargaining. San Francisco: D.C.
Heath & Company, 1965. Print.
Petholoukis, James. “Obama Adviser Summers: Unions Cause Unemployment.” U.S. News &
World Report Online. 31 Jan. 2009. Expanded Academic ASAP. Web. 18 Mar. 2010.
Wagner, Viqi, ed. Labor Unions: Opposing Viewpoints. San Francisco: The Gale Group, 2008.
Print.
“Workers of the World Disunite.” The Economist [US] 18 Aug. 1990: 57. Expanded Academic
ASAP. Web. 18 Mar. 2010.
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