According to some, the reason we need unions is because without them employers would grind employees into the ground. Were organized labor to disappear, wages would plummet; workers would have to work on Sundays, tip their hat to their bosses and suffer all sorts of other indignities – including losing virtually all improvements in working conditions made over the last century.
This is all wrong. Wages and working conditions aren’t set by firms. Rather, they depend upon the productivity of labor. This can be defined as the extra amount of revenue brought in by adding one more person to the payroll. For example, if there were 1,000 workers creating an item that sold for X dollars and then the 1,001st employee came on board and the firm’s sales rose to $X + $7, then the marginal revenue productivity of the last person hired would be $7 per hour.
Wages can’t (long be) higher than this amount, or the company will lose money on every worker it hires. For example, if compensation is $10, and revenue taken in due to the efforts of the worker is $7, then the firm loses $3 every hour the man is on the shop floor.
On the other hand, a situation can’t long endure where wages are lower than this amount. For example, suppose pay was $2 per hour, while productivity remained at the $7 level we are considering. Then, the employer would earn a pure profit of $5 every hour. This can’t last. Other companies would have incentive to hire such a worker away from his employer. Assuming that the productivity of the latter would be the same $7 everywhere, a competitor could offer, say, $2.25. This would be a substantial increase over and above the present salary of $2 and yet would allow the newcomer to earn a profit of $7-$2.25 = $4.75. But if this would work, so would a bid of $2.50, $2.75, $3.00, etc. Where would this process end? As near to $7 as allowed by the costs of finding such “underpaid” workers and convincing them to switch jobs for higher pay. This doesn’t mean that under free enterprise there will be no deviations from this amount. But there is an inexorable tendency for wages to continually move in the direction of this equilibration.
If wages were really set by employers, why is it that employees such as Shaquille O’Neal, Brad Pitt and Brittney Spears all earn mega bucks? Generosity? No, the reason they do is because their productivity (ability to fill seats in sports arenas, movie theaters, concerts) is very high. If their present employers did not pay them in accordance with productivity others would gladly jump in and do so.
When unions artificially boost wages above this stipulated $7 productivity, they look good in the short run. But in the long run they create business failures and rust belts. It’s impossible for any substantial length of time to maintain wages above productivity levels.
What determines the level of productivity and hence the wages? This is based on how hard and how intelligently people work and the amount and sophistication of the tools and capital equipment they are given by their employer to work with. This, in turn, depends upon how much saving occurred in the previous periods and even before that, how economically free and law abiding is the populace. The more reliance on private property rights and free enterprise, other things equal, the better in this regard.
If organized labor is really the only institution that stands between the workingman and abject poverty, how is it that real wages have been increasing while the rate of unionization has been declining over the last half century? Why is it that some industries that have never come within a million miles of unions (computers, banking, accounting) pay very high wages, often in excess of that earned by the rank and file? Given that they are at the mercy of the capitalist pigs, should they not have been ground into the dust? How can it be that the south, which is the least unionized part of the country, is the fastest growing? What accounts for the fact that countries where western style unionism is all but unknown (Hong Kong, Singapore, Japan) there are economic powerhouses, with standards of living envied in many places on the globe?
Walter Block is a professor of business administration and Wirth chairman of economics.
