Labor Unions Aggravate Inflation by Lowering Wages; D. Lee

Dwight R. Lee Labor Unions Aggravate Inflation by Lowering Wages IT IS commonly believed that labor unions generate inflation by in creasing the wages of workers. This is not the case. Labor union activi ties do aggravate inflation, but they do it by reducing the real wages re ceived by workers, not by increasing them. An understanding of why this is true requires, first of all, a brief explanation of the cause of inflation. We are currently experiencing in flation for the same reason that any economy, at any time, has ever ex perienced inflation: the money sup ply has been growing more rapidly than the growth in production. As sume, for example, that the produc tion of goods remained the same but the number of dollars we have to spend on these goods doubled. We Dwight Lee Is Associate Professor of Economics, center for Study of Public Choice, Virginia Polytech nic Institute and State University.

244 would all be willing to spend ap proximately twice as much on each good as before. But this means that the price of goods would also double, as would the general price level. In crease the growth in the money sup ply and reduce the growth in pro ductivity and inflation will result. Since monetary growth is subject to much larger changes than pro ductivity growth, it is a rapidly growing money supply that explains most of our inflation. It is the federal government that controls the money supply, so the major blame for infla tion can be placed on government activity. Labor unions aggravate in flation however, by engaging in practices which impair economic productivity. It is only by imposing restrictions on the economy which reduce pro ductivity that a· union can provide LABOR UNIONS AGGRAVATE INFLATION 245 an economic benefit to its members. In a free and open labor market a worker will be able to receive a wage that reflects his productivity and which is no higher than what com parably skill~d workers are receiv ing .elsewhere in the economy. A higher wage would attract addi tional workers thus driving the wage back down to the competitive level.

Of course, this competitive process increases the productivity of the economy by directing workers into those employments where their con tributIon is greatest. And it is pro ductivity that has increased over time in response to the incentives and direction provided by competi tive markets that, at least until re cently, made U. S. workers the best paid in the world. But union leaders cannot attract dues-paying members by getting them a wage rate that they could 'earn without a union. And the only way unions can provide their mem bers with higher than competitive wages in some occupations is to re strict the competition from non union workers. While this may in crease union wages in the short run, it does so at the expense of .lower wages for other workers. Higher union wages and prices in one sector of the economy are effectively offset by lower wages and prices elsewhere in the economy.

In order to realize· this relative wage advantage for its members, organized labor has consistently fought for legislation which reduces, if not eliminates, the opportunity for non union workers to secure jobs that would otherwise be available to them. Organized labor's struggle for the closed shop (only union mem bers can be employed) and their bit ter opposition to state right-to-work laws (which eliminate unionmem bership as a requirement for em ployment) are clear examples of union attempts to protect their workers against competition. Other examples are union efforts to re strict imports and obtain legislation restricting the movement of large employers from the unionized North East to the less unionized Sun Belt states. CompetitionReduced To the extent that organized labor has been successful in these restric tive activities, the economic compe tition and mobility that is a major source of increased productivity has been reduced. And strong evidence of the success of unions in protecting their members against productive competition is· seen in the feath erbedding practices they are able to impose, practices which could never survive open competition. Unions have long inflicted costly feath erbedding practices on the railroads, with the requirement that firemen remain on diesel locomotives being a well-known example. The build246 THE FREEMAN ing, theatrical and oceanshipping industries, as well as many others, also suffer from union featherbed ding requirements.

A typical example is that of a con struction job which required the use of several very small gas-powered generators. Because of union re quirements, each generator had to be attended by an operating engi neer, an electrician, and a pipefitter. The engineer had to start the engine a few times each day, the electrician pushed wire plugs in the generator's sockets if they were moved, and the pipefitter was there, tJust in case." Obviously, such practices further the negative effect organized labor has on our economy's productivity. It is this impact on productivity that explains why the overall effect of organized labor is to reduce real wages. Productivity is the source of all income, including wages. Real wages depend on the wage earner's ability to buy goods and services. It cannot be purchased unless it is first produced. Furthermore, for a given rate of monetary growth, the lower our productivity the higher the in flation rate. So unions have an infla tionary impact by reducing producUnionized Unemployment tivity and thus lowering, not raising, the general level of real wages.

MarketEfficiencyHampered The best way to increase produc tivity, improve the living standard of all workers, and help retard infla tion is to allow competition in free and open markets. Unfortunately we can expect little support in this di rection from organized labor. Union leaders cannot tolerate the effi ciency of competitive markets be cause what they have to offer their members comes from their ability to reduce the free market opportuni ties of others. The very existence of organized labor depends on its ability to use its political influence to sabotage the efficiency of the free enterprise sys tem. If allowed to operate freely, the market process would simply cir cumvent union efforts to impose inefficiencies on the economy. This would leave union leaders with lit tle to justify their healthy incomes, but also with little ability to under mine productivity, aggravate infla tion and thereby reduce, in the long run, the real incomes of us all, union and nonunion workers alike. , IDEAS ON UNEMPLOYMENT prevails where a person who wants to work for the wage $ an employer is willing to pay is prohibited from doing so by some outside power. So fewer hours than wage earners would prefer of their own free LIBERTY choice amounts to·the same thing as forced unemployment.

F. A. HARPER,Why Wages Rise A REVIEWER'S NOTEBOOK JOHN CHAMBERLAIN WealthofNations • Irl Crisis IN ITS REITERATION of home truths, Ronald C. Nairn's Wealth ofNations in Crisis (Bayland Publishing, P.O. Box 25386, Houston, Texas 77005, 288 pp., $12.95) is a simple book. The title harks back to Adam Smith; the ((lesson" is that State incursions into the economic process work only toward the impoverishment of peo ple.But simplicity is not enough in a world that has succumbed to illu sions. So, as a means to establishing his basic point that the individual must be allowed to make his own decisions if human productivity is to be revived, Mr. Nairn has been at back-breaking pains to illustrate what has been happening all over the world to inhibit the three-bil lion-strong· peasant populations whose farming activities keep a bil lion city dwellers alive. The virtue of Mr. Nairn's book re sides in its incredibly learned detail.