Economy & Business

Why Organized Labor Hates Trade

AFL-CIO head Richard Trumka (Chip Somodevilla/Getty)

Organized labor pulled out all the stops in the recent trade battles on Capitol Hill. The AFL-CIO organized its membership to lobby against Trade Promotion Authority and even Trade Adjustment Assistance. It froze campaign contributions to incumbents. It even promised to spend millions on primary challengers to Democrats who voted for free trade. As one member of Congress told reporters, “I haven’t seen this look in their eyes in a long time.”

Many reporters have examined the unions’ role in derailing the trade agenda. Far fewer have examined why they oppose it so vehemently: Competition undermines unions’ business model.

Any introductory labor-economics textbook explains that unions function as labor cartels — not in the sense of using goons to get their way (though a few do), but in the sense of trying to gain a monopoly over a market. The Organization of Petroleum Exporting Countries (OPEC) is an oil cartel. It tries to increase oil prices by reducing oil production. Unions, similarly, try to raise wages by making it hard for companies to hire non-union workers.

Consider the United Auto Workers. In the 1930s and 1940s, the UAW organized virtually the entire U.S. auto industry – General Motors, Ford, and Chrysler. The union’s members built almost every car sold in America. The UAW used its monopoly to force heavily inflated wages and inefficient work rules on the automakers. If they resisted, the union would strike until they caved.

The automakers usually did cave. They didn’t have to worry about higher costs driving away businesses — the UAW would insist on almost identical terms for their competitors. Consumers could not buy less expensive vehicles elsewhere. So the UAW won increasingly generous contracts. By the mid 2000s, UAW members in the auto industry made $70 an hour in wages and benefits. Successful cartels are very profitable for their members.

The Detroit automakers, however, passed these costs on to their customers. Union contracts added an extra $800 to the cost of each GM vehicle in 2006. These higher prices pinched customers’ budgets, putting a new car just out of reach for some families. Fewer sales also meant that the auto industry needed fewer workers. Unions raise their members’ pay primarily by raising prices and reducing employment opportunities for everyone else.

These economic losses to those outside the union exceed the benefits to those inside it. This is true of all cartels (which is why federal antitrust law generally prohibits them; unions have a special exemption). Even so, unions prefer to benefit their members, even at a cost to the rest of society.

However, unions can deliver these benefits only if they can limit competition from non-union employees. Non-union businesses do not have to follow union pay structures, abide by union work rules, or spend months negotiating to change their operations. Their lower costs enable them to charge lower prices and grow at the expense of unionized firms. Economists find that — all other things being equal — non-union businesses grow 3 to 4 percentage points a year faster than their unionized competitors.

Cartels can succeed only when they keep out competition.

This dynamic shifts jobs from less efficient unionized firms to more efficient non-union ones. It also pressures unionized companies to bring their pay in line with market rates and eliminate union work rules. Unionized firms that do not make these changes go under. Cartels can succeed only when they keep out competition.

Since the 1970s, that has become much harder for unions to do. Americans have much more freedom to buy from non-union companies (and workers) than they once did. Presidents from both parties have liberalized trade and deregulated large sectors of the economy.

In turn, unionized companies have had difficulty keeping up with new non-union competition. Researchers find that the poor performance of unionized firms explains virtually all the drop in private-sector union membership over the past generation. Just as U.S. shale-oil production undercut OPEC, rising non-union competition has undercut the union movement.

The Detroit automakers again illustrate this fact. Gold-plated UAW contracts didn’t hurt the Detroit automakers as long as Americans could buy only from them. But in the 1970s, Japanese and German automakers gave Americans new options. These companies did not have to deal with UAW contracts. Their cars — initially built overseas, then increasingly built with non-union labor in America — offered car buyers higher quality at lower cost than Detroit’s vehicles.

Consumers voted with their wallets. Today the Detroit automakers sell less than half of all cars in the U.S. Not coincidentally, the proportion of U.S. autoworkers in the UAW fell from over three-fifths to below one-fifth over the past generation.

In fact, this has been the story of the entire manufacturing industry. Most people think that the U.S. has deindustrialized over the past generation. That is not true. Manufacturing output in the U.S. has continued to grow. Between 1977 and 2014, non-union manufacturing firms added almost half a million net jobs. Nonetheless, total manufacturing employment dropped by a quarter over that period. This happened because unionized companies have lost 6 million net jobs since 1977 — 80 percent of their total employment. The so-called deindustrialization of America is really a de-unionization. Most unionized manufacturers could not survive competition from non-union firms.

This process has benefited American consumers, who enjoy lower prices and a higher standard of living than a generation ago. But it has also dropped union membership to below 7 percent in the private sector.

This explains why organized labor opposes trade so vehemently. They can control the labor supply in very few markets today. Research now shows that workers who vote to unionize today do not see their wages rise. To change this, unions need to restrict competition from non-union workers. The last thing they want is to promote international competition.

— James Sherk is a senior policy analyst in labor economics at the Heritage Foundation.



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