Last night’s post from my union-political-director guy (in response to this) elicited much consternation and vexation among Corner readers. The key problem, as many noted, is the claim that unions improve productivity by making labor more expensive. The UPD-G made this point in both of his posts, and it has bothered me from the get-go. If I understand it right, the argument goes like this: Unions make labor more expensive, so employers try to avoid hiring expensive workers and instead invest in productivity boosting equipment and the like. I kept thinking I misunderstood this point, because it seemed to me that pro-union forces wouldn’t want to admit that hiring fewer Americans and automating industry is why unions are “good for the economy.” This, it seems to me, is an argument for why unions are good for union members, which I never really disputed. Anyway, my Productivity Guy finally caught the bat-signal and chimed in. Here’s his take:
Jonah – I saw the message from your union political director guy, and thought it was time for your productivity guy to chime in…
He notes (correctly) that per unit labor costs and productivity aren’t the same thing – but “productivity” and his narrow definition of “productivity” aren’t the same thing either. He defines productivity as output per unit of labor hours, but this is labor productivity, which is only a partial productivity measure. A more comprehensive measure of productivity is total factor productivity (TFP), which is output produced per total resource inputs (labor and capital). He’s claiming that higher union wages increase productivity, because they force firms to use more capital or better technology (broadly speaking, to substitute capital for labor), which in turn benefits the entire economy. Let’s investigate this scenario….
Suppose a firm has two options it can choose to produce all-purpose widgets – a labor intensive option, which uses a relatively large number of workers and few ‘machines,’ and a capital intensive option, which substitutes machinery for workers. Both options are available to the firm, and if both labor and capital markets are unconstrained (i.e. no unions) and the firm selects the labor intensive option, it has done so because it is more profitable than the capital intensive technology. This is the same thing as saying that the labor intensive technology is more productive overall (i.e. leads to lower overall costs, and doesn’t impact revenues assuming the same, given number of widgets are produced in either case). TFP is therefore higher, but since the firm used relatively more labor, labor productivity will be lower compared with the other option (increase use of an input and its marginal productivity declines). Now let’s investigate the union political guy scenario, where wages are higher – if wages get high enough, this could in fact lead the company to select the capital intensive technology. This uses fewer workers and therefore raises labor productivity. But the TFP of this technology must necessarily be lower, because if it wasn’t it would have been selected in the initial, unconstrained case.
You can also look at it another way…the basic economics of unionization are that unions set wages that are above unconstrained, market levels, which necessarily leads to a lower quantity of labor being employed. If firms are going to hire relatively fewer workers, which ones are they going to keep? The more productive ones. If any firm lined up its workers from least to most productive and fired the bottom half, the productivity of its workforce will necessarily rise – but that doesn’t mean it’s a good idea, or that it will make the company more productive or profitable overall.
I confess I don’t know the literature on unionization and productivity very well, but if this is the best they can do it seems like the case is closed. Artificially raising the price of labor is not a path to higher productivity or prosperity. It’s also well known that focusing on partial productivity measures (like labor productivity) can be misleading, and TFP is a more reliable metric.
PS A personal note – my father was an electrician and an IBEW member his whole life. I’m not necessarily anti-union, particularly in the early days of industrialization when they helped to establish safer and more humane conditions in many workplaces. But the case for the merits of unions shouldn’t rest on far-fetched arguments that they’re forcing companies to become more productive.