It’s an age old struggle—more often rhetorical than physical. Usually framed as business vs. labor, it’s really about cooperation vs. confrontation. Since humans could walk upright we have entered into cooperative relationships. This natural organization is the foundation of a market economy—and a font of human prosperity. But it has not always existed unchallenged. Always and everywhere confrontation lurks.
For centuries, it worked through ancient craft guilds that kept out new competitors, often under threat of force. Guilds gave way to unions, which morphed into the behemoth we now know as Big Labor. Far from voluntary, Big Labor relies on a complex web of laws, mandates, and government-granted privileges.
By raising the cost of labor, unions decrease the number of job opportunities in unionized industries. This then increases the supply of labor in nonunion industries, which in turn drives down wages in those fields. As a result, wages for those occupations decrease, as more people compete for the same number of jobs.
The overall effect is to increase the natural rate of unemployment. This is not to say that in order to ensure future growth, employers should pay workers less; but rather, that increases in productivity, not wages, ultimately drive the economy. Artificially raising wages beyond their market-clearing price would force employers to reduce the number of available job openings. The sum total of all these consequences is a dead-weight loss on the economy, essentially meaning that the economy is running below peak efficiency.
Of course, the extent of this dead-weight loss varies across states, largely depending on each state’s union presence. As economist Lowell Gallaway and labor expert Jonathan Robe found in their analysis, Michigan had the greatest loss among the states, at 23.1 percent of GDP over a 37-year period, while South Carolina had the least, at 3.5 percent. The difference? Heavily unionized Michigan enacted a right to work law only in 2012, after the period Gallaway and Robe studied (1964-2011), while South Carolina has had a right to work law for many years.
A right to work (RTW) law gives workers the right not to join unions as a condition of employment, and stops unions from coercively collecting dues from non-members. Currently 24 states have right to work laws. As Robe and economist Richard Vedder show in another study, most RTW states have experienced a growing and functional economy, while those that lack right to work laws tend to have stagnant economies.
These laws foster positive relationships between workers and employers, as they are based on a more cooperative vision of employment, in contrast to the confrontational union approach.
The presence—or absence—of a RTW law can also influence company decisions on where to relocate, and thus influence migration from one state to another. For years, RTW states have enjoyed an influx of labor, resulting from greater job opportunities. Meanwhile employers are less likely to invest in non-RTW states, where they have to deal with higher labor costs from greater levels of unionization. On this measure, California fares especially badly. It had the biggest total income loss. Yes, it’s the nation’s largest state, but it also had the third highest per capita income loss, behind Alaska and Connecticut.
Clearly, laws that encourage, or even force unionization are detrimental to economic growth. Reforming such laws, however, poses quite a challenge. As economist Robert Sarvis explains in his study of state government pension debt, government employee unions consistently oppose any and all reforms that would dilute their power. Meanwhile, politicians who rely on those same unions for electoral support find it much easier to avoid the issue and pass the bill to future generations, rather than anger their union allies.
Without significant reform, pension debts will go on adversely affecting their states’ business climate through higher taxes and fewer basic government services. And compulsory unionism laws will continue to deter investment and job growth. Throw in the reality of a stagnant economy and we are experiencing a genuine economic malaise.
So can anything be done? Perhaps, though it won’t be easy. But reformers have on their side the key principle of market economics that “reality is not optional.”
That’s something unions and their political allies will have no choice but to confront.