Union Power in the States: Lost Pay, More Taxpayer Debt
Summary: New studies on the harms of American labor laws paint a grim picture. The laws drag down economic growth, suppress workers’ wages, and cause government debts to soar.
Could your family use an additional $13,100 a year? If you live in a forced-unionism state, that’s what the lack of a Right to Work law may be costing you.
At the same time, you’re harmed by the federal mandate that gives unions the power of monopoly (a.k.a. “collective”) bargaining. That federal mandate, it’s estimated, costs workers about 15 percent in forgone income.
In addition, unionization of government employees has helped add many billions of dollars to the unfunded liabilities of public employees’ pensions—a debt for which taxpayers will be held responsible.
Three new studies from the Competitive Enterprise Institute (CEI), the Washington, D.C. think tank where I am a senior fellow, examine these harmful consequences of unionization and of laws that push unionization. The purpose of the studies is to identify the problems caused by union power in states across America; express the problems in numbers; rank the states based on the problems’ severity; and point the way toward solutions by comparing states to see what policies work.
1. Monopoly (“collective”) bargaining
Labor law history makes clear that a key factor in union power is monopoly bargaining, also known as collective bargaining. Monopoly bargaining is an element in the National Labor Relations Act (NLRA), also known as the Wagner Act after its lead sponsor in 1935, U.S. Sen. Robert F. Wagner (D-N.Y.). The Wagner Act’s Section 7 provides:
“Employees shall have the right to self-organization, to form, join, or assist labor organizations, to bargain collectively through representatives of their own choosing, and to engage in other concerted activities for the purpose of collective bargaining…”
Collective bargaining becomes monopoly bargaining when a union acts as the exclusive collective bargaining representative for all members of a bargaining unit (a group of workers who are said to share an economic interest, such as all the assembly-line workers at a factory). If one is not a member of the union or disagrees with the union’s bargaining position, one is left without a voice in bargaining. Workers who disagree with the union have no recourse, as they have no way to bargain individually with the employer regarding their own employment conditions and wages.
The intellectual groundwork for the NLRA, set during the first half of the 20th Century, was known as the High-Wage Doctrine. According to this doctrine, higher wage rates translate into greater purchasing power and a more prosperous economy, and a business downturn cannot be reversed by lowering wage rates.
The High-Wage Doctrine enjoyed wide support. Several prominent business leaders, including Henry Ford, Thomas Edison, Edward Filene, and Gerald Swope supported the idea, as did major political figures, including Herbert Hoover when he served as President Harding’s Secretary of Commerce.
When the stock market crashed in October 1929, then-President Hoover convened a series of conferences at the White House with prominent business leaders. He sought to persuade them to set an example for the nation by refraining from reducing wage rates. In late November 1929, following one of Hoover’s high-wage conferences, the New York Times cited a White House press release:
“The President was authorized by the employers present at this morning’s conference to state on their individual behalf that they will not initiate any movement for wage reductions, and it was their strong recommendation that this attitude should be pursued by the society as a whole.”
Hoover’s employment conferences appeared to succeed—at first. Between the fourth quarters of 1929 and 1930, real wage rates in the United States rose by more than 5 percent (despite an average labor productivity decline of over 5 percent during that period). Rising real wages largely resulted from stable money wage levels and falling prices. But Hoover’s apparent success was short lived, as this inflation-adjusted increase in the cost of labor led to a near-doubling of the unemployment rate over that period, from 5.7 to 10.7 percent.
If the High-Wage Doctrine were valid, the United States would have been enjoying a roaring prosperity. The reality was quite different, as the unemployment rate climbed above 18 percent in 1931.
High wages are good, if driven by higher productivity. But raising demand does not create supply all by itself. One cannot improve aggregate living standards via high wages unless sufficient productivity exists to support the increased demand. Otherwise, the result is either inflation or unemployment.
Origins of monopoly bargaining
The National Labor Relations Act’s monopoly bargaining provision saw its origins in a predecessor law, the National Industrial Recovery Act (NIRA), whose Section 7 was essentially revived in Section 7 of the NLRA.
The NIRA was enacted during the first session of the 73rd Congress on June 16, 1933. What a bill it was! Its very first sentence declared a national emergency:
A national emergency productive of widespread unemployment and disorganization of industry, which burdens interstate and foreign commerce, affects the public welfare, and undermines the standards of living of the American people, is hereby declared to exist.
A declaration of national emergency is often a prelude to the curtailment of individual rights. The NIRA was no exception. It included a long litany of measures “to provide for the general welfare by promoting the organization of industry” (“organization” meaning “unionization”), “to induce the united action of labor and management under adequate governmental sanctions and supervision,” and “to improve standards of labor.”
The NIRA gave the President the authority to establish whatever agencies he wanted, staffed by whomever he wanted, to achieve the broadly stated purposes of the Act. It gave the President power to establish industrial codes (regulations for all transactions). And it allowed the President to investigate businesses at will and to require whatever paperwork he wanted from businesses.
The NIRA’s Section 7 imposed collective bargaining. It also capped work hours, instituted a “minimum wage,” and set conditions for employment, all approved or prescribed by the President. All of these concepts were radical at the time.
The two-year authorization of the act was due to expire in June of 1935, but just before expiration, on May 27, 1935, the United States Supreme Court ruled the act unconstitutional in Schechter Poultry Corp v. United States. By July 1935, however, a replacement for the NIRA was sent to President Roosevelt. Echoing Section 7 of the NIRA, it established a formal mechanism for certifying specific labor unions as monopoly bargaining agents for certain groups of workers and for requiring employers to negotiate with those unions. Monopoly bargaining was thus resurrected in another Section 7 which operates today.
To protect his New Deal policies, FDR went after the Supreme Court itself. On February 5, 1937, Roosevelt unveiled his plan to pack the United States Supreme Court with additional justices of his own appointment. The President spoke about his court-packing plan in his Fireside Chat of March 9, 1937, in which he explained how court-packing would give the President the additional power he desired:
“In 1933 you and I knew that we must never let our economic system get completely out of joint again-that we could not afford to take the risk of another Great Depression. We also became convinced that the only way to avoid a repetition of those dark days was to have a government with power to prevent and to cure the abuses and the inequalities which had thrown that system out of joint.”
Three weeks later, the U.S. Supreme Court ended its 40 years of strong support for the liberty of contract (a period known to Constitutionalists as the Lochner Era). West Coast Hotel Co. v. Parrish was the first case upholding a state minimum wage law. Immediately thereafter, in April 1937, the Supreme Court, in National Labor Relations Board v. Jones & Laughlin Steel Co., held the National Labor Relations Act (Wagner Act) to be constitutional.
With that decision, labor policy in the United States shifted toward active federal encouragement of unionization and toward the legal certification of unions’ status as monopoly bargaining agents.
Monopoly bargaining hurts a state’s economy
In the CEI study “The Unintended Consequences of Collective Bargaining,” authors Lowell Gallaway and Jonathan Robe analyze and rank the effect of unionization on economic growth on a state-by-state basis, and calculate the “deadweight loss” resulting from unionization.
By raising the cost of labor, unions decrease the number of job opportunities in unionized industries. That, in turn, increases the supply of labor in the nonunion sector, driving down wages in those industries. The effect of this situation is to increase the natural rate of unemployment, thus imposing a deadweight loss of economic output on the economy. Deadweight loss in this context means that unionization artificially increases the price of a factor of production—labor—above the price that would be established in a free and competitive marketplace. The artificially high cost of labor then lowers economic output, known as GDP (Gross Domestic Product).
The presence of deadweight losses that arises from labor union activity can be shown by a formulation devised by labor economist Albert Rees. Rees demonstrated the consequences of union wage-raising initiatives on employment in both the union and nonunion sectors of the labor force.
The Rees formulation can be used to calculate the value of these deadweight losses from unionization if three factors are known: (1) union density (the percentage of employees who are unionized), (2) the wage premiums associated with the presence of unions, and (3) the general elasticity of demand for labor (how much the quantity of labor demanded by employers changes because of a change in the price of labor). Using this and other estimates, the CEI study calculates the deadweight losses for six different years during the period 1967 through 2000.
Over 50 years, the cumulative reduction in worker wages would be about 15 percent. Because wages are only a fraction, though a large one, of total output or GDP, the deadweight losses from unionization in GDP are smaller, but over a long period of time those small annual effects add up to produce a substantial cumulative loss of GDP—as much as 10 to 12 percentage points over a half century. (And the real number may be much worse. The Rees analysis understates the harm because it doesn’t consider the way that lower wages shrink the labor force.)
Different effect in different states
Deadweight loss contributes to significant differences in income among residents of various states. To explore the extent of this phenomenon, Gallaway and Robe’s analysis uses a statistical model to explain the differences in real per capita personal income among states. The unionization rates and five other independent variables are included in the model to account for additional factors that are likely to affect the growth in income: manufacturing, income tax rates, real per capita income in 1964, politics, and college education.
The study indicates that every additional percentage point of average unionization from 1967 to 2000 reduced the growth in real per capita personal income by 1.73 percentage points. Knowing this relationship makes it possible to estimate the effect of union-related deadweight losses on the growth in real per capita income in the various states. The above chart, based on that analysis, shows the different effects of collective bargaining on the several states.
Two broad conclusions emerge from this study. First, the presence of labor unions that operate as collective bargaining agents has the potential to seriously inhibit economic growth in the several states and the District of Columbia. This conclusion suggests that the National Labor Relations Act’s provision mandating collective bargaining was rife with (presumably unintended) bad consequences.
Second, the disparity in the relative incidence of unionization of the workforce across the United States leads to widely disparate impacts on the states. Some states, such as Michigan (which only recently enacted a Right to Work law), have suffered large amounts of foregone economic growth, while others, such as South Carolina (which has had a Right to Work law for decades), have been far less affected.
2. Right to Work laws
In December 2012, President Obama made an ultimately futile attempt to thwart Michigan’s proposed Right to Work (RTW) law. Speaking at the Daimler Detroit Diesel plant, the President declared, “These so-called Right to Work laws, they don’t have anything to do with economics. . . . What they’re really talking about is giving you the right to work for less money.”
Contrary to the President’s claim, Right to Work laws have a lot to do with economics. Contrary to the President’s suggestion, Right to Work laws mean better pay for most people. The evidence is compelling that Right to Work laws are good for both the American worker and the financial health of states across the country. Economic growth in a state is significantly related to the presence of a Right to Work law.
Short of repealing the monopoly bargaining contained in the federal Wagner Act, the best way to repeal forced unionism is to enact Right to Work laws in individual states. Here, history provides a guide.
The onerous effects of the 1935 National Labor Relations Act continued unabated for over a decade. Then, in 1947, the Taft-Hartley Act became law, providing a modicum of relief by amending the National Labor Relations Act to read:
Nothing in this … shall be construed as authorizing the execution or application of agreements requiring membership in a labor organization as a condition of employment in any State or Territory in which such execution or application is prohibited by State or Territorial law.
From that point forward, states, if they chose, could pass Right to Work laws. Currently, 24 states have such laws, which give workers the right not to join unions as a condition of employment and which prohibit the coercive collection of dues from workers who choose not to join. In the CEI study “An Interstate Analysis of Right-to-Work Laws,” authors Richard Vedder and Jonathan Robe analyze the effect of Right to Work laws on state economies, and rank states’ loss of per capita income from not having such a law.
Table 2. Estimated Per Capita Income Loss Associated with NOT
Having a Right to Work Law, 30 non-RTW States
The top 10 states most harmed by their failure to adopt Right to Work laws are Alaska,
Connecticut, California, New Jersey, Illinois, Hawaii, Maryland, Wisconsin, New York,
and Michigan. The study analyzes the period 1977-2012. Idaho, Oklahoma, Michigan, and
Indiana enacted their Right to Work laws in 1985-86, 2001, 2012, and 2012, respectively.
Over the study period, these states faced full or partial economic losses associated with
the absence of RTW. Indiana’s law is currently making its way through the courts.
People have been migrating in large numbers from non-RTW states to RTW ones. The evidence suggests that economic growth is greater in RTW states, as indicated by some key factors:
►Attracting investment. Right to Work laws tend to lower the presence of unions, reduce the adversarial relationship between workers and employers, and make investment more attractive. As one would expect, these factors have a positive impact on measures of economic performance including job creation and, ultimately, on the general standard of living. Over the study period, employment grew 71 percent nationwide, with a big difference between RTW and non-RTW states: Employment grew by only 50 percent in non-RTW states, compared to 105 percent in RTW states.
► Causing the migration of labor. Conversely, lack of a RTW law may be a factor in the out-migration of labor from a state. From 2000 to 2009, 4.95 million people migrated from non-RTW states to RTW states. Legislation favoring unionization raises labor costs and makes employers less likely to invest. This, in turn, reduces the capital resources available to support workers, lowers both productivity growth and wealth creation, and makes people less well off than they would be in a fully free labor market.
► Pushing incomes higher. Incomes rise following the passage of RTW laws, even after adjusting for the substantial population growth encouraged by those laws. The evidence suggests that if non-RTW states had adopted RTW laws 35 years ago or so, income levels in those states would be on the order of $3,000 per person higher today, with the impact varying somewhat from state to state.
The bottom line:
The median loss of income is $3,278 per capita, which translates to over $13,100 for a family of four. The total estimated loss of income in 2012 from the lack of RTW laws in a majority of U.S. states was an extraordinary $647.8 billion.
Thus, when a state refuses to enact a Right to Work law, that choice doesn’t just hurt workers who are forced to join unions or make payments to unions against their will. That choice hurts everyone.
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Aloysius Hogan is a senior fellow at the Competitive Enterprise Institute, a free-market think tank in Washington, D.C. This article originally appeared in the September 2014 issue of “Labor Watch,” published by the Capital Research Center, and appears here with permission.