Tag Archives: ecoomics



Unions are in the news again thanks to the recent shenanigans in Wisconsin. Scott Walker, the governor of Wisconsin has proposed a bill that would force the men and women that belong to public employee unions in Wisconsin to contribute some of their pay to their own health care and retirement plans. Previously all the money for these plans was generously “contributed” by tax victims. The bill also forces the unions to give up their collective bargaining “rights” for work rules, but not for wages. These rather modest demands have led to massive protests on the part of these unionized “public” employees.

So what should the libertarian position on labor unions be? What exactly is a union in the first place? How do unions operate? Do they operate differently in the so-called “public” (violent) sector than they do in the nominally “private” sector? Could unions play a part in a theoretical free market society of the future? Many libertarian thinkers have said that while public sector unions are clearly immoral, it is possible for private sector unions to legitimately exist on a free market and operate according to free market principles. I disagree. A union operating on free market principles will not accomplish its goals, and to the extent a market is characterized by union activity it cannot be called free.

In order to understand how unions operate we have to first identify what they are and what their purpose is. Unions are organizations that claim to represent a certain group of workers in a collective bargaining process with employers. Other kinds of organizations can call themselves unions, but for the purpose of this essay I am using this definition because this is the most common type and this is what unions are usually understood to be. The purpose of a union, whether in the private or public sector, is to raise the wages and benefits of the members. How do they go about doing this? As Franz Oppenheimer pointed out in his essay “The Genesis of The State:”



While the political economy of unions in the public and private sectors is different, unions are necessarily parasitic organizations that must resort to the political means to achieve their ends. The common myth, relentlessly promoted by unionized government indoctrinators, that past union activism has led to the improvements in pay and working conditions that we all enjoy today is false.

On a free market, or even a hampered market such as exists in the “United States” today, wages will tend towards the marginal product of labor (MPL). The marginal product of labor is the amount by which a firm’s output will rise if it adds one worker. This is not necessarily the same for all workers. More productive workers get paid more because they add more output and thus more revenue. Given a competitive market, where more than one firm bids for labor, wages will tend toward this level. The market need not be totally free for this to occur. In the US today there is no  kind of free market, but there are multiple bidders for labor numbering in the hundreds, possibly thousands. For unskilled labor the number of bidders is even greater. It is not just firms competing for the same market like McDonalds and Burger King that are bidding for unskilled labor in that market. All companies across all markets that want to hire unskilled labor must compete for people from the same pool of unskilled workers. While ultimately the price of labor is determined by the market and employers will want to pay as little as they can, given the level of competition in the US wages for both skilled and unskilled labor will hover very close to MPL.

A worker’s MPL rises if he or she adds new skills, but also if more capital is added to the production process. For example, I am much more productive with a computer than without. If you give me a newer and faster computer my productivity will increase even more. Pay and working conditions have improved since the time of the industrial revolution not because of unions but because of capitalism. The more capital there is relative to labor in the process of production the higher will be a worker’s MPL and thus the higher his wages. It has nothing to do with unions at all. The reason wages were low and conditions poor at the time of the industrial revolution is the same reason these conditions exist in poor and industrializing countries today. There is a low level of capital relative to labor. (Keep this in mind the next time you see spoiled college students protesting so-called “sweat shops.” They are protesting to maintain precisely the conditions that will keep workers in poor countries in poverty.) It is likely that because of the lost wealth and hampering of capital formation due to union activity wages are lower and working conditions worse than what they would otherwise be. Even worse, by driving workers out of certain fields unions create gluts in others, thus lowering the wage level for workers in those fields and creating unemployment.

In the private sector unions are essentially price fixing cartels. They operate by the same logic as a corporate cartel. They restrict output and raise prices. The goal of unions is to raise the wages and benefits of their members. Since on a competitive market wages will already tend to hover near the MPL, logically unions must seek to raise them above this level. How can they do this? In order to raise their wages above this rate unions must create artificial scarcity. They must limit the supply of labor. They must necessarily resort to the political means — violence. They can either engage in this violence against employers and “scabs” themselves or they can get the state to do it for them. In the old days of union activism they would do it themselves, today it is outsourced to the state.

Many people will argue that it is theoretically possible for a union to restrict itself to doing as a group only those activities that each individual can morally do on his own. That is, threaten to withdraw their labor if wages are not increased. Perhaps the cost of replacing so many workers all at once will give the capitalist an incentive to accede to their demands. But when we look at history we see that in fact unions never actually do this. There is good reason. It is unlikely it could ever work. If they are going to act peacefully and morally unions must overcome two almost impossible hurdles. They must get employers to voluntarily bargain with them in the first place, and they must get non-union workers to voluntarily agree to not seek work in the same trade or for the same employer, and to not replace them if they go on strike. Unions have never done this peacefully.

Before they got the state to force employers to recognize them as bargaining agents unions would engage in threats and intimidation of replacement workers, vandalism of private property and obstruction of peaceful trade during their strike actions. The government would usually take a hands off approach to this sort of violence. With the passage of The Wagner Act in the US, forbidding the firing of strikers and the permanent hiring of replacements, unions effectively outsourced their violence to the state. They became little mini-states unto themselves.

There are a number of ways we can know that private sector unions are in fact raising the wages of their members above MPL and forcefully keeping others out of the trade. Union members pay dues to the union bureaucracy that are automatically deducted from their paycheck. These dues are just like income taxes for everyone else. If the union members are really worth the increased wage they are getting then they have every incentive to bargain behind the back of the union, get that wage on their own and  and cut the union out. They do not do this. They are prevented legally from doing this today, but workers paid dues to unions even before they were legally barred from doing this. Why didn’t union members do this back then?

We can know that unions are cutting other workers out of their trades because there is a high degree of unemployment and abstention in the fields that are unionized. Recently in New York City the Electricians Union opened up 100 apprentice jobs and about 2000 people lined up to get them. Clearly there is an artificial shortage in this field and plenty of people that would like to enter it. The union is a huge barrier to entry. Like all cartels, unions must create barriers to entry to the industry. It is significant that these people had to make their application to the union rather than directly to an employer. That is because the electrician trade in New York City is 100% dominated by the union with the backing of the full force of the state. At this point it is ridiculous to even speak of this as a private sector union.

Industries that are heavily unionized such as auto manufacturing, airlines and steel are also heavily regulated and cartelized by the state. Only a few privileged companies are allowed by the state to participate in these industries. It is not a surprise that they tend to be heavily unionized. One way to tell that a company is heavily subsidized by the state is if it is unionized. These are exactly the kind of companies that are likely to manifest Kevin Carson’s corporate calculation problem. Carson does not claim that unionization is one of the factors that leads to his calculation problem, but it stands to reason that having a significant number of employees receiving wages above the MPL, engaging in strikes and slow downs and bringing all kinds of workplace regulations to the daily operations of the company would contribute to calculation problems. When these companies find themselves buried in red ink and are bailed out by the state this is also a bailout of the union. The union was one of the main factors that brought the company down in the first place. The idea that unions act as a countervailing force to the state/corporate complex is false. They are firmly embedded in this complex and could not survive without it.

The situation is even worse with “public” sector unions. Here the “employees” work directly for the government. In the public sector there are no market signals whatsoever. It is impossible to put a rational price on government “services.” It is impossible to know what a public sector worker’s marginal productivity is. It is impossible to know whether or not the “services” that the state claims to provide are demanded by consumers in the first place. No one is given a choice, so how can you know? What public sector unions engage in cannot even be properly called bargaining. It is just helping themselves to the product of other people’s labor. Public employee unions are the ultimate expression of the political means. It is little better than organized looting. In the private sector there is at least some downward pressure on the demands of the union based on the bottom line of the company. The government has no bottom line. All government money is taken by force in the form of taxes or created with debt that is collateralized by future taxes. Public sector unions profiteer off the sweat of their neighbors and the futures of their children. Politicians have no personal stake in the money stolen by the state, so they have no incentive to bargain downwards with the unions. Union members are also voters, and politicians want that vote. Unions hire big-time lobbyists and make big campaign contributions as well. So there is every incentive for the politicians to give the union what they want and little incentive to deny them.

If the state ever does come into confrontation with the public employee unions it has to be because the promises to the union have grown so extravagant that the state faces a fiscal crisis. This is what is happening now in Wisconsin and across the country. States are not going to be able to make good on the promises to these unions. If they raise taxes to do it they will further destroy investment, jobs and productivity in the private sector. If they issue debt to do it they will only make their fiscal situation worse, and at some point no one is going to be willing to buy their worthless bonds. As the privileges these unions expected to get are cut and promises made by the state are reneged on we can expect more temper tantrums like the one in Wisconsin. No doubt these tantrums will come packaged with self-interested and hypocritical appeals to justice and solidarity. Don’t buy it. The working class are the victims of unions, not helped by them.

So to answer the original question, what is the proper libertarian position on unions in general, and in particular what is the proper position on the Wisconsin controversy? For unions in the private sector libertarians should oppose price fixing and support freedom of contract. People that want to work should get the chance to bargain with potential employers, no matter what their group affiliation or lack of affiliation may be. The state’s actions in the Wisconsin controversy may actually lead to some beneficial effects for the majority in the short term, but that is no reason to support the state. Libertarians should call a pox down on both houses and hope the battle lasts a long time and weakens both institutions.

Here is an excellent lecture by Tom Woods that details some labor history in the US and highlights some major incidents. He provides a large amount of facts to back up my statements about the violence of early union organizing and he details all the pro-union legislation that has been passed in the US over the last hundred years or so. Part II of the lecture should be available in the related links section.