If you ever spend a spell in Business School you will probably learn that Unions reduce productivity by causing an inefficient market for labor and diminishes its value. This is hard to argue against, since if you are compelled to use a Union labor you are most certainly compelled to pay higher in labor costs. There is also the restrictions that unions put on labor which can limit the flexibility and competitiveness of a company. With less than 1 in 15 being members of Unions in the private sector in the U.S., the impact of Unions has all but been relegated to the public sector. On the unions side, if you look at jobs from 100 years ago and today and the improvements in wages and health are largely attributable to the them especially for lower waged workers.
For a minute I would like to look at the economic impact of unions today and compare it with the economic impact of capital owners. By capital owners, I don't mean the managers and CEOs of the companies, but simply those that are the owners of the capital.
This is a bit of a thought experiment and with the following assumptions:
o Unionized labor is essentially the same as non-unionized labor with an additional cost of X% higher (e.g. 10% higher)
o There is no difference in quality between unionized labor and non-unionized labor, except those captured in the higher cost (e.g. increased time-lines, reduced flexibility etc. can all be captured in the 10% increase in cost)
o The 10% higher cost translates to 10% increase in wages for the union worker, although in reality there is a union administration which will also take a proportion.
All these assumptions are highly controvertial and for the moment make just a stick figure to do our thought experiment.
Additionally, lets look at the capital owners. In this view I look at passive investors. If a company is run by a founder who is a major shareholder, I break the founder into two people, the CEO/manager who receives a typical CEO/manger salary and the passive shareholder. With some studies that show increased equity above a certain amount does not improve performance, this is probably less controvertial than it sounds (the person promised a billion dollars in equity is not 10 times better than the person promised 100 million). So looking at these (real or virtual) passive investors one should look at the economic impact of these. With this in mind I make another simplifying assumption:
o 10% of the price of any product goes to the passive capital owners.
In terms of unionized labor, one can assume that any finished product will cost approximately 10% more if all costs going into it are 10% higher, so a 100% unionized labor force would add 10% or less (depending on the independent raw costs of materials) to the price of goods. Additionally, the need to furnish capital owners a reward for investing capital adds 10% to the cost of all goods, both based on the sweeping assumptions above.
So, based on a very simple model the average consumer pays at most 20% (ignoring compounding) above and beyond the basic raw costs of (non-unionized) labor and materials. One could see reasons to resent both groups, the unions force consumers to pay above market prices and the capital providers take money for doing absolutely nothing. But this is not the end of the story.
If you take a look at what each group does with their 10% the story starts to differ. Unionized labor made up a 34% of the U.S. labor workforce in the middle of the 1950's. How these unionized workers invested their 10% was staggering. Health standards for thier children improved dramatically, along with education and college completion. They also bought cars, refrigerators and other consumer products which helped spur further growth. Their investments in the United States was one of the most important in the history of the country. The capital owners, disproportionately rich, also spent their 10% but being much fewer in number than the labor force, the benefits was limited to a smaller group of people.
I don't want to diminish the importance of strategic investment, but lets face it, most of the stock market is not game changing venture capital but shares in long established mature companies where the investors behind the scenes are quite passive and add little value to the comapies they invest in. Their long term behavior, in chasing investment returns, does guide the actions of CEOs and managers in ways that build efficiency into capitalism and separates us from a stagnant communist system, but their investment strategies could be replaced by a simple computer program (hire money manager, if money doesn't go up enough, get new money manager).
I don't argue whether unions are good or bad for an individual company. However, thier gradual demise from the private sector from 1980 onwards is coincident with the growing income disparity. Few would disagree that the unions did reduce the wealth gap in the U.S. which was accompanied by a huge rise in the middle classes and their demise from the private sector shouldn't be celebrated too much.
