The free rider and labor law: Introduction and overview

SYMPOSIUM

ECONOMIC ASPECTS OF U N I O N M E M B E R S H I P

FREE RIDERS OR PAYING CUSTOMERS*

The Free Rider and Labor Law: INTRODUCTION A N D OVERVIEW

Daniel Orr Virginia Polytechnic Institute and State University

The main concern of American labor law, at least since the Wagner Act, has been to find a workable and equitable balance of power and resolution of con- flicting interest between employers and employees. Two opposite perceptions have focused much of the accompanying debate. First, it has been perceived that individual employees, forced to bargain on their own, may face a great dis- advantage in bargaining power, due to the employer's superior supply of information about labor market conditions, greater bargaining experience, and (usually) relatively lower costs of postponing the formation of an employment contract. In many instances, these considerations lead to the view that the employer has effective monopsony power visa vis prospective and continuing employees: he is in effect the sole available buyer of their service. Second, it has been perceived that labor unions, where they are agents of whole trades or skills, may be able to exercise effective monopoly power against employers; and in particular, if the unions can control entry into their particular trades or skills, their monopoly power can be meaningfully secured: they would not find it necessary to accept lower wages, or agree to any other devices which would diminish the rents they collect, in order to maintain their status as sole sup- pliers. Hence, the economy will be subject to the full misallocative impact of union monopoly.

Legislatures have been forced to search for an appropriate balance between these opposing views. Curiously, that search has taken a pattern which is practi- cally devoid of compromise or balance. In thirty states, unions and empIoyers are permitted to sign contracts which stipulate that a union favored by a majori-

*This research symposium was held September 15, 1978, in Washington, D.C., under the sponsor- ship of the Center for Study of Public Choice at Virginia Polytechnic Institute and State University. The Foundation for the Advancement of the Public Trust supported the symposium and provided a grant for the publication of these papers.

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ty of the workforce shall be the agent and representative of all workers; one such contract form requires the worker to join the union within a specified term after employment (the union shop); another requires the worker to pay dues to the union, although not requiring membership (the agency shop). By contrast, the remaining twenty states, the "right-to-work" states, have explicitly ruled out such contractual arrangements; even in instances where a union may be the sole bargaining agent for a particular class of employee in a particular workplace, there is no requirement that the employee support or subscribe to the union in exchange for its bargaining services.

These right-to-work laws have been a major source of political tension for decades. For many years, it appeared that right-to-work was a political movement on the defensive, doomed to eventual extinction outside its bastion in the deep south and Utah. But more recently, the weight of sentiment has swung. The number of states with right-to-work laws has increased since Taft-Hartley days from seventeen to twenty, and the possibility of further increases looks real.

Throughout the period in which right-to-work has been controversial, the Federal courts steadfastly have refused to concede or acknowledge that it is an issue which deserves to be treated at the level of fundamental constitutional protection. Union rights to collect dues have been upheld in the non right-to-work states; dissenters there have been told that they must pay for the union's services, regardless of any basis for objection. In the right-to-work states the illegality of agency shop or union shop arrangements also has been upheld. Clearly, the courts are waiting for Congress to decide whether there should be national policy on the question; they can find no compelling arguments on either side couched in terms of constitutionally protected rights. (Thus, in their attitude toward enforcement or regulation of employee representation, the Federal courts treat the issue the way they treat the right to buy and sell whiskey, not the way they treat the right to be free of religious activity and religious sym- bolism in the public schools. Curiously, the Federal courts and the Congress have deferred to the states in two issues of significant economic consequence, while preempting vigorously on religious observance in the schools, an issue of no economic moment.)

A number of interesting and important questions arise regarding appropriate allowable contract arrangements in the labor market. Traditionally, the discussion has focused on the protection of the workers' interest. Proponents of "compulsory representation" offer an argument, which can be cast as a syllogism, and which holds that

(1) a union conveys benefits by negotiating its clients' terms of work and representing its clients in grievance proceedings;

(2) clients who are not required to pay for these services will refuse to do so: they will choose to be free riders;

(3) it is therefore necessary to require payment in support of the union by all represented workers, in some instances by the en- forced subscription of dues by nonmembers, in other instances by compulsion of membership.

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Without such enforcement of dues payment, obviously, the resources available to the union will be diminished, its activity will be restricted, and the quality and quantity of benefits provided to all workers will be reduced (not just for the ones who refuse to pay dues). The workers who actually do pay their dues get less in the way of benefit per dollar of dues than they are entitled to, less than they would get if everyone paid.

The main questions addressed in this volume are all germane to the right- to-work controversy, and the answers offered here should serve to illuminate useful directions for labor law. Those questions are (1) is the free rider syllogism a solid and enduring foundation for contracts which stipulate compulsory support for unions? (2) In the absence of contracts which require such support, what would happen to the effectiveness of the union movement, and the benefits which can be derived from membership? Three aspects of that second question are considered: union membership, and the relative wage effects of union membership, are compared between right-to-work and non right-to-work states; the success of unions in European countries which have no laws providing for exclusive representation is described; and the decision calculus of a wealth- maximizing individual is applied to the question of whether to join a union in a regime of free choice.

The Free Rider Syllogism

Proponents of right-to-work laws have never squarely confronted or boldly challenged the free rider argument as it is used in the courts to support exclusive representation. Instead, they have chosen to tackle the issue on bill-of-rights grounds, arguing in effect that it is as wrong to compel support of a union as it would be for the state to establish a church. Not that the free rider syllogism is an airtight argument. First, it should be possible for a union to exclude non- payers of dues from the benefits that are negotiated, or at least to diminish the benefits realized by non-payers. By explicitly excluding non-payers from the list of covered employees, the union would identify those individuals as fair game for the employer, who is represented as a party who is anxious to take the max- imum advantage of any weaknesses to be found on the supply side of the labor market. Only workers with demonstrably superior work records would be safe in choosing to venture alone into such a bargaining environment; and if the employer's bargaining position is indeed disproportionately strong relative to that of individual employees, even the superior worker might find it difficult to increase his overall compensation compared to what the union could provide. If the employer passed up the opportunity to squeeze the loners, and instead perversely chose to pay everyone on the same schedule regardless of union membership status, union employees would still enjoy the benefit of union representation in grievance proceedings. Finally, a strong and effective union prob- ably could incite a heavy burden of ostracism against non-members who appeared to be taking a free ride on union-provided benefits. Thus, the free rider argument could be used by unions to absolve themselves from acting as agents for non-members, a course which they not only have never pleaded for, but on the contrary have strenously resisted.

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Morgan Reynolds' paper gives reasons why unions have clung to exclusive representation instead of refusing to represent non-members. It is because exclusive representation protects the union against competition in the supply o f labor services. Without exclusive representation, individuals would be able to negotiate their own terms of work (again, in the case of demonstrably superior productivity); or alternative unions could form, and would attract members if the established union were insufficiently effective. Either alternative, of course, would lead to more efficient resource use through competition. In effect, exclusive representation is cherished by unions because it offers an easy and direct way to monopolize the labor market. As the negotiating agent, the union can set and maintain high wages, and the union hierarchy can share in the benefits which derive from the monopoly position. Thus, it appears, the free rider argument is a neat inversion of the truth: union negotiated benefits may in important part be the consequence of union monopoly power, which in turn is the consequence of exclusive representation contracts.

It is easy, however, to make too much o f the view that monopolizat ion through exclusive representation is the main or chief source of union-delivered benefits. Industrial relations is not always a zero sum or negative sum game; tangible benefits can be realized by both workers and employers f rom a well drawn contract, and the union may have an instrumental role in the adminis- tration of the contract which is of significant value both to its members and to the employer.

Productive Dimensions o f Union Activi ty

I f we insist on a competitive market economy as a benchmark, then our assess- ment of the efficiency consequences of union activity is likely always to be negative. But when we introduce such considerations as imperfect information and attendant local monopoly, or the costs of factor mobility and at tendant local monopsony, then the possibility of mutual employer-employee benefit from the presence of a union is enhanced.

From the perspective of the worker, membership in a union can have many desirable effects. In some craft or trade occupations, the union hall is both the source of news about available work, and an important social center. The union provides the members assurance of wage adequacy; protection against employer attempts to chisel on benefits or entitlements like unemployment compensation credits, overtime pay, or sick leave; and a means of redress against substandard conditions in the workplace.

In those same craft occupations, the union provides the employer with certification of competence of the employee. It is doubtful , however, that the net value o f such union activity to the employer is positive, unless (as in the instance of seasonal or irregular production) there is rapid turnover among employees. Or perhaps the work force is highly mobile, and the certification o f worker competence that comes of membership in a different local of a national union provides information that the employer could otherwise obtain only at substantial expense. In any occupation, the benefits conveyed by a union to its members are greatest where the union effort to monopolize the labor supply is most suc-

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cessful. However, in occupations where work is seasonal, and the labor force is mobile or migratory, workers would be most vulnerable to monopsony exploitation. The union, in such cases, may avert some degree of monopsony exploitation if partially successful, and may impose some degree of monopoly exploitation if wholly successful. As obvious and immediate quid pro quo to the employer, worker competence is certified. But the benefits to the employer may take a more subtle turn: without a union, numbers of the more reliable and productive workers might leave the trade, and employers might find it difficult to hire workers on non-union terms who can cope with the complexity of in-place capital equipment. Thus, more formally, the union may enable highly productive workers to overcome wage uncertainty in an otherwise superior occupation; thereby rendering the occupation unambiguously superior; and the union at the same time may overcome worker quality uncertainty as perceived by the employer, thereby freeing the employer to invest in a more complex capital structure with higher rate of return.

Such an argument is weakened in the absence of labor turnover or labor mobility. In a local market, both employers and employees develop highly specific reputations, and an atomistic market has a good chance of yielding an efficient solution. This, however, does not mean that no pattern of mutual benefit to worker and employer can be found in non-seasonal or stable industries. Industrial unions, too, can have a positive role.

For the employee, the chief positive consequences of union activity center on issues of remuneration, job security and job tenure. Retirement and health plans can be linked to a specific employer, and these can be made to grow signif- icantly in value through time. To protect the employee's expectation of growth in the value of such plans, the union enforces seniority provisions in employment contracts, without which such benefits would be of little value. For the employer, seniority is likewise a worthwhile protection; it discourages labor turnover, and permits higher training-period wages. The worker is dissuaded by seniority rules from selling the training he receives in firm A to the higher bid of firm B, for were he to do so he would have to start at the bottom of B's scale. Thus, firms are exempted by seniority from a dilemma, in which they would have to consider whether to devise costly methods for making their training firm-specific, or to devote their resources to pirating workers trained elsewhere rather that to training them in the firm. Both choices (firm-specific training or pirating) could well be quite expensive relative to the existing regime.

Seniority, especially in routine manual occupations, is a protection to an individual at some stage during his worklife, because it is widely believed than an individual's productivity falls off fairly sharply later in life. If a worker's product has declined relative to the going wage in his job category, he would be vulnerable to layoff in the absence of seniority. (If productivity typically falls to a level that is actually below his wage in a worker's later years, it is necessary that his productivity be greater than his wage in his earlier post-training years.)

Thus, seniority is a provision which permits a more orderly and productive arrangement of training by the employer, and a more secure and longer worklife to the employee. And without a union, or some other cartelizing device, seniority would be difficult if not indeed impossible to enforce.


Other union provisions and efforts can serve to stabilize and humanize the employment relationship in industrial occupations. The repetitive nature of much team production activity can create boredom, job dissatisfaction and labor turnover. Unions can helpfully represent worker views on regular exchange of tasks or responsibilities, appropriate provision of breaks, and other conditions of work. These exchanges can lead to improvements from the stand- point of productive potential; perhaps more important, they can involve workers in a close-to-home line of political activity which is diverting and hence productivity-enhancing. For the employer, the payoff in this type of union activity comes through reduction in the cost of monitoring team production, as well as through the predicted output increases. Union activity gives a worker an alternative to shirking, sabotage or job-switching; and while other institutions could be conceived or constructed that are capable of filling the same role, unions are here, and they are believed by their members to be beneficial.

When we look beyond monopolization for other possible sources of private (and possibly social) gain from unionization, we are looking at a topic which is of great potential importance, and yet which has received little attention. Reynolds concludes his paper with the prescription that the free rider argument in support of compulsory representation be scrapped; however, he does not seek to outlaw compulsory representation. Rather, he assumes a standard laissez

faire economists' posture, and prescribes that a wide variety of labor contracts be permitted. Let exclusive representation be tolerated so long as it is accepted by labor and ownership; let bargaining agents be voted in or out, or into competition with each other, so long as the workers represented in the bargaining unit feel they can gain from changes. Conceivably, competition would enhance the performance of bargaining agents from both a social perspective and the private perspective of worker-clients; the remaining three papers in this volume offer evidence that such gains are possible, and suggest some of the forms they might take.

Everett Kassalow examines European experience. Excluding the British Isles, there has never been a major push for exclusive representation in Europe. Unions have tended to be more ideologically polarized than has historically been true in the United States, with several important consequences: exclusive representation has been resisted (and indeed, several unions have occasionally func- tioned in paralled within what American labor law would recognize as the same bargaining unit); unions have been the source of important "social" benefits (in the group-club sense) for their members, rather than being exclusively a source of economic benefits; and unions have tended to be superseded in much of Europe in the important area of contributing to the delineation of agreements on conditions of work, in some countries by workers' councils, in others by the codetermination movement. In Kassalow's view, unions have contributed sub- stantially to the economic well-being of membership without any significant monopoly position as a basis for those gains; due, however, to differences in attitude and different patters of change in institutional structure through time, it cannot be asserted that the European pattern is one toward which evolution can be expected in the U.S., or indeed, can be expected to be maintained in Europe.

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Bernard Lentz once more examines the private dimension of gains from union membership. Past studies of this question have focused almost entirely on relative wage rates, a potentially misleading indicator of union benefits. Expected wages, employee benefits, hours and working conditions (somehow quantified) must be measured net of union dues and expected worker-borne strike costs; and the measurement must take place with discounting over a worker's lifetime in order to capture the private costs and benefits of union membership. Lentz' is one of a series of recent empirical investigations that have sought to illuminate this question of private benefit, and his results indi- cate that the rate of return on membership as an investment may be negative for new male workers, becoming positive only when seniority effects, which assure earnings of older workers, become sufficiently strong. There is a degree of ambiguity in his findings regarding the present value of membership over a lifetime, just as there is in the findings of others regarding comparative flow rates of benefits to members vs. non-members at particular points in time. His results offer some support for the view voiced earlier, that unions can and indeed do provide benefits which enhance the durability of the worker-employer relationship.

Finally, William Moore looks behind the frequently seen fact that wages and earnings are far higher in the non right-to-work states than in the right-to- work states, a fact which has been interpreted to portray right-to-work laws as a major impediment to union effectiveness. He discovers that in the right-to-work states, union workers enjoy a far higher wage differential over non-union workers than is the case in the non right-to-work states. The other major finding he reports is that when proper account is taken of the possibility that anti-union sentiment may vary widely from state to state, no direct causal link can be found between right-to-work laws and low union membership. Earlier analysis had discovered a correlation between the presence of right-to-work laws and low rates of unionization; that correlation is susceptible to two possible explana- tions. Either right-to-work laws could be thwarting union efforts to organize; or alternatively, in those states in which anti-union sentiment is strong, voters pass right-to-work laws and those same voters, as workers, refuse to join unions. The difference between those possibilities is very significant to intelligent strategy within the union movement. If the first explanation is the more credible, the union should continue their strong efforts to combat right-to-work laws. If the second is the better explanation, then right-to-work should be viewed as the symptom, not the disease; and organized labor should devote its resources to overcoming the hostility and mistrust that it meets, not to belaboring right-to- work laws. Moore's results suggest that in fact, the second explanation appears to be the more persuasive based on well-constructed statistical tests.

These three papers, then, offer support to a view that unions can prosper; and two of them (Kassalow and Moore) argue that unions can provide significant benefits to their members, even without the protection of union security laws. The net benefits which stem from union membership typically appear more significant from the perspective of an entire lifetime of earnings than when measured as a simple increment in the current wage rate (Lentz).


Hence, an optimistic view can be supported by this evidence: unions can be an important positive force in the organization of production, by stabilizing employment relationships through time, by processing grievances, by helping to organize and monitor the tricky task of team production. Even in states where anti-union sentiment is strong enough to pass right-to-work laws, the productivity-enhancement potential in some establishments is sufficient to overcome anti-union ideology, and to yield very substantial wage gains (relative to the option of not having a union). In states where anti-union sentiment is less strong, productive establishments more routinely unionize regardless of the benefit to be gained by doing so, and hence the gain realized from unionization by the average union member is much smaller. Thus, union security is not depen- dent upon maintaining a position of monopoly.

An alternative and more pessimistic explanation of the large union wage differentials in the right-to-work states is possible, however. Suppose that most of the union establishments in these states are new plants of national manufac- turers. Suppose that the productive technology embodied in these plants was developed in the unionized states, where there had been a long history of capital-labor substitution due to the exercise of union monopoly power over the labor supply. Then the union's productive role of helping to organize those im- ported capital-intensive plants in the right-to-work states is rooted in the monopoly pricing of labor services by the union, in those industrialized states where the capital-intensive techniques first were developed.

Obviously, it is impossible to be coherently, scientifically prescriptive regarding "the best" policy for a nation on so highly charged an issue as union security versus right-to-work. On the central questions: how do unions affect productivity? how do they affect the total wealth and the distribution of wealth of the nation's individuals? we have no information and little hope for information. On the question: does the free rider argument offer a sufficient justifica- tion for the enforcement of union security provisions? different readers will find Morgan Reynolds' analysis persuasive in different degree. The questions considered in the Kassalow, Lentz and Moore papers are peripheral, but related to, the two central questions of union effects on productivity and wealth distribution. It is possible to accept the answers offered in those three papers while maintaining either a pessimistic view: all private gains realized from membership in unions are due ultimately to the exploitation of union monopoly power; or an optimistic view: unions are instruments which enhance the private and social product of some industries.

Whatever the ideological predisposition that is brought to bear on these questions, it must be recognized that there is no such thing as a laissez faire alternative for policy affecting union security. Labor law can be redrafted, or it can be scrapped entirely; but even if it is scrapped, it will be replaced by some combination of contract, property, agency and tort law, supplemented by germane and not-so-germane statutes from various jurisdictions.

Until more solid information has been obtained about the central issues of how unions affect productivity and how they affect the total wealth and its dis-

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tribution among individuals, it is impossible to determine whether the optimistic or the pessimistic view is more appropriate. The papers presented in this con- ference should provide useful point of departure for future research on these important topics.

The free rider and labor law: Introduction and overview

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