Unions, Wages, and the American Worker

Unions, Wages and the

American Worker

TRENDS, 1965-2005 • Declining Real Wages.• Declining Value of Minimum Wage.• Middle Class “Squeeze.” • Downsizing, mass layoffs,

“restructuring,” mergers, etc. • Economic Insecurity.• Declining Unionization.

• “A man must always live by his work, and his wages must be at least sufficient to maintain him. They must even upon most occasions be somewhat more; otherwise it would be impossible for him to bring up a family, and the race of such workmen would not last beyond the first generation.”

– Adam Smith, The Wealth of Nations, p.96

DECLINE OF REAL WEEKLY WAGES

Source: US Bureau of Labor Statistics

200

250

300

350

1965 1970 1975 1980 1985 1990 1995 2000

We

ek

ly W

ag

es

in

19

82

Co

ns

tan

t D

oll

ars

REAL WAGES

3

4

5

6

7

1965 1970 1975 1980 1985 1990 1995 2000

Re

al

20

03

US

Do

lla

rs

MINIMUM WAGE

DECLINING VALUE OF MINIMUM WAGE

Source: Economic Policy Institute

0.00

10.00

20.00

30.00

40.00

1965 1970 1975 1980 1985 1990 1995 2000

Un

ion

Me

mb

ers

hip

as

% o

f W

ork

forc

e

US UNION MEMBERSHIP

DECLINING UNION MEMBERSHIP


ARE THESE TRENDS RELATED? Ceteris Paribus Effects

Slower Economic Growth.

Job Market Restructuring.

Globalization.

Stagnant Economic Growth?

• Growing Profits.• Growing Productivity.• Growing GDP.• Wall Street Booming.• Unemployment Rate

– High in late 1970s and 1980s.– Declined in 1990s and remains steady

between 4-6% (2004-2006).

0

2

4

6

8

10

12

14

1965 1970 1975 1980 1985 1990 1995 2000

GD

P a

s %

Ch

an

ge

, F

irs

t Q

ua

rt

GDP

GDP % ChangeIn Current Dollars

0

200

400

600

800

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Mil

lio

ns

of

US

Do

lla

r

Corporate AFTER TAX Profits

Corporate Profits

GROWTH OF AFTER TAX PROFITS

Source: US Dept. of Commerce, Bureau of Economic Analysis

Source: Bureau of Labor Statistics. See also Economics: Private and Public Choice, p. 561

PRODUCTIVITY and EMPLOYEE COMPENSATIONUS 1948-2003

0

1

2

3

4

1948-1973 1974-1995 1996-2003

% A

nn

ua

l R

ate

of

Inc

rea

se

Output Compensation Difference

012

3456

789

1965 1970 1975 1980 1985 1990 1995 2000

Ja

nu

ary

UE

%,

Se

as

on

ally

Ad

jus

ted

UNEMPLOYMENT RATE

US UNEMPLOYMENT RATE, 1965-2000


• Wages & salaries now make up the lowest share of GDP since 1947.

• According to a report by Goldman Sachs economists, the most important contributor to higher profit margins over the past five years has been a decline of labor’s share of national income.– Harold Meyerson, “Devaluing Labor,” The

Washington Post, Aug 30, 2006.

How Do We Find Answers?

• How the issue is framed.

• How the problem is described.

• What questions are asked.

• Who sets parameters of debate.

“In raising the price of commodities the rise of wages operates in the same manner as simple interest does in the accumulation of debt. The rise of profit operates like compound interest. . . .”

“Our merchants and master-manufacturers complain much of the bad effects of high wages in raising the price, and thereby lessening the sale of their goods both at home and abroad. They say nothing concerning the bad effects of high profits. They are silent with regard to the pernicious effects of their own gains. They complain only of those of other people.”

Adam Smith, The Wealth of Nations, pp.136-137

Why are rising wages deemed an “inflationary” threat, but rising profits are lauded as signs of growth?

JOB MARKET RESTRUCTURINGHomogenous vs. Heterogeneous Markets.

Permitted economies of scale.Permitted efficient unionization.

Service vs. Manufacturing.

Skills Mismatch.Both over-education and under-education.

More Winner-Take-All Markets.Top performer receives > marginal revenue

product. May be aggravated by globalization. (Text, pp. 554-555; 589)

GLOBALIZATION • Free trade increases consumer choice

and lowers prices. • Loss of decent jobs in US has led to

trade backlash, advocating return to 19th century-type protectionism.

• Is free trade the problem? Or exclusion of worker representation from trade negotiations?

DR. RAVI BATRA

Professor of Economics,

Southern Methodist UniversityDallas, TX

Correctly predicted the downfall of Soviet Communism in 1990.

Author of:

The Great American Deception

The Myth of Free Trade

The Great Depression of 1990

Surviving the Great Depression of 1990

,,,and several texts on the Theory of International Trade and Uncertainty.

“The modern classical economists have no idea about the real wage blight that has afflicted America…real wages have been tumbling for 80% of the workforce since 1982.”

“Today the economic profession is greatly bewildered…None of the schools of thought that gained prominence in the 1970s and the 1980s has even been aware of plummeting wages….”

“Economists have been caught napping in their ivory towers.”

From The Great American Deception, 1996

The words of DR. RAVI BATRA

Assumptions of Competitive Equilibrium

• Infinite number of buyers and sellers, none of which has any degree of market control.

• Absolute perfect information—infinite computational capacity.

• Everyone has identical and correct beliefs about prices.

• Equality of bargaining power.

EMPLOYER DEMAND FOR UNION LABOR

• Elasticity vs. inelasticity of demand for particular skill.

• Availability of substitutes. • Supply elasticity of nonunion

labor.• Unemployment rate.

EMPLOYEE DEMAND FOR UNION REPRESENTATION

• Wage Premium.• Benefits and job security.• Cost—dues and fees.• Other terms and conditions of

employment.• Peer pressure.• Employer pressure.

Do Workers Want Unions?

• 53% of nonunion workers say YES.– Tim Noonan, ICFTU

• 52% of nonunion workers say YES.– Andrew Stern, SEIU

• “When you take away the terror, workers are eager to sign up.” – Larry Cohen, CWA

The Leisure Tradeoff• Are wages down because workers are

“choosing” leisure? • Individuals are working longer hours and

more persons per household are working.• Americans have fewer vacation days than

any other industrialized nation.• Suggests that wage decline has actually

been underestimated, as more work is required just to keep from falling farther behind.

WORK-LIFE BALANCE IS THE NEW LABOR ISSUE

• Work-life balance is main concern (32%)• New demands are flexible schedules,

child care, elder care.• 88% of women and 85% of men favor

laws strengthening family and medical leave.

• Second concern is job security (22%), followed by salary (18%).

ROBERT LUCASUniversity of

ChicagoProfessor of Economics

Awarded 1995 Nobel Prize in Economics.

Founder of Rational Expectation Theory: People consider all variables when making decisions about the future, not just look at the immediate past (e.g. interest rates). Errors of decision-makers will be random, and not consistently biased in one direction or another.

See Text, pp.333-334

Theory states that as wages fall, workers will return to work only when opportunity cost of leisure becomes too high. Infers that all unemployment is voluntary and therefore painless!

“At least the classical economists were…not heartless enough to suggest that joblessness is a substitute for leisure….”

“The logical flaw here is that, up to a certain level of income, work is far more important than relaxation because…survival may be at stake.”

“Lucas is not alone in his belief that because leisure and employment are substitutes, unemployment is voluntary….”

“One wonders about the sanity of a profession that rewards such views with acclaim, research grants, Nobel prizes and distinguished professorships….”

DR. RAVI BATRA

• “An internal culture has developed within academic economics which positively extols esoteric irrelevance….”

• “Contemporary orthodox economics is isolated. It is isolated from its roots in the late 18th century…Its method of analysis is isolated from the wider context of society, in which the economy operates, and which Adam Smith believed to be of great importance.”

– Paul Ormerod, The Death of Economics, 1994

ARE UNIONS EFFECTIVE FOR WORKERS?

• Bargaining Power.• Better wages & benefits.• Wage Information.• Due Process.

– No absolute “job security.”• Involvement in Production Decisions.• Political Representation.

What is Due Process?

• Notice of action to be taken and reasons therefore.

• Opportunity to be heard.• Opportunity to cross-examine.• Requirement that factual elements be

proven before deprivation takes effect.

• Fair hearing before an impartial decision-maker.

NON- % DIFF- UNION UNION ERENCE

All Workers $781 $612 28%

Private $739 $604 22%

Public $832 $683 22%

Male $829 $685 21%

Female $723 $541 34%

Construction $893 $588 52%

Manufacturing $694 $654 6%

Transportation &Warehousing

$819 $619 32%

Utilities $979 $948 3%

Healthcare &Social Assistance

$656 $588 12%

Wholesale Trade $722 $674 7%

Retail Trade $567 $507 12%

Service Occupations $655 $389 68%


UNIONS & EMPLOYEE BENEFITS


0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Pension Def Benefit Def Contrib Medical Dental Vision

% o

f P

riv

ate

Se

cto

r W

ork

ers

Union Nonunion

WHEN UNIONS AREN’T EFFECTIVE

• Corruption.• Cooptation.• Resist New Technology.• Industry Transitions. • Diverse work force.

– Discrimination.– “Cafeteria” benefits.

• Victims of their own success?– Airline concessions.

Effect on Nonunion Wages

• Threat—employers raise wages to avoid unionization.

• Crowding—Job loss in union sector results in displaced workers lowering wages in nonunion sector.

• Positive correlation between higher nonunion wages and % of unionization.

THE PARADOX OF PUBLIC EMPLOYEES

• Public sector wages and job schedules are set by legislatures.

• Limits to wages of public workers dictated by budget constraints, not share of profits.

• Public sector job security also determined more by Constitutional mandates and budget issues rather than CBA.

0

10

20

30

40

1965 1970 1975 1980 1985 1990 1995 2000

Un

ion

iza

tio

n a

s %

of

Wo

rkfo

rce

% Private Sector % Public Sector

Private Sector vs. Public Sector


LEGAL HISTORY OF US LABOR LAW

• The Law of Master & Servant.• Obscure 1885 decision by NY Court of

Appeals creates “at-will” rule.– US employees are only industrialized

workers with no general statutory protections against unjust dismissal.

• National Labor Relations Act, 1935.• Taft-Harley Act, 1947.• Equal Employment Opportunity Act,

1972.

NATIONAL LABOR RELATIONS ACT

• Section 7: Guarantees right to engage in concerted activities for the purpose of either collective bargaining or “other mutual aid or protection.”

• This section protects conduct pertaining to wages, hours, working conditions or other terms and conditions of the employment relationship.

TAFT-HARTLEY, 1947

• Authorizes President to call up the National Guard in order to dispel “labor uprisings.”

• Permits individual states to enact “right-to-work” laws.

22 RIGHT TO WORK STATES

RIGHT TO WORK LAWS

• 22 States.• Approx 20% of workers.• Lower unionization rate.• Lower wages.• Free Rider.

– Reduces demand for membership.– Reduces “supply” of unions willing to

commit to costs of certification.

• LEGISLATION.– Who has most influence in Congress.– Deregulation.– Expand definition of “exempt” employees.

• AGENCY RULES.– Agency heads are political appointments.– Lengthy & complicated procedures.– Enforcement (or lack thereof).

• US Supreme Court Rulings.

Do Laws Generally Favor Employees or Employers?

“Whenever the legislature attempts to regulate the differences between masters and their workmen, its counsellors are always the masters. When the regulation, therefore, is in favor of the workmen, it is always just and equitable; but it is sometimes otherwise when in favor of the masters.”

Adam Smith, The Wealth of Nations, p. 195

Who Has Heard About….?

Bayview Massacre (Wisconsin, 1886)

Ludlow Massacre (Colorado, 1914)

Triangle Shirtwaist Fire (New York, 1911)

Bisbee Deportation (Arizona, 1917)

Salt of the Earth, 1954 movie about striking Mexican-American miners—banned by the US government.

“The masters, being fewer in number, can combine much more easily…and in all disputes…can hold out much longer. Masters are always and everywhere in a sort of tacit but constant and uniform combination not to raise wages above their actual [natural] rate…[and upon occasion] even below this rate.”

“We seldom, indeed, hear of this combination because it is the usual…natural state of things… These are always conducted with the utmost silence and secrecy till the moment of execution, and when the workmen yield, as they sometimes do, without resistance…They [employer efforts to reduce wages] are never heard of by the people.”

“Such combinations, however, are frequently resisted by a contrary combination of workmen…But whether [the workers’] combination be offensive or defensive, they are always abundantly heard of.”

Adam Smith, The Wealth of Nations, pp. 94-95

UNION-BUSTING

• 92% of employers force employees to attend closed door meetings to listen to anti-union propaganda.

• 80% required supervisors to attend session on how to attack unions and instruct them to hold one-on-one “pressure sessions” with employees.

• 75% hire consultants to conduct anti-union campaigns based on mass psychology.

UNION-BUSTING (cont.)

• 51% threaten to shut down if workers join a union.

• In 25% of organizing campaigns, workers wanting to join a union are illegally fired. If employer is prosecuted (rare), penalties are minimal.

• When workers win a union election, 1/3 of employers never enter into a bargaining agreement.

HISTORY OF PROPERTY RIGHTS

• Magna Carta, 1215.• US Constitution. • Slavery.• Protects employment of Federal and

State workers.• Extended to intangibles such as

patents, trademarks, stock options, trade secrets, business “good will,” but not private employees.

Constitutional Basis of Property Rights

• Property rights in the Constitutional Convention.

• No persons shall be…deprived of life, liberty or property, without due process of law….– Am. V, US Constitution

• [No] State shall deprive any person of life, liberty, or property, without due process of law… – Am. XIV, US Constitution

“The property which every man has in his own labor, as it is the original foundation of all other property, so it is the most sacred and inviolable.”


“In that original state of things, which precedes both the appropriation of land and the accumulation of stock, the whole produce of labor belongs to the laborer. He has neither landlord nor master to share with him.”


“Necessitous men are not free men.” Franklin Delano Roosevelt, January 1944

“Such dependence of the mass of the people for all of their income is something new in the world. For our generation, the substance of life is in another man’s hands.”

F. Tannenbaum, a Philosophy of Labor, 1951

“Our cultural values of freedom, independence and equality make the necessity of working for someone else seem undemocratic, even un-American.”

Joanne B. Ciulla, The Working Life: The Promise and Betrayal Of Modern Work, 2000

PROPERTY RIGHTS PROTECTION as the NEW LABOR LAW

• An insecure subsistence is a threat to liberty.

• Expansion of property rights appeals to both liberals and conservatives.

• Challenge for policymakers is trade off between flexibility and security.

• Economy should serve the people rather than the reverse.

Summary• Classical economics is unable to fully

explain trends.• “Natural” wage cannot be defined.• Traditional labor unions will have to

adapt to constantly changing environment.

• Workers are more than inputs or expenses—they are citizens, customers and potential investors.

• “ Is…improvement in the circumstances of the lower ranks of the people to be regarded as an advantage or as an inconvenience to society?...What improves the circumstances of the greater part can never be regarded as an inconveniency to the whole. No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable.”

– Adam Smith, The Wealth of Nations, pp.110-111

Unions, Wages, and the American Worker

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