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Unions, unite!

By Dr. D. Eric Schansberg

The AFL-CIO gathered this week to commemorate the 50th anniversary of the merger of the American Federation of Labor and Congress of Industrial Organizations. But there isn’t all that much to celebrate considering a half-century of declining union membership and, in recent decades, diminished political power.

To add insult to injury, a maverick group calling itself the “Change to Win Coalition” has decided to compete with the AFL-CIO. The leaders of this new group believe they have better strategies and promotional efforts. Unfortunately, the creation of this coalition will prove to be a blip in the long decline of private-sector unions rather than the pivotal moment its organizers anticipated.

Why have private-sector unions declined during the last 50 years? In a word, the answer is competition.

The problem for unions has not been a failure to recruit workers, organize drives or promote unionism. Rather, private-sector unions are doomed to diminish in an increasingly competitive marketplace.

Unions are a labor-market cartel whose members bind together as one bargaining unit to artificially increase wages and compensation. Like a cartel in a product market (e.g. OPEC), they hold the group together by promoting solidarity among members and limiting competition from outsiders.

The busy legislative agenda of unions underlines their commitment to restricting labor-market competition. Their lobbying efforts range from supporting trade protectionism to upholding "prevailing wage" laws. Unfortunately, their political activity benefits themselves at the expense of consumers and competing workers.

As a cartel seeking greater compensation, unions can thrive in arenas with limited competition and the relatively high profits that follow. In those cases, unions are splitting the booty with the owners of the firm; both benefit at the expense of consumers who have few options. But when competition is intense, companies can neither afford to pay the compensation premiums that labor demands nor tolerate the inefficiencies that unions encourage.

A number of economic factors have combined in recent decades to undermine the success of traditional unions. For example, our economy’s transition from manufacturing to service-related industries has made life more difficult for unions.

Given the large investments required to start most manufacturing endeavors, it is relatively difficult to enter those industries. As a result, such markets are dominated by fewer firms with cartel-like power. By contrast, service industries typically don’t require as much investment of capital and thus are marked by a greater number of firms, tighter profit margins and a more competitive environment.

Unions have had an extremely difficult time adjusting to the increased regional and global competition in the manufacturing sector. Our global economy has resulted in manufacturing firms facing greater competition not only from the rest of the United States but also from around the world.

Such firms can scarcely afford artificially higher costs. In fact, manufacturers can often avoid the higher costs associated with unions since it is increasingly easy for them to operate in non-union environments in the United States or in foreign countries.

Perhaps the largest contributor to the decline of private-sector unions was the deregulation of the communications and transportation industries under Presidents Carter and Reagan.

The competition in these arenas dramatically enlarged the capacity of people and companies to engage in trade, which increased competition between firms. Along with important technological advances such as the Internet, the resulting lower communication and transportation costs were the catalysts for the globalization we see today.

Deregulation introduced significant competition into key union strongholds. Previously, the unions had been dominant forces within these regulated monopolies like Ma Bell and heavily regulated industries such as the airlines.

Reducing competition is the only remedy that will restore unions’ influence. Absent dramatic policy changes like massive trade protectionism or re-regulation, private-sector unions have little or no opportunity of enjoying a renaissance.

Ironically, today’s union movement is built on the idea that competition is a bad thing. Yet the “Change to Win Coalition” intends to try and compete – rather than remain united – with the AFL-CIO.

Beyond that, the coalition’s efforts are built on the futility of trying to push back the clock to an era when consumers were in far less competitive markets.

– Dr. D. Eric Schansberg is professor of economics at Indiana University Southeast and an adjunct scholar for the Bluegrass Institute, Kentucky’s free-market think tank.

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