Fredrick Bastiat in The Law opined “It almost always happens that when the immediate consequences of an economic policy is favourable, the latter consequences are disastrous”. Australia’s economic life has undergone a complete metamorphosis in the past century. Currently, many goods and services consumed locally are imported from countries which are able to produce them cheaply with less expensive labour. Firms in search of a more business – friendly environment outsource part of their operation or even relocate themselves to countries with lower labour costs and less cumbersome industrial labour relations laws.
Unions yield power, prestige and income to their officers. They give workers a feeling of participation, of solidarity with fellow employees and community. This feeling is created when unions succeed in providing fringe benefits (such as health services or pensions or life insurance) tied to the job and common leisure activities for their members. These things can be provided too (they are in Japan) regardless of unions. Few things strengthen solidarity more than a common enemy. Economic life rests on cooperation yet there is ambivalence and occasional conflict about how the products of the common work of employees and management, of labour and capital, are to be shared and about who is to make decisions. Unions capitalize on the feelings of members that they ought to get more power and money and promise to get both of them.
Union membership is declining globally as some workers feel they are better off on their own. Others recent specific union practices or the cost of membership. In spite of this, they are often compelled to join them if they have to keep their jobs. When unions benefit their members by obtaining higher wages, the money cannot come out of the profit of employers as members are made to believe. It comes out of higher productivity and from higher prices for whatever is produced by the workers whose wage has been raised. When prices rise, less is being sold than would be sold at a lower price. When less is sold, less is produced and fewer workers are employed in the industries that had to raise prices. Either way union members get huge wages at the expense of workers who do not get, or do not keep jobs because of lower sales and less production. These workers remain unemployed or have to go into lower paying non unionized jobs.
If real wage for all workers could be increased by union activity (or by government decree), two things happen. First, if the government does not allow the volume of monetary circulation to increase, inflation is prevented thus prices cannot rise as wages do. When wages increase and production does not, profits decline and become less for some, leading to firms closing or not expanding. Unemployment subsequently creeps in. Secondly, if the government allows the volume of monetary circulation to increase as wages do, there is inflation. Prices rise and real wages (purchasing power) do not go up. Workers get more and have to pay more. People on fixed incomes suffer and so do creditors who get money due them but can buy less for it. With or without unions, wages are determined by the demand for and the supply of different kinds of labour. Unions however attempt to monopolise and restrict the supply of labour against the free market price through restricting union membership while compelling employers to hire only union members, by threatening to strike. To strike is to refrain from working while keeping ones job and discouraging or preventing others from doing it. In economic terms, it is to withhold supply of labour, to prevent it being replaced and to attempt to compel employers to pay the price the union wishes to charge.
Labour markets tend to conform to the economists perception of institutions that tend to move towards equilibrium outcomes. In an unconstrained labour market, the price of labour (wage rate) will move towards a level at which the number of workers interested in working at that wage will match the number of workers that employers are interested in hiring. Here, job seeking workers approach the labour market with a reservation wage in mind. If an initial search reveals no job opportunities that satisfy their reservation wage aspiration, they continue to search. As the search process continues, superior job alternatives are revealed and workers revise their reservation wage expectation downward in response to the previous search disappointments. Eventually, a correspondence between an actual job (and wage) opportunity and the job seekers reservation wage will be attained and the market will clear.
As unions increase wages rates through the use of monopoly power, job opportunities in the unionised industries and occupations decrease, increasing the supply of labour in the non union sector. This drives wages down in those areas and increases the relative number of lowered wage jobs available to workers engaged in the job – search process.
In the early years following World War II the dead weight process associated with union activity was relatively small although not trivial. However after 1953, as unions became more solidly entrenched in the economy, the dead weight losses mounted, peaking in the 1970s. This was followed by a decline in union impact on both union membership (density) and union wage premium fall. By the end of the century, the dead weight loss estimates returned to their early post World War II level.
The Union of Kenya Civil Servants and the 30 000 strong Kenya Nurses Association are bracing for demonstration for not being awarded a 600% pay rise. The secretary general of the civil servants’ union says that the government has imprisoned them. Jophinus Musundi, secretary general of the nurses union says that no nurse will be in hospital in June. They say that a strike is the only language the government understands. Unions should reconsider labour dynamics and free people to work, as the government refrains from politicizing the economic mechanics.
Trade unions and those like minded want to see tighter regulations, yet such thinking of compulsory conciliation and arbitration is counterproductive. Strict labour market laws such as minimum wages, unfair dismissal laws raise the cost of hiring and price out of the labour market the very workers they intend to help. Union campaigns should beware of boring a hole in the boat they are sailing.
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