Northwood University

In Defense of Capitalism & Human Progress

 

The Economic Case for Right-to-Work by Richard M. Ebeling

The following economic case for right-to-work is an enlarged excerpt from a joint report prepared by a group of faculty members associated with Northwood University and Central Michigan State for the Michigan Chamber of Commerce entitled, 2012 Michigan Economic Competitiveness Study. This part of the report was written by Richard M. Ebeling, professor of economics at Northwood University.

 

The current economic crisis that has gripped the United States over the last several years has been especially negative in its affects on the levels and opportunities for employment in various parts of the country. Michigan has been one of the hardest hit states, with unemployment levels significantly above the national average.

A number of states attempting to recover from the severity of the recession have been looking at policy changes and economic reforms that could improve the labor market in terms of job creation. One of these policy changes has been reconsideration of Right-to-Work Laws. (Moore and Newman, 1985)

The Principle of Freedom of Association
An underlying and fundamental principle in the American political and economic system is the idea of freedom of association. Individuals should have the personal liberty to freely associate with any other members of society for lawful and commonly shared goals, purposes, and activities.

This principle also implies it’s opposite: that individuals may not be compelled or coerced into joining or participating in any association without their voluntary consent. The underlying premise of a free society is the right of individuals to say, “No,” whether this involves joining a church, entering into a contract, participating in any social club or group, or membership in a labor union. (Baird, 1988)

Historically, the idea of a right-to-work emerged out of the medieval system of compulsory guilds, under which employment and training within various professions, occupations, and trades were strictly controlled and regulated by urban associations of “masters” who limited entry of “apprentices” into their corners of the market. The occupational guild system artificially narrowed employment opportunities, restricted supply of goods and services, and limited competitive alternatives for buyers. (Epstein, S., 1991)

Beginning in the 16th and 17th centuries, the guild systems were slowly weakened and abolished. By the second half of the 18th century, the ideal had become each individual’s right to work at any line of employment that he freely chose to enter. (Robbins, 1978, pp.5-13; Dickman, 1987, pp. 28-39). The idea was captured in the words of Adam Smith in his famous work, The Wealth of Nations, in which he spoke of “the obvious and simple system of natural liberty” under which:

“Every man, as long as he does not violate the laws of justice, is left perfectly free to pursue his own interest in his own way, and to bring both his industry and capital into competition with those of any other man, or order of men.” (Smith, [1776] 1937, p. 651)

This principle of economic liberty and freedom of association became the hallmark of the American enterprise system. As urbanization and industrialization slowly developed and then accelerated in 19th century America, workmen in a variety of skilled occupations formed trade unions to negotiate for better work conditions and improved salaries.

However, under common law practices labor unions were not allowed to compel membership in their organizations for those seeking to work in a particular industry or occupation; nor could employers be forced to enter into union contracts if mutually agreed upon terms could not be found. (Reynolds, 1987, pp. 5-9)

Trade Unions and the Right-to-Work
This began to change in the late 19th and early 20th centuries. The Sherman Anti-Trust Act of 1890, which was meant to prevent monopoly restraint of trade by companies entering into cartel arrangements to limit competition and raise prices charged to consumers, was also applied to labor unions in a number of cases that came before the courts.

However, in the Clayton Act of 1914, unions were exempt from anti-trust prosecution under the assertion that “labor” was a commodity different from ordinary goods and services bought and sold on the market. The special privileging of labor unions to establish union representation over all workers employed on the basis of a majority vote by employees in a company was reinforced by the Norris-LaGuardia Act of 1932, and, then, with the establishment in 1935 of the National Labor Relations Act. (Boarman, 1963; Epstein, R., 2004)

In 1947 the National Labor Relations Act was amended allowing state governments to have the legislative authority to limit union representation by passing Right-to-Work Laws, freeing workers from compulsory union membership (the “closed” or “union” shop) or payment of mandatory union dues (the “agency” shop) to remain employed as a non-union member.  (Hartley, 1947; Petro, 1957, pp. 138-148; Schmidt, 1973; Reynolds, 1984, pp. 92-132). Currently almost half of the states have passed Right-to-Work Laws.

Critique of Union Arguments for Compulsory Membership
Broadly, the arguments against an individual employee’s right to work without membership in a union has been of three general types: (a) Only unified union membership can protect all workers against the superior bargaining power of the employer; (b) Only compulsory membership can protect other workers from the “unfair” competition of non-union members that may result in the wages of all workers in that industry being pushed below their “fair market value”; and (c) Only mandatory union membership (and dues paying) prevents non-union members from a “free ride” at the expense of union workers in a company or industry.

(a) The supposed superior bargaining power of the employer. The inferior position of the individual worker is claimed to be due to a number of factors. First, it is argued that the individual worker must accept the wage offered to him by the employer, since if he does not accept it, there are always many other workers looking for jobs ready to take his place. This ignores the fact that competition is two-sided in virtually every modern, developed market, and especially in a country like the United States. Thus, any employer who fails to offer a wage that tends to reflect the anticipated value that the worker contributes to a company’s profitability runs the risk that the potential employee with useful and productive skills will search out alternative employment where his skills are more highly valued by another employer wishing to get ahead of his competition.

The same applies to a currently employed worker who, if he believes that he is not receiving a wage commensurate with his actual market value, will see the advantage of changing employers in the same or a related market. This will force any employer attempting to “low ball” his workers to raise his wage offers, or run the risk of losing a growing number of qualified workers without whom he may not be able to retain his market position relative to his rivals.

Another argument sometimes used to claim that the individual worker has the inferior bargaining position says that the individual worker cannot “wait” to look for a better job. First, if the worker does not earn wages he cannot eat. The employer can wait to find a worker willing to take any salary he wishes to offer because, he has “capital” to live off until a worker comes along who will accept the lower wage the employer wishes to pay. Second, it is stated that labor is a perishable “commodity.” It cannot be “stored” to sell on another day. So if the worker does not take the wage offered, that lost day’s labor can never be regained.

However, that are limits to any such claimed “waiting” advantage on the part of the employer. First, every day of less output produced because needed workers are not yet hired is a day with lost sales revenues resulting from less output than could have been produced and sold on the market. Thus, waiting to find workers who might be willing to accept wages less than their real market value imposes a cost on the employer in the form of smaller profits and less market share that could have been acquired, if a wage more in line with workers’ worth was offered and accepted.

Second, financial capital may be “stored” rather than invested in hiring workers and producing output. It can be held as cash or loaned out (short-term) for some interest return. But delaying the hiring of workers who would otherwise have gladly worked at reasonable market-valued wages results in the prospective employer earning neither profit nor interest if a part of his financial capital is held as cash. And even if lent out to earn short-term interest, the potential employer loses every day the difference between the interest he may earn and the greater profits that could have been his if he had not delayed hiring needed workers for productions that could have been manufactured and sold. (Hutt, 1954; 1973, pp. 61-76; Machlup, 1952, pp. 348-352; Chamberlin, 1951, pp. 168-187)

(b) Unions protect wages from unfair non-union competition. It is argued that unions are able to collectively negotiate wages above what they would be in a market if workers were individually negotiating with prospective employers. If non-union workers could compete for union jobs, those union-secured, higher wages would be competed down. Thus, all workers will be better off with gainful employment in a market by being required to join and jointly negotiate through the representing union.

Labor, however, like every other good or service offered on the market, is subject to the law of supply and demand. If a union successfully negotiates a wage above the one that would have been competitively established on the market, fewer workers might be employed since the higher the wage the less profitable the number of workers potential employers find it attractive to hire (or retain). In other words, wages that compulsory unions may successfully impose runs the risk of pricing some workers out of the market. (Velasco, 1973)

In this instance, the “conflict” is not between “labor” and “management,” but instead between union workers and non-union workers. In effect, compulsory union membership serves as a mechanism to limit the available supply of workers willing and able to offer their services to potential employers in that unionized sector of the market. The union “locks out” members of the labor force who would have been willing to work for prospective employers on terms mutually attractive to the two sides.

This forces the locked out and displaced workers unable to find employment at the mandatory union-imposed wages to search out alternative gainful employment in jobs and with employers that are less well paying and not as attractive. The union members’ gains are, as a consequence, at the expense of other workers, who must enter other markets for employment and thereby pushing down wages in that alternative part of the labor market below what would have prevailed if the union had not locked them out, with the resulting “over-supply” of labor in the alternative labor market.

This process can and often does entail workers having to migrate out of the state where they had previously found work, or where they would have chosen to reside, if not for compulsory union membership rules pushing non-union workers out of that part of the labor market, and that part of the country in which “closed shop” conditions prevail. (Hayek, 1960, pp. 267-284; Knight, 1959, pp. 21-45)

(c) The Need for Union Membership to Avoid Non-Union Free Riders. The argument for compulsory unionism also has been based on the rationale that the higher wages and better working conditions negotiated by the labor union benefits not only the union members but all other workers in the company or industry who are covered by the union terms of employment. If non-union members are able to benefit from the “positive” results of union activities it is only reasonable that they should be required to bear a part of the costs of obtaining those favorable work conditions and wages. Thus, non-union workers should be, if not required to join the union,  at least obligated to pay union dues to assist in defraying the organizational and related expenses to provide those benefits.

At the same time, the potential for “free riding” reduces the incentive to belong to a union, and thus can result in fewer union members, and therefore weaker unions unable to effectively negotiate on behalf of workers’ interest. (Ickniowski and Zax, 1991)

The free rider problem can only arise when the gains from the actions of some cannot be prevented from benefiting others who have not participated in covering the costs that have generated those “positive” results. However, excludability is possible in the case of union-generated wages or work conditions by simply stipulating in the negotiated union contract that the terms of that contract only apply to union members.

If non-union workers are unable to obtain from the employers wages and work conditions equal to or better than those arranged by the union that will act as a positive incentive for non-union employees to find it in their own interest to, then, join the union. If, however, non-union employees are able to negotiate for themselves wages and work conditions not much different from (or even superior to) those covered by the union contract that would be, in itself, a clear demonstration that union membership and dues is superfluous. (Baird, p. 37)

The Benefits from Right-to-Work Laws
A number of arguments have been offered in support of Right-to-Work Laws, among them are: (a) The case for personal freedom; (b) The gains from competition; (c) The benefits from labor mobility and workplace flexibility; and, (d) An efficient use of scarce resources for improved productivity.

(a) The case for personal freedom. The hallmark of a free society is the extent to which the individual has the liberty to make decisions guiding his own life, including the occupation or profession he chooses to follow to earn a living and given meaning and enjoyment to his daily activities. By definition, then, union exclusion of workers who would, otherwise, find gainful employment on the basis of free and voluntary contract between themselves and willing employers is a restraint not only on trade, in general, but a restriction on the personal freedom of workers to enter into consensual association with others for peaceful and lawful mutual benefit.

The same applies to compulsory payment of union dues as a “tribute” to a union for the right to work for a particular employer or in a specific industry (the “agency shop”). Indeed, it can be argued that it is a form of imposed tax for the privilege of working within the “jurisdiction” over which the union claims authority.

The union is asserting “ownership” over the jobs within the sector of the economy or industry in which they acquire compulsory membership. As such, it is not only an abridgement of the non-union members’ liberty of choice in employment, it is also an infringement on the freedom of the employer’s right to enter into contracts and hire any and all workers with whom he may reach mutually agreeable terms. Indeed, it implies that the union claims control over a vital element of entrepreneurial and managerial decision-making. (Richberg, 1957, pp. 114- 126)

(b) Compulsory unionism limits labor market competition. “Closed shops” have historically had one essential goal, anti-competitive and monopoly restriction on segments of the labor market. (Simons, 1944, pp. 121-159) The purpose is to limit the supply in various occupations, professions, and trades as a means to raise the price of labor above the levels at which the free interactions of market supply and demand would have set wages.

As such, closed shop unionism directly raises the cost of employing workers within companies and industries, and as a result indirectly raises the prices of the goods and services bought my consumers on the market. Compulsory union-dominated industries, therefore, potentially limit the supply of consumer-desired goods and services and raise the prices consumers may pay for that more limited supply.

Companies or cartels that attempt to act in a monopolistic manner bear the cost of leaving a portion of their capital and equipment idle precisely to withhold potential output with the hope of deriving a sufficiently higher net revenue by selling less at a higher price. They must weigh the cost of underutilized plant and equipment relative to the higher price with the decreased output.

Compulsory unions however restrict entry into their market to reduce the supply and raise the price of labor – wages – but bear no such cost. Their responsibility and “costs” extend no further than a weighing of the advantages and disadvantages to the workers who remain employed under the union wage and work condition rules negotiated on the basis of collective bargaining. Those workers priced out of employment in the closed shop are no longer voting or dues-paying members, and therefore no longer an element in the union leadership’s decision-making.

The burden of the compulsory union’s actions, as a result, falls on the shoulders of the excluded workers. They bear a cost they had not bargained for or agreed to. And, thus, the unemployment or less valued employment that these displaced workers now face are a negative “externality” that these unions impose on others without their agreement or consent.

Right-to-Work Laws reduce (if not eliminate) union’s anti-competitive and potentially monopolistic practices in the labor market. The number of workers employed in an industry, occupation and trade reflects the consumer demand for the products workers can produce. As long as the value of the product is greater than workers’ opportunity costs of being employed in some other way of earning a living, the supply of workers will increase, the output of the desired goods and services will expand in supply and the prices at which those goods are offered to consumers on the market will decline.

(c) The benefits from labor mobility and workplace flexibility. Compulsory unionism and the closed shop tend to reduce and limit labor mobility between industries and regions of the country. Competitive markets,inevitably, experience constant change, and therefore continual adjustment and adaptation to new circumstances. Consumer demands change, resource availabilities are modified, capital investments shift from one line of production to another, and technological innovations transform how and where goods and services can be profitably supplied and in what amounts.

Union restrictions retard the required adaptations and adjustments that must constantly be undertaken in different ways and different places if markets are to be continuously moving in the direction of sustainable balance and stability.

Under Right-to-Work Laws, workers and employers have the flexibility and openness to find the “right” patterns of worker employment, to perform the tasks and types of work in and between industries that the shifting conditions of market supply and demand suggest are the most profitable and advantageous for both employees and employers.

This also means that more flexible labor markets, where Right-to-Work Laws are present, are likely to offer the adaptability and profitability to attract more industry into regions and states that allow labor markets to effectively function. At the same time, a more competitive labor market  is likely to attract qualified and energetic workers from other areas who are looking for more attractive and gainful employment.

The difficulty is that closed shop unionism prevents both employers and employees from using their knowledge and talents in ways that they discover are most advantageous. On the other hand, a Right-to-Work area offers the openness that permits workers to have the ability to find more gainful employment in less contractually restrictive ways. The formerly excluded or constrained workers and their potentially matching employers can dynamically better meet both domestic and foreign competition for successful employment and wage opportunities, and for the supplying of better and less expensive goods and services for the consumers of that state and the nation as a whole.

(d) More efficient and productive labor under Right-to-Work Laws. Right-to-Work environments enable labor, as well as other resources and capital, to be effectively allocated and employed where best business judgments suggest in a world that is always changing and in which, therefore, that is an irreducible amount of uncertainty and risk.

It is not that businessmen never get it “wrong” or workers never have second thoughts about jobs they’ve taken. It is rather that given the inescapable fact that some decisions will always turn out to be wrong, what labor markets, as well as all other resource and capital markets, must have is the greatest potential to readjust and transform what, how, and where production is undertaken and job opportunities are now found to exist.

It has become a cliché to say that America now exists in a far more competitive, global economy. It is nonetheless very true. Any state or country that wishes to meet this challenge, not only by retaining businesses and jobs, but in  attracting new investment and an expanding workforce, needs to offer business and workers the type of economic environment that makes that place an attractive magnet.

Conclusions on Right-to-Work
In spite of the impressions sometimes created, Right-to-Work Laws are not “anti-labor” or “anti-union.” The economic literature strongly suggests that worker opportunities for the greatest number of people is most likely to be present in an “open shop” market-setting, rather than in which labor markets are “closed.”

The flexibility and adaptability in labor markets that comes with “Right-to-Work” legislation, can serve as an important aspect of a policy focused on job maintenance and job creation, when combined with other vital reforms in the wider setting of fiscal and regulatory policy.

References:

Baird, Charles W. (1988), “Varieties of ‘Right to Work’,” Managerial and Decision Economics, Winter, pp. 33-43.

Boarman, Patrick M. (1963), Union Monopolies and Antitrust Restraints. Washington, D.C.: Labor Policy Association.

Chamberlin, Edward H. “The Monopoly Power of Labor,” in David McCord Wright, ed., The Impact of the Union. New York: Harcourt, Brace.

Dickman, Howard. (1987), Industrial Democracy in America: Ideological Origins of National Labor Relations Policy. La Salle, Ill.: Open Court.

Epstein, Richard. (2004).  Free Markets Under Fire. London: Institute of Economic Affairs.

Epstein, Steven. (1991), Wage and Labor Guilds in Medieval Europe. Chapel Hill, N.C.: University of North Carolina Press.

Hartley, Fred A. (1947), Our New Labor Relations Policy.  New York: Funk & Wagnall.

Hayek, Friedrich A. (1960), The Constitution of Liberty. Chicago: University of Chicago Press.

Hutt. William H. (1954), The Theory of Collective Bargaining. Glencoe, Ill.: Free Press.

——————–  (1973), The Strike-Threat System: The Economic Consequences of Collective Bargaining. New Rochelle, N.Y.: Arlington House.

Ichniowski, Casey and Zax, Jeffrey S. (1991), “Right-to-Work Laws, Free Riders, and Unionization in the Local Public Sector,” Journal of Labor Economics, vol. 9, No. 3.

Knight, Frank H. (1959), “Wages and Labor Union Action in the Light of Economic Analysis,” in Philip D. Bradley, ed., The Public Stake in Union Power. Charlottesville, VA: University Press of Virginia.

Machlup, Fritz. (1952), The Political Economy of Monopoly. Baltimore, MD: The Johns Hopkins University Press.

Moore, William J. and Newman, Robert J. (1985), “The Effects of Right-to-Work Laws: A Review of the Literature,” Industrial and Labor Relations Review, Vol. 38, No. 4 (July).

Petro, Sylvester. (1957), The Labor Policy of the Free Society. New York: The Ronald Press.

Reynolds, Morgan O. (1984), Power and Privilege: Labor Unions in America. New York: Universe Books.

————————–  (1987), Making America Poorer: The Cost of Labor Law. (Washington, D. C.: Cato Institute)

Richberg, Donald R. (1957), Labor Union Monopoly. Chicago: Henry Regnery.

Robbins, (Lord) Lionel. (1978), “Economists and Trade Unions,” in Trade Unions: Public Goods or Public ‘Bads’? London: Institute of Economic Affairs.

Schmidt, Emerson P. (1971), Union Power and the Public Interest. Los Angeles: Nash Publishing.

Simons, Henry. ([1944] 1948), “Some Reflections on Syndicalism” in Economic Policy for a Free Society. Chicago: University of Chicago Press.

Smith, Adam, ([1776, 1937), The Wealth of Nations. New York; Modern Library.

Velasco, Gustavo R. (1973), Labor Legislation from an Economic Point of View. Indianapolis, IN: Liberty Fund.

Dr. Richard M. Ebeling is professor of Economics at Northwood University. He was formerly president of The Foundation for Economic Education, was the Ludwig von Mises Professor of Economics at Hillsdale College in Hillsdale, Michigan, and served as vice president of academic affairs for The Future of Freedom Foundation.
  • Mike in MI

    Thanks for this article.

    If we can’t avoid them in the first place, laws of plunder (ala Frederic Bastiat) and other bad laws need expiration dates. Like plunderous and bad politicians, they are difficult to get rid of!