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This is the second part of a series of posts responding to Matt Steinglass at the Economist, who put forward some common progressive arguments in favor of more unionization recently. To understand the big picture problem with the argument for more unions, it’s useful to look at the reasons why unions have died out in the first place. One common explanation is that the most highly unionized industries, like manufacturing, have shrunk, and that unionization was simply taken along for the ride. This is not the case however. As Barry Hirsch details, while overall manufacturing employment fell from 20.1 million from 1973 to 15.6 million in 2006, nonunion manufacturing employment rose by 1.5 million. A similar patter persisted in the other main union industries of construction, and transportation/communication/utilities: union employment fell while nonunion employment rose. The graphs below, from Hirsch, tell the story pretty clearly:

If declining industries is not the cause then what? Hirsh identifies 3 main explanations for the decline of unionism: competitive, structural, and institutional. Ultimately, he provides a convincing argument that the fall of unionism is due to a more competitive and dynamic economy. Part of the problem, he argues, is that collective bargaining slows firms down:

“Were changes in the economic environment very gradual and competitive pressures weak, a  formal and highly deliberate union governance structure might pose few problems. The costs of deliberate or sluggish union governance, however, increase with the speed of change and the degree of competition. New information is constantly coming to a firm and its workers and it is prohibitively costly. to have explicit contract terms for every possible contingency. Revising formal contractual terms is costly. Although many collective bargaining agreements have broad management rights clauses, formalized contractual governance limits flexibility and managerial discretion in union companies. “

A related problem is that by cartelizing labor, unions raise wages above the competitive level. The more competitive a firm’s market, the less they will be able to raise price in response to higher wages, and the more costly unionization is in terms of lost employment. For both reasons it is difficult more difficult for unionization to exist in a competitive and dynamic economy.

A common counterargument to this, which Matt makes, is to point to the high employment and unionization of the 50s and 60s as evidence that they can co-exist. But the economy was much less dynamic and competitive than it was today. As detailed by Brink Lindsay in Nostalgianomics, labor market competition in that time period was limited by discrimination against minorities and women, and strict immigration restrictions. Goods market competition was limited by government policy like tariffs and price controls, and a much lower level of global competition than you have today. Despite this, strong economic growth was possible due to lots of long-hanging productivity fruit and innovation.

Today low unemployment can’t co-exist with high unionization of the kind we have in the U.S. because the world, and especially the U.S., is more competitive and dynamic.  I think an implicit argument made by some, although not necessarily Matt, is that we should be willing to give up the dynamic and competitive economy in exchange for more unionization. But aside from being good for all the reasons detailed in Nostalgianomics (free trade, less discrimination, and more immigration are good things), a competitive and dynamic economy is extremely important. As Tyler Cowen argues in The Great Stagnation, we’re out of low-hanging fruit like we used to have, and so we can’t afford to give up the economic growth we do have by attempting to decrease labor market and goods market competition enough that unions can thrive again.

Matt Steinglass at the Economist has replied to my recent piece on how liberals often ignore labor markets by outlining how we can have more unionization without less employment.  His argument goes like this:  unions capture profits and increase the labor share of national income. This increases aggregate demand, which fuels growth and leads to higher employment. I’m going to address this argument in two posts, since the reply will be lengthy.

The first question I want to address is “if unions increase wages by capturing profits, would it increase economic growth?” I think this argument suffers from what I’d like to call the fallacy of permanent Keynesianism. It’s true that there is slack in the economy right now, and that increasing consumption and therefore aggregate demand will increase economic growth. But the level of unionization in the economy is a long-term structural and institutional issue, not a short-term countercyclical one.  Attempting to increase consumption like this will come at the expense of savings, which in the long-run means lower investment, a lower capital stock, and therefore lower economic growth. In short, more consupmtion does not necessarily mean more economic growth. Consider, as a simple example, the Golden Rule of savings in a Solow growth model.

In fact, in a symposium commemorating the 25th anniversary review of his celebrated book “What do unions do?”, labor economist and union defender Richard Freeman makes the complete opposite argument as Steinglass.  He argues that the negative direct impact of of unions on economic growth (which, as discussed below, he acknowledges) may be offset by an increase in workers’ savings that result from labor contracts with larger pensions.

But even if it were true that more consumption always meant more economic growth, I do not agree with Matt’s contention that unionization would increase the labor share of national income. The following graph shows the ratio of labor compensation to corporate profit from the BEA’s NIPA tables. While Matt is right that this ratio is at a historical low, notice that the pattern bears no relationship to the level of unionization in the economy, shown in the graph below it.

Labor’s share of national income actually fares much better when you use the definition used by Robert Gordon and Ian Dew-Becker in their paper on inequality.

Here the denominator is GNP minus consumption of fixed capital, minus indirect business taxes. While the number has fallen recently, it is well above historical lows, and well above what it was during the heydey of unionism. Again, the important thing is there is nothing to indicate that the decline in unionization has affected labor’s share. Gordon and Dew-Becker conclude in their paper:

“Thus,to a first approximation, we conclude that the increase in American inequality after the mid-1960s has little to do with labor’s share in domestic income.  What has happened is a sharp increase in skewness within labor compensation.”

However, even if unionization doesn’t allow labor to capture profits in the aggregate, the empirical evidence (some of which is summarized usefully here by Barry Hirsch, more can be found in the symposium discussed above) does suggest that it happens within unionized firms. But is this a good thing as Matt believes? The problem is that measured profits, when they are rents that unions can potentially capture at all, can be either pure rents or they can be quasi-rents. In the long-run, competition eats away at pure rents, and quasi-rents that represent normal returns to long-lived physical and non-tangible capital are necessary and important. Allowing unions to ex-post grab quasi-rents to long-lived capital incentivizes firms away from making those investments in the first place. In fact the empirical evidence on this topic shows that unionized firms have less profit, less investment, and less R&D spending.

While Matt seems to disagree, the notion that unionized firms suffer from lower employment is actually not a very controvertial claim among labor economists.  For instance, in his aforementioned book, Richard Freeman agrees that union firms not only have lower rates of R&D, investment, as discussed above, but that they have lower employment growth. He argues that this may not negatively impact economic growth if the decreases in union firms are offset by increased investment, R&D, and employment growth by non-union firms. But this is exactly the problem with arguing for a more unionized economy: the only way it isn’t damaging is if there are nonunion firms to take up the slack and grow. In the long-run, this suggests a steady decline of unionization is inevitable.

There is another major disconnect between the way liberal writers like Matt and liberal labor economists like Freeman write about unions. Typically, the former praise the so-called “monopoloy face” of unions, whereas the latter usually recognize that unions ability to raise wages above market level is a downside of unions. Labor economists who support unions tend to do so for what economists call the “voice face” of unionism. Indeed, I think this positive aspect of unions, whereby they communicate with owners and managers the desires of the workers, is underestimated by many conservative writers. The “voice face” of unions can lead unionization to have a positive impact on firm productivity. Granted, there are a lot of issues here, like the possibility of alternative ways of providing workers voice that don’t risk a “monopoly face”, and the fact that the empirical impact of unions on productivity is ambiguous whereas the wage impact is not. But suffice it to say that the aspect of unions liberal writers praise is often recognized by prominant liberal labor economists as a problem.

Next I’ll discuss why unionization has fallen in the first place, why high unions could co-exist with low unemployment in the 50s and 60s, and why both of these things tell us that high unionization is undesirable today.

The debate over public sector unions has been lacking in economic arguments, and the justifications argued on unions behalf have not been of the kind one usually finds in these debates among labor economists. The two main economic arguments for unions are to provide workers with voice, and to counteract monoposonies. My main concern here is the latter, but I’ll briefly address both with regard to teachers unions in particular.

With respect to the voice function of unions, a standard reply of labor economists is that the National Labor Reform Act should be changed to allow more non-union types of voice. For instance, the act prevents  firms from supporting any type of labor organization. That means a firm is unable to organize a non-union way for  workers to voice complaints, settle disputes, negotiate over working conditions. As Barry Hirsch argues, these parts of the NLRA, while not without legitimate purposes,  “restrict development of nonunion vehicles for employer-employee, cooperation and productivity-enhancing voice.” Canada, in contrast, does not bar employer-initiated or supported labor groups. And every progressive loves Canada, right?

The second economic argument for unions is to help counteract the power of monopsonies. In the public sector, this is certainly a plausible complaint. Given that governments are often the only ones providing some services, they may have large degrees of labor market power, also called oligopsony power. While few may be explicitly making this economic argument, the common concerns about teacher powerlessness in the face of fickle administrators certainly reflects this problem. In a well-functioning and competitive market, administrators would face repercussions for firing good teachers. For one thing, parents would be upset, and competitive enterprises suffer consequences when customers are unhappy. In addition, competitive labor markets would mean teachers would demand a risk premium to work at firms where they could be fired for political or illegitmate reasons. When there is no competitive check on a school, neither of these repercussions is as important.

Thus if we are concerned about the oligopsony power of schools, and we want teachers to be treated as other comparable professionals are treated, then one possible solution is to make schools more competitive by allowing more school choice, either through charters, vouchers, or simple choice among public schools. This way, if an administrator has a reputation for firing good teachers, there are consequences. This will not prevent unjust firings from happening ever, as no system could, but it will make it less likely. After all, we don’t worry too much that about good accountants getting fired, do we?

On the other hand, the lack of competition for government, and schools in particular, also provides the opportunity to earn so-called economic rents just as lack of competition does in the private sector. These rents may be shared in an organization among administrators and teachers, meaning that less competition means higher pay for teachers. So while more competition can mean more labor market power relative to administration, it may also theoretically mean lower pay.

In order to shed some empirical light on this issue, a recent paper (I can’t find an ungated version) by Lori Taylor at Texas A&M looked at teacher pay in Texas. Importantly, Texas is a right-to-work state so collective bargaining does not confound her analysis. What she found was that in a handful of very uncompetitive markets, teacher salaries actually would decrease as a result of more competition, meaning that they were sharing in some of the economic rents. In most markets however, oligopsony power meant that increasing competition among schools would actually increase teacher salaries. Here is how Taylor summarizes her results:

More than 88% of the teachers with less than 20 yr of experience would benefit from increased competition. Seventy-nine percent of the highly experienced teachers would also benefit. Only 2% of beginning teachers, 5% of experienced teachers, and 6% of highly experienced teachers could expect increased competition to lower their pay.Profits and Rent-Sharing.

To provide one example, she highlights the Houston, Dallas, and San Antonio areas, home to more than 70% of the charter schools in Texas. Prior to the existence of these charter schools, a 1% increase in competition would increase teacher salaries by 2.5%. Given these increases in salaries, it seems likely that non-wage power of teachers is increased as well, meaning it’s harder to fire a good teacher for bad reasons.

Despite the theoretical ambiguities discussed above, these really are common sense results: the more labor market opportunities you have, the less power your bosses have over you, and the more competition there will be to hire the best teachers. The only place this isn’t going to be the case is areas where teachers are earning rents and schools are very uncompetitive. In these areas teachers are already likely to be overpaid, and the other benefits from competition, like better student outcomes, are likely to be the greatest. Long story short: more competition helps the teachers who need it.

Allison Schrager writes

. . . people must rethink the social contract between state workers and taxpayers. As health care gets more expensive and people live longer, the old model simply isn’t sustainable. This means that either benefits must be cut (which, given legal hurdles, is unlikely) or state residents must pay more taxes.

An issue I have with the popular discussion of public sector pay and unionization is that on all sides there is a temptation to frame this as a moral question. What are worker’s rights? What are tax payer’s rights. What is the social contract and is one group cheating the other.

Some of this is unavoidable since public sector pay is influenced by the democratic process. Still we should not encourage it.

The public sector isn’t a stage on which to air our perceptions of the just society, either from the point of view of workers or tax payers. The public sector is a labor market.

In a labor market the greater the total value of the compensation offered the greater the size of the applicant pool. The question facing policy makers is at its heart, do we have too many applicants or not enough? Are our best applicants over qualified or under qualified?

If they are over qualified then you are paying too much. This is bad, but not primarily because it raises costs for tax payers. Obviously tax payers would prefer to pay less, but so would any customer for any service.

If the tax payer is buying a higher quality service than he or she needs then the problem is that we are wasting human talent. That public sector worker could be employed somewhere else in the economy and produce more value there.

On the other hand if public sector workers are under qualified then they are being paid to little. Again this is bad but not primarily because the workers are getting too little pay. All workers, public and private would prefer to be paid more.

It’s a problem because there are workers somewhere out in the private sector who could be creating more value as a public sector worker. This may strike some more libertarian readers as crazy. Yet, consider the following simplistic example.

A talented driver might face a choice of whether to  to drive a fire engine or drive a tractor trailer. Both involve a special set of skills that is rewarded by higher pay. It could be the case that human welfare is higher if the best drivers all drove private tractor trailers, but this is not obviously the case. There is a lot on the line in getting a fire engine to a fire quickly and safely. Having the worst or even a mediocre set of drivers could easily be more costly to the public than offering higher pay.

Now, we might imagine that this simplistic analysis is mucked up by the presence of labor unions and public pay scales. Some of this is possible if the union prevents the firing of certain workers or doesn’t allow differences in pay based on differences in ability.

Simply driving up the salaries and benefits for public sector workers, however, will not cause basic labor market mechanics to collapse. This generates inefficiencies but the basic forces of supply and demand still assert themselves. We still have an upward slopping labor supply curve and unless the union is actively keeping people out, that doesn’t change at all.

Unlike in a private firm there is no profit maximizing relationship that matches labor demand to the marginal benefit of customers. This implies that there is no force to mitigate inefficiencies on the customer side. It doesn’t change the nature of the inefficiencies emanating from the labor market, though. Either the workers will have pay in excess of the marginal benefit of quality or the marginal benefit of quality will be in excess of pay.

In a private market the very same inefficiencies would occur. Constriction on the supply of workers would drive up the wage which would drive up prices for customers. The customers would respond by buying less and that would mitigate the inefficiency to some extent. Yet the failure in the labor market would be the same, the bar for quality is set too high.

We shouldn’t think that simply because public workers are employed by the government that the basic rules of supply and demand fall apart. Labor supply curves still slope upward and the quality of workers will still be a function of their compensation. 

Ezra Klein asks

Have you or anyone close to you belonged to a union? How did that change your impressions of organized labor in general?

For 17 years or so my mother was a shop steward for the Amalgamated Clothing and Textile Workers Union. She was a weaver in at Cone Mill’s White Oak plant in Greensboro, North Carolina. She eventually left that job to become a full time union organizer.

I grew up in the Union, so my impressions were formed by it. Those impressions evolved considerably as I grew older, both because of observations about the union and the world around it.

Observations from Growing Up in a Union

As a small child I thought that unions were the only way that workers could receive anything above subsistence wages. I also thought that there were intentional erected barriers in society that prevented people, particularly black people, from changing their class. If you were born working class then by-and-large you were destined to stay working class.

We did not use the phrase middle class. Carpenters, mechanics and other skilled laborers were considered well-to-do members of the working class. Doctors and lawyers and other professionals were considered part of the rich.  The least intellectual would often refer to the rich generally as “white people.” 

Though everyone was aware that working class white people were also white, this fact was not pointed out unless there was some explicitly racial conflict. The phrase “white people” generally referred to those not in the working class.

Though the issue rarely came up the assumption was that all rich people would be on the side of the Company. This wasn’t because of ideology but simply identity. The Company was rich. They were rich. There was no reason to presume people would betray their side.

None of this was taught. It was simply the air that we breathed. Working people were working people. The rich were the rich. Unions were the primary mechanism through which working people were protected from the rich.

A variant of Marxism was the accepted ideology of the Union, though the term Marxism was not regularly used. This Union Marxism was seen as different than communism in general or Soviet communism in particular. Those were viewed as perversions; a corrupted version of the perfect world. This corruption was attributed to moral weakness of their leaders.

There were some overt communist sympathizers in the Union, my parents among them. However, these people were considered radicals.

It was also not widely known that there was some worldview other than Union Marxism. Union Marxism had a role for the rich to play and they seemed to be playing it. Thus, it would not occur to someone that the rich had a different system of belief. They simply had a different role. Theirs was to oppress – ours was to struggle for freedom.

Again the Union was the primary instrument through which this could be accomplished. This was because the rich needed our work to maintain their lifestyle. If we withheld our work as a collective then they could be forced into some concessions. Though, this term was never used, the inability of the Union to demand and receive full compensation was thought to be limited by the free rider problem.

Collective action required that we all stand together but some people would naturally decline to suffer the pain of this and this would weaken the effort. This is why the Union had to constantly endeavor to increase its number and instill in its members a esprit de corps.

Loss of Faith

I began to loose my religion somewhere around the age of 10 or 11. That may seem young and people may wonder what religion I had to lose. However, the Union was as pervasive as normal religion or ethnicity. At least by five years of age it had heavily influenced my worldview because it told me things about who I was in the world, who my family was, and who other families were.

Yet by around 10 those things seemed not to be so true. For one thing I in math and science I was tracked along with the children of rich kids. I had rich kid friends and went to visit their homes. I would mention sometimes in the company of their parents that they were rich. This hardly failed to amuse them and they would say that they were not rich. They would explain that some other group of people was rich.

Though I didn’t believe them this planted the seeds of doubt because it meant that they did not share our worldview. That our worldview was true, that everyone knew it and that everyone played their part was something unsaid but core. Hearing people question it was shocking.

I also around this time became fascinated with the notion of community college. I don’t know how I first found this out but I realized that one could not be denied admittance to community college. At the same time, however, it promised access to jobs that were better paying than most working class jobs.

This was sharply at odds with the core theory. The core theory suggested that the system was designed to keep the majority of us from leaving the working class. There would be some exceptions and my parents expected me to be one. Yet, the majority was presumed to be held down.

Yet, here was a vehicle for rising somewhat and it said that admissions were open. Why then I wondered could we not all go to this community college and all escape. I was told that there would not be enough of these skilled jobs for all of us. This seemed unsatisfying and no reason not to try.

The final crack came when my mother became a union organizer. She was regularly admonished for spending too much time helping workers solve nonwork related problems and not enough time building membership.

I became convinced that dues rather than solidarity was behind the drive for more members. My faith in unionism was crushed and I went looking for other answers.

I’m not sure how I was introduced to it but within a short time I had discovered John Locke and  become obsessed with Thomas Jefferson. It was soon after that, that I discovered Milton Friedman and then mainstream economics. All of these influences further weakened my belief that unions had even played a major role in the rise of living standards.

A story in the Times today covers the ongoing attempts by politicians to decrease the pay and power of unions:

State officials from both parties are wrestling with ways to curb the salaries and pensions of government employees, which typically make up a significant percentage of state budgets….

But in some cases — mostly in states with Republican governors and Republican statehouse majorities — officials are seeking more far-reaching, structural changes that would weaken the bargaining power and political influence of unions, including private sector ones.

And yesterday, at the Economix blog, Times reporter Michael Powell had some more comments on a previous article he’d written about public sector pay, where he made this claim:

A raft of recent studies found that public salaries, even with benefits included, are equivalent to or lag slightly behind those of private sector workers.

An important note about these public sector studies is that I don’t believe that any of their authors are claiming that there is no public sector union wage premium. Just like in the private sector, being in a union raises your wages by over 10%.

Of course some of these studies explicitly control for union membership, which then tells you that public sector workers aren’t overpaid once you take their union premium into account. Not all studies control for unionization, which is an attempt to provide a measure of the overall wage premium for public sector workers, but I doubt that those authors would deny that there is still a public sector union wage premium.

So are public sector workers overpaid? It’s a tough question to answer because there are many perks for occupations, and also probably some selection bias. But I think we can say with a fair degree of certainty that , just like in the private sector, those in unions receive a substantial wage premium above market rates.

The L.A. Times investigation into standardized test scores is amazing, and you should definitely be reading everything they have. The Times deserves lots of praise, especially for it’s humane but honest treatment of the teachers, for whom this must be a stressful and, for many, shameful ordeal. Consider this teacher:

Even at Third Street Elementary in Hancock Park, one of the most well-regarded schools in the district, Karen Caruso stands out for her dedication and professional accomplishments.

A teacher since 1984, she was one of the first in the district to be certified by the National Board for Professional Teaching Standards. In her spare time, she attends professional development workshops and teaches future teachers at UCLA….

Third Street Principal Suzie Oh described Caruso as one of her most effective teachers.

But seven years of student test scores suggest otherwise.

In the Times analysis, Caruso, who teaches third grade, ranked among the bottom 10% of elementary school teachers in boosting students’ test scores.

This is clearly not a lazily tenured teacher, but someone who was trying in earnest and working hard at being good at their job. She was not being protected by the union and the school district’s decision to hide these scores, she was being done harm and is one of the victims here. Good teachers want this information to make them better teachers, which you can see in her response to the news of her poor scores:

Still, Caruso said the numbers were important and, like several other teachers interviewed, wondered why she hadn’t been shown such data before by anyone in the district.

“For better or worse,” she said, “testing and teacher effectiveness are going to be linked.… If my student test scores show I’m an ineffective teacher, I’d like to know what contributes to it. What do I need to do to bring my average up?”

When you read these stories about teachers across the hall from one another, with the same population of students from the same socioeconomic background, yet performing so vastly different from each other I find it hard not to reflect on a dying notion in educational reform: that the problem is that teachers need is more resources and smaller classrooms. In the not-so-distant future it will unanimously be understood that this was a completely wrongheaded idea, and we will wonder how it could ever have been believed. It will be like price controls in the 70s, or the idea that the Soviet Union would outperform the U.S. The not-so-distant future will wonder how anyone ever thought education could be reformed when performance and pay were so disconnected, and when nobody -not even the teachers themselves- knew who was succeeding and who was failing.

Smaller classrooms and more resources without better information and incentives would be like trying to save a sinking ship by filling up the gas tank.

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