The simple macroeconomics of labor unions

by on February 26, 2011 at 2:59 pm in Economics | Permalink

From Nick Rowe, via Scott Sumner:

If all prices are sticky, then an expansionary monetary policy, which increases aggregate demand, increases output and makes everyone better off. That's why booms are good, because it brings the economy closer to the competitive equilibrium. And why recessions are bad, because they take the economy further away from the competitive equilibrium.

And cartels, like labour unions, just make the problem worse. Because by joining together with similar sellers into a group, the demand curve facing the group is  steeper than the demand curve facing the individual, since members of the group no longer compete against each other for buyers. So there is an even bigger difference between the downward-sloping trade-off facing the group of sellers and the horizontal trade-off facing us all.

Unions are bad for the very same reason that recessions are bad.

All New Keynesian macroeconomists have understood the above for the last 20 years. Which is why all New Keynesian macroeconomists are fundamentally opposed to cartels, labour unions, minimum wage laws, etc.. OK. It's why they should be opposed to such things.

But alas, we do not quite find consistency on these issues…

foosion February 26, 2011 at 11:34 am

Surely you jest

An increased to an aggregate is not necessarily good if the result is that some are worse off. In order for it to be unambiguously good, all have to be made better off.

These days big business and similar interests have a rather large degree of control over the government. Unions are good if you believe there should be a political counterweight to these interests.

thepolemarch February 26, 2011 at 12:09 pm

What a painfully thin argument, foosion. In no way is a change from an open labor market to a union Pareto improving, either. Jobs are lost by the creation of a union, but that never seems to be relevant to the pro-union crowd.

Chris February 26, 2011 at 12:26 pm

the "political counterweight" argument for unions is truly ridiculous.

If the aerospace industry wants higher government subsidies, how are strong unions a political counterweight to this?

If the coal industry wants to block carbon taxation, how are strong trade unions a political counterweight to this?

If General Motors wants a government bailout, how are strong unions a political counterweight to this?

Unions aren't a counterweight to business corruption. They're what puts the crony into capitalism.

RD February 26, 2011 at 12:43 pm

What is added to this argument by talking about aggregate demand and New Keynesianism rather than just a non-competitive labor market at the micro level, such as the effect of the minimum wage?

Jim February 26, 2011 at 12:49 pm

"Unions are bad for the very same reason that recessions are bad."

Well we don't like you economists either.

yoyo February 26, 2011 at 1:11 pm

Unions make firing harder, and so prevent panic/recession caused layoffs, which make the downturn worse.

At any rate, a model that suggests the main issue in most people's wages is that they demand (and get) too high of a wage is…interesting. This is another version of the vacation argument. And I think people suggesting it should take one themselves.

Jay February 26, 2011 at 1:24 pm

Preface: This was censored by Mark Thoma because it goes against the DNC talking points.

From the BLS QCEW survey, which covers 99% of workers:

Average annual wages in Wisconsin:

Local government – $38,121
Private sector – $38,626
Local government primary and secondary education – $39,121
Private sector primary and secondary education – $30,510
http://www.bls.gov/cew/
ENU5500050310
ENU550005036111
ENU5500050510
ENU550005056111
ENUUS00050310
ENUUS0005036111
ENUUS00050510
ENUUS0005056111

Andrew Edwards February 26, 2011 at 1:36 pm

Also nearly every argument on this topic works less well when the buyer of the labor is the government, rather than a private firm.

save_the_rustbelt February 26, 2011 at 1:57 pm

One of the strongest cartels in the country is the cartel of tenured university faculty.

The cartel has the ability to reduce work output while increasing compensation, thus the sky rocketing cost of higher education.

Good for the goose, good for the gander?

dirk February 26, 2011 at 2:18 pm

Bill hates Christmas. What a surprise.

Anyway, I can quickly disprove that deadweight loss on gifts theory: The worst gift is cash, therefore every non-cash gift must be worth more than its cash value.

Jason February 26, 2011 at 2:33 pm

"Because by joining together with similar sellers into a group, the demand curve facing the group is steeper than the demand curve facing the individual, since members of the group no longer compete against each other for buyers."

This is false.

It a) implies we know how to add up individual micro demand curves to get a macro demand curve and b) implies that the optimal strategy would be to be a free-rider not doing any work at all, which clearly does not happen. Therefore there must be competition of some type going on.

Matt February 26, 2011 at 3:03 pm

Do the anti-unionists also proposes we rid ourselves of chambers of commerce and other de facto employers' unions?

jm February 26, 2011 at 3:19 pm

cliff, labor unions are great if you belong to one. If you are unemployed they represent a barrier to entry. i live in nyc where something like 15% of the population live in rent controlled or rent subsidized housing. It's a wonderful policy for those 15% of the people but bad if you are a free renter. Proponesnts of unions, minimum wages and rent control have to rely on political arguments as to why their policies are more just but they can't argue they are most optimal or most efficient.

J. Bogart February 26, 2011 at 4:03 pm

It is an argument about (organized) groups, not unions in particular. Groups include corporations. Moreover the second paragraph is false — not all competition is price for one thing.

To February 26, 2011 at 4:33 pm

Higher wages increase aggregate demand and are good for growth. Expansionary monetary policy only does so through increasing debt, which is not sustainable in the long run. Cf. 2008.

Anastasia February 26, 2011 at 4:45 pm

Sounds nice on paper and I imagine the equations are pretty…but seriously?! They are basing this on an equilibrium assumption, which is complete nonsense. I mean really, equilibrium for who? It seems like equilibrium is a terrible place for a working person to be.

Not to mention this kind of "model" can work the other way around too. Don't those increased wages result in increased aggregate spending and growth, thus making everyone "better" off (if buying more stuff and having more production is what we consider better).

wkwillis February 26, 2011 at 5:53 pm

The way you put price flexibility into unions is you put price flexibility into corporations, because if you only have a few big corporations, you can pass through union wage increases, and if you don't, you can't.

If you have small corporations they can't pass though price increases. Tool and die unions decide they want more money, some of the corporations go non union, the problem is solved.

Of course, competition also results in lowering the wages of the management union…

Rahul February 26, 2011 at 9:40 pm

A local union creates a local monopoly on labor. But I could think of a large local steel employer as a monopsony on skilled labor too. Why are monopolies worse than monopsonies?

Rather than have one large steel company one could have 50 smaller ones. Wouldn't that be closer to competition (both on buyer and seller side)? You could argue that the big company gets economies of scale thus getting better returns on capital. But then, can one think of higher-wages of unions as economies of scale too? By banding people together they get higher returns?

No axe too grind. Just curious.

Troy Camplin February 27, 2011 at 1:25 am

Unless Keynesianism was actually designed to protect the unions:

http://zatavu.blogspot.com/2011/01/thoughts-on-wa

rjs February 27, 2011 at 3:17 am

better be careful…after they finish off the labor unions, they'll be coming after the college professors…not a week goes by where i dont have a handful of links about a number of schoolteachers being laid off in one district or another…im starting to think that the plutocracy understands too well the implications of the depletion of our energy & other resources, and their thinking is that the rest of us are consuming too much, so they'd like to drive us all to a level where we will only be useful insofar as they need a population of illiterate gophers to support them & their offspring in the style to which they have become accustomed…if no one but the kids of rich people can read, only the kids of rich people will be able to organize society’s resources.

Yancey Ward February 27, 2011 at 6:33 am

This was hilarious:

There is no profit motive for government and there seems to be plenty of incentive to keep costs low.

KS February 27, 2011 at 6:39 am

Does anyone else find it dubious that a single mechanism is invoked to explain the undesirability of unions, recessions, cartels, and minimum wage laws? The world cannot possibly be that simple.

Noah Yetter February 27, 2011 at 7:51 am

I'd sure like to buy this, but it's false, and here's why:

"If all prices are sticky, then an expansionary monetary policy, which increases aggregate demand, increases output and makes everyone better off."

1. Not all prices are sticky
2. Expansionary monetary policy does not necessarily increase aggregate demand
3. Increased aggregate demand does not necessarily increase output
4. Increased output does not necessarily make everyone better off

Since the rest of the argument is based on this first sentence, we must reject it as deeply flawed.

As a send-up of New Keynesianism though, it's wonderful.

Phill February 27, 2011 at 9:05 am

@Jon: This comment will now be lost in the void of the internet but, because we don't live in a perfect, free market environment. Or at least, the environment in which they first arose was very far from a free market.

Or perhaps a more orthodox perspective for this crowd would be that unions are just another naturally arising economic agent – one that seeks to minimize externalities imposed on workers.

Andrey February 27, 2011 at 10:56 am

1) Politicians regulate in favor of employer "unions"

2) Some people are unhappy with outcome

3) Politicians regulate in favor of employee unions

4) Some more people are unhappy with this outcome, but people from 2) remind them that unions were created to fight against employer's manipulation of government, therefore any non-union employer or employee must be hosed for the greater good.

Am I the only one to see problem with this kind of logic?

Also it's funny how some people tell us that big business pushes government for political favors, but at the same time public employee unions aren't harmful since voters can kick out too accommodating politicians.

Careless February 27, 2011 at 5:56 pm

Also it's funny how some people tell us that big business pushes government for political favors, but at the same time public employee unions aren't harmful since voters can kick out too accommodating politicians.

This, a thousand times.

Eric February 27, 2011 at 6:58 pm

We rarely hear, it has been said, of the combination of masters, though frequently of those of workmen. But whoever imagines, upon this account, that masters rarely combine, is as ignorant of the world as of the subject. Masters are always and everywhere in a sort of tacit, but constant and uniform combination, not to raise the wages of labour above their actual rate[.]

When workers combine, masters … never cease to call aloud for the assistance of the civil magistrate, and the rigorous execution of those laws which have been enacted with so much severity against the combination of servants, labourers, and journeymen.

-ADAM SMITH (Pointing out hypocrisy, one "libertarian" at a time)

GinSlinger February 28, 2011 at 4:50 am

@Eric You realize what that Adam Smith passage is about, right? The masters in that case are guild masters. Since guilds acted as a means of keeping wages artificially high mainly through restricting access to work (among other functions), the passage you posted is much more anti-union that pro if it is apropos to the subject at all.

access control secur February 28, 2011 at 6:11 am

I agree to your thought and I believe it, that If all prices are sticky, then an expansionary monetary policy, which increases aggregate demand, increases output and makes everyone better off.

TGGP February 28, 2011 at 7:01 pm

"The New Right seems to be warming up to unions and minimum wages"
I have seen no evidence of this.

Eric March 1, 2011 at 7:41 pm

An interesting side note is that Smith uses the term "appropriation" for the process leading to private property, giving it a distinct connotation of illegitimacy, at least in the case of those who own land worked by others. Anyone using similar phrasing today would likely go deaf from the calls of "SOCIALIST" coming from those who claim to be followers of Smith.

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