Labor union sentences to ponder

to raise labor share, unions have to decrease markups or the cost of capital; don’t see evidence or mechanism there

That is from A Macroeconomist, on Twitter.  A union which simply grabs for more from the employer will raise marginal cost and induce an offsetting boost in the price, restoring capital’s share (to some degree, depending on assumptions), and of course passing some of the burden along to consumers, most of whom are workers.  The tweeter did also note that unions might decrease income inequality within the category of labor, however.  Nick Bunker comments on that.  Via Kevin Lewis, here is a new and interesting paper on how unions might reduce wage inequality.  David Henderson comments on unions and prices.

I am often struck by the conflict between one supposition and one fact.  First, employers are supposed to be reaping some big surplus from hiring unskilled labor.  Second, when a downturn comes, it is unskilled labor who are laid off.

Comments

Well, here in Silicon Valley, friends tell me that companies fire middle managers first and fire the technical talent last whenever there's cash flow problems (whatever the reason may be). As for low-skilled labor being the first to go, that might be an additional mechanism by which productivity rises during recessions (or at least for this last recession). During recessions, wages stagnate so that high-skilled labor (usually most expensive) becomes relatively cheaper. This by definition would raise productivity, no?

"companies fire middle managers first"

This is evidence for Tyler's assertion that unskilled labor is the first to go.

Ha ha, just joking...but in all seriousness, it probably does indicate that the companies think technical talent is a harder to replace skill set.

Or that they think decent employees can go without guidance longer than managers can go without people to manage.

It's pretty hard to fill leadership spots in skilled professions.

If you enjoy exercising your professional skills, why would you want to devote time to the long littleness of a "leadership spot"?

This is true in our office as well. It is the Middle Management and Marketing that go first most layoff years.

My working theory on why middle would be laid off earlier in a recession:
A) Line-level employees are usually doing a good job or they are let go.
B) some line-level employees eventually are promoted to management. It is not always clear if the person promoted will be successful transitioning to manager.
C) *Theory* It is harder to lay-off mid-management generally because someone has promoted them. Vested interest in success.
D) But in a downturn, poor middle-management are easiest to lay-off because they weren't doing a good job and there wasn't a good mechanism in place to let them go earlier.

Does the literature agree that unskilled labour is laid off first? I understand that in a downturn the first effect is that firms stop hiring which hurts young people -- who are less skilled on average -- the most. I am not familiar with the finding on layoffs.

You might be interested to read about the 'Prices and Incomes Accord' that was in place in Australia between 1983 and 1996 - it was an attempt to control inflation and costs through union mechanisms.

http://en.wikipedia.org/wiki/Prices_and_Incomes_Accord

Maybe the marginal product of unskilled labor is more cyclical? In a boom, MPL is high, wages rise very slowly (at least at first because of large pool of unemployed) and the employer grabs a large surplus. In a slump, MPL of unskilled labor collapses, wages don't fall, firing ensues.

I'm not saying I'm convinced that's the case, but alongside sticky nominal wages, it could potentially reconcile your two points. Anyway, food for thought...

This was my first thought as well. Not that it's necessarily true, but that it doesn't even occur as a possibility to someone who sees no real role for unions (other than maybe reducing inequality, which isn't really a problem, right?)

There are two types of unions: pro-employer (Japan, Germany, Nordic countries) and pro-employee (Greece, US). UK has elements of both. The pro-employer unions help moderate wage increases and indeed help moderate "sticky wages" (paper by Gordon in early 1980s).

As for game theory and economics, see this book, which makes the argument that regulation and government can in theory make capitalism stronger, "Moral Calculations: Game Theory, Logic, and Human Frailty" by Laszlo Mero (1998).

There are also public-sector unions. They don't need to worry about either markups or cost of capital: they can suck on the limitless teat of the taxpayer.

I wouldn't say they are pro-employer, per se. I get the sense that they just have a much bigger role in company and community affairs, such as active participation in company decision making, beyond just collective bargaining. One outcome of this seems to be that pay levels tend to be similar across an industry (maybe moderating increases, as you say), but they are still working to make those wages higher overall. Does this explain why TN workers voted to not create a works council at VW? Or was it because they had been reading billboards, listening to radio and seeing their senator tell them for two months that their jobs would be gone if they voted to unionize? Hmm.

If the workers were that easily manipulated, then the company really dodged a bullet. Think of the damage they could do to VW's operations if they actually got to participate in the decision-making process.

First, the workers did Unionize and they haven't lost their jobs. Indeed, the debate over the issue was whether the VW plant would get additional state money to expand it's operation in the state.. And the state officials said that they would not give additional state money if the UAW was successful at unionizing the plant. It's neither an illegal nor an immoral position.

The UAW screwed over the state in the early 90's by insisting that GM import UAW workers from out of state to man the Springhill facility. This happened despite the previous GM assurances that locals would be hired. So indeed, you can expect all of the politician's who stood against the UAW to have a boost in their re-election odds.

So the plant got additional money for not unionizing? Perhaps I'm misunderstanding...

"So the plant got additional money for not unionizing? Perhaps I’m misunderstanding…"

VW was asking Tennessee for state incentives in exchange for an expansion at their Chattanooga facility. The story is rather complicated, but effectively the state said you won't get more state money if you unionize with the UAW. The situation is complicated but here's a link to a Washington Post article on it.

http://www.washingtonpost.com/news/storyline/wp/2014/11/19/the-strange-case-of-the-anti-union-union-at-volkswagens-plant-in-tennessee/

I will stress that the author of the article doesn't seem to understand (or at least clearly state) that most of the hostility is directed less at a plant union and more at the UAW.

VW isn't trying to dodge the bullet. They want the bullet. They are throwing out the workers' vote and bringing in UAW against worker desires. VW worked to subvert a new workers' organization set up to represent workers on the Works Council in favor of the corrupt UAW.

The Scott Sumner link is to an EconLog piece by David Henderson. I suspect the name, rather than the link, is incorrect.

>>> and of course passing some of the burden along to consumers, most of whom are workers <<<

My take on this is that if labor (and ownership) all over the economy are extracting the max the consumer is willing to pay (as a practical matter labor can only do this through centralized bargaining I think), then, the structure of the physical output (including services) of the economy will be will be determined purely by consumer choice. (It's the market.)

Currently, in my outlook, America has a two tier market (meaning de-unionized) where the content of physical output is distorted by labor not extracting the max: leaving many goods more attractive than they would be because of lower price -- leading to more demand for those cheaper products or more demand for other products with the left over money (how many Big Macs can you consume).

The end result seems not to be totaled up locally -- at the original mass consumer level -- rather price-extraction cash that is squeezed out of the bottom travels THROUGH (?) the middle and ends up on the top. If you squeeze a toothpaste tube on the bottom, it all comes out the top --where high end real estate prices escalate, high end services are in demand and sail boats are on sale.

PS. Up until recently too many economists in my observation would treat a rise in labor price as an equivalent rise in the whole product price -- w/o considering that it was only a fraction. If Walmart's average wage rises to $100 an hour, prices only go up 50% :-) That happily seems a thing of the past as all get serious about the labor market.

If I could disagree with one point of David Henderson is people truly sell themselves not hours to company. In this competitive global environment you have to sell yourself to the company to succeed and you must constantly give yourself to the company. (Although at the times you have to be ready to take treasonous actions especially in downturns.)

In terms of Wal Mart, they are no longer "Harder to get into as Harvard" so with labor practices, they have to raise wages. My guess it won't work.

Former Econolog-er Arnold Kling says that employees are no longer a cog in the production line. Their purpose is to create "organizational capital", things like policies and procedures, improving processes, creating strategies.

Wal-Mart sales have suffered as too many other employers have walmarted their labor force so too many of Wal-Mart customers depend on welfare that Republicans are cutting. If the government won't pay its customers, then Wal-Mart needs to force other employers to pay its customers more, and Wal-Mart is hoping Henry Ford was correct in the way to force other employers to pay more.

Suggest the utility of unions would be in mutual aid functions (pension funds, credit unions, insurance purchasing pools, and labor lawyers on retainer) and being a mechanism for information flow (from lower to higher levels) in highly bureaucratized firms. Of course, for the latter to work, management have to be listening.

You believe that employers know they must pay higher wages to boost demand for all the goods of all other businesses by their employees buying more with their higher incomes in order for your sales to increase so you can grow?

Or do you think all employers wait for all other employers to pay more so you sell more before you raise the wages of your workers and provide increased sales to everyone else?

Tyler,
Thanks for the mention. Although, to be fair, a commenter named JLV, who seems obviously to be up on the union/wage literature more than I am, has posted a comment on my post referencing an important article that, on its face, at least, refutes me. I think his other comment on the minimum wage is wrong, though.

During the period in the US when unions were strongest labor compensation increases matched productivity gains very closely.
Although there were cyclical swings from 1950 to 1980 labor's share of the pie was very stable at around 66%.
(see the BLS data on productivity)

These two points suggest that there was no problem of unions taking too large a share.

Since 1980 labor's share has fallen significantly --from around 66% in 1980 to some 56% in 2014.

1980 was roughly when labor's power peaked.

Moreover, income inequality has a very strong negative correlation to labor's share.

The data strongly suggest that the only problem with unions is in economists imagination.

Again, what is the evidence that US unions have taken too large a share?

The better question is what is the evidence people have a large enough share of the revenue from production to sustainably buy all that is produced and thus create the incentive to grow production with increased investment in both built capital and human capital?

The rise in all forms of debt in real terms, public, corporate, and personal, since roughly 1980 is the only thing that has fueled growth, but as soon as debt default begins redistributing wealth by the Constitutional Federal technocrat, lending is reduced and that slows growth because no one produces stuff without having buyers for very long.

"lending is reduced and that slows growth"

Really? Why is lending mandatory for growth? You're probably talking about growth in the aggregate but is it impossible for an individual enterprise to grow without going into debt?

" lending is reduced and that slows growth because no one produces stuff without having buyers for very long."

Is this lending to the producer or to the consumer? Is it a requirement that people go into debt to be consumers? Since debt involves payment of interest isn't it true that over time a debtor will have LESS money to spend on consumption?

Spencer,
Noah Smith has been proffering the notion that the upper side of the middle class did alright post 1980 -- so the weight of income inequality fell on the lower end of the (former?) middle class. That fits neatly enough with the bottom half today taking roughly 10% of income while the top 1% income share has increased from 8% way back when to 25% (and growing!) today. Shift 10% back to the bottom -- 'twould do the very top no harm. (Fits my "squeeze the toothpaste tube at the bottom; it all comes out the top" cab driver theory of inequality pretty neatly too.)

This back shifting of income is a desperate necessity -- make no mistake. Minimum needs for a family of three: $11,000 for a silver plan (Brill, p.346, family of four), $4,000 payroll taxes on $50,000, $15,000 for rent and utilities and you still haven't put the dried beans in the water overnight to cook. More: 100,000 out of what I would guess 200,00 Chicago gang age males are in street gangs -- I presume because they wont work for a minimum wage near $4 below 1968 when per capita income has doubled since (them or most any other American born workers).

Meantime the median wage is $26,000! First national priority: get the labor market back in shape which means re-unionization (which will simultaneously -- synergystically? -- get the political forum back to democratic mode, small "d").
http://www.cbsnews.com/news/gang-wars-at-the-root-of-chicagos-high-murder-rate/

PS. Just noting that Card and Kruger (and others?) doing fast food studies of the minimum wage (I think) are picking on the sector with the highest labor costs by far.

You're saying that if unions regained their former power there would be fewer gang members in Chicago? It is to laugh.

Are you arguing that eliminating all workers by replacing them with robots and automation, the gangs will be eliminated? Or the gang members will be replaced by gang robots?

Seems like the most obvious step then would be to eliminate the $4000 in payroll taxes.

I think you've touched on the big problem with unions - they shift money from some workers to others who waste it. There is no benefit to spending more than $3k/year on healthcare but unions created an insurance system which wastes 80% of what it takes in. They also created insolvent pension schemes that prevent people from keeping what they earn, and have been the biggest political supporter of payroll taxes. Ending these taxes and "benefits" that are in the nature of a tax would go a long way to bringing wages in sync with productivity.

The unions "created insolvent pension schemes"? Really? The unions? Puhleeze.

How to bring unions back on the quick? The ultimate – federally prosecutable -- sweetheart labor contract may be no contract at all.

No one would doubt the criminality of a mob union boss and/or an employer threatening to fire workers for speaking out against a mobbed-up sweetheart contract – in order to obtain for themselves the pay and benefit moneys that might otherwise have gone to employees through fair bargaining practices. A for certain RICO or Hobbs Act target.
http://ricoact.com/

Why shouldn't the exact same extortionate activity be viewed in the exact same extortionate light when union busting “consultants” and ownership threaten to strip away workers' economic livelihoods should they dare to participate in a federally approved path to establish federally approved union bargaining rights?
US Attorneys -- Criminal Resource Manual 2403
http://www.justice.gov/usao/eousa/foia_reading_room/usam/title9/crm02403.htm

Not to lock up half of management and all their "consultants." Just to watch them run for the hills to avoid exposure to fines (at first) after the first "guiltys" comes down. By the time it takes to sort it all out at the USSC level, the organizing will be all done. :-) And a more natural, human state of affairs will have taken place on this side of the pond.

Why would the relative number of workers matter, rather than the absolute buying power of labor v. capital? If most buying power is Capital's, then the hypothesized price increase would tend to affect Capital more than Labor, and hence reallocate somewhat towards labor.

Or what if unions only did this in industries that produce goods or services aimed at Capital? Say a robust yacht- builder union.

Let's say 100% of the production is done by and revenue goes to robots; who buys what is produced? The robots? The capitalists? Workers won't buy anything.

What you are describing sounds a lot like what the internet is doing to information exchange. Its not the apocalypse.

I find it so odd that free lunch economists think they have the answers.

Lower wages will lead to higher profits and growth as if workers are not consumers and consumers are not workers.

TANSTAAFL

Lower wages or lower employment, even for part of the population, will slow growth because you don't produce what you can't sell no matter how great the robots and automation are, nor no matter how high the profit margins.

The solution since Reagan has been endless debt that is never repaid by both the Federal government, thanks to Reagan proving deficits don't matter, and the private sector thanks to deregulating lending so banks can make the loan sharks of the 60s look like prudent lenders offering very low interest rates.

"The solution since Reagan has been endless debt that is never repaid by both the Federal government, thanks to Reagan proving deficits don’t matter,"

The US was running deficits for decades before Reagan was elected. You have a weird obsession with trying to link every ill of the Federal government to Reagan.

Thats because he has a weird connection with reality.

Great, then give everybody a 100% raise and we'll all be rich!

Workers are consumers, and consumers are workers. Guess what? I care very much about the environment I spend half of my day in, which is to say my working environment. The more say I have over my working conditions, the better. Does that affect the price I pay at the grocery store? Maybe so, but the bottom line is that I'm willing to make a trade off. Why is it that when it comes to working conditions, suddenly right-wing economists forget all about trade-offs and everybody's a consumer?

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