Wednesday, January 19, 2011

Do Powerful Unions Enhance Job Growth? Of Course Not!


In a perplexing analysis in today's New York Times, entitled "In Wreckage of Lost Jobs, Lost Power," David Leonhardt manages to turn both microeconomics and macroeconomics on its head, claiming, as he does, the stronger unions would somehow result in faster job growth and faster economic recovery. In so doing, he channels some of the discredited arguments that FDR and others made in favor of state-backed cartelization, including cartelization of labor, during the 1930s. Here are some excerpts of Leonhardt's analysis.

"But beyond these immediate causes, the basic structure of the American economy also seems to be an important factor. This jobless recovery, after all, is the third straight recovery since 1991 to begin with months and months of little job growth. . . . .

Why? One obvious possibility is the balance of power between employers and employees."

Later in the piece Leonhardt claims that:

"Study after study has shown that unions usually do benefit workers."


"For all their shortcomings, unions remain many workers’ best hope for some bargaining power."

Leonhardt does not explain how stronger unions and resulting "bargaining power" would speed job growth. "Union bargaining power" is simply a synonym for market power over the price of a very important input --- labor. Presumably unions would use such power to increase wages and/or foist other unwanted conditions of employment on employers. Because there are substitutes for American labor --- capital, foreign labor, or both, policies that raise the price of American labor will predictably cause firms to purchase less of it, either by substituting capital for such labor or exporting jobs to countries where wages are lower. (Moreover, foreign investors may choose not to invest here in the first place.) This is just basic microeconomic price theory, and Leonhardt offers no argument or evidence that the basic rules of price theory do not apply in this context. While unions may benefit workers who retain their jobs despite the wage-raising exercise of bargaining power, such a conclusion does not suggest that unions increase employment. Quite the contrary. The very exercise of bargaining power that raises wages and makes some employees better off also makes labor more expensive and causes firms to purchase less of it.

It should be noted that America experimented with the sort of policies Leonhardt advocates in the early 1930s. In 1933, Congress passed and FDR signed the National Industrial Recovery Act. The NIRA allowed firms, via trade associations, to adopt so-called "Codes of Fair Competition," and the NIRA required such codes to include provisions raising wages above the competitive level, as a means of stimulating the "purchasing power" of workers and thus jumpstarting recovery. However, none other than John Maynard Keynes suggested, in an open letter to President Roosevelt in the New York Times, that the N.I.R.A. "probably impede[d] recovery" by artificially raising wages and prices. According to Keynes, policies that stimulated aggregate demand would raise wages and prices, and not the other way around. Over a decade ago your not-so-humble blogger argued that the N.I.R.A. and other policies that raised wages and prices slowed the recovery from the Great Depression. See Alan J. Meese, Will, Judgment and Economic Liberty: Mr. Justice Souter and the Mistranslation of the Due Process Clause, 41 W. & M. L. Rev. 3, 48-49 (1999) (contending that the N.I.R.A.’s wage and price fixing likely exacerbated the Depression and slowed economic recovery).

Modern economists agree with Lord Keynes that the N.I.R.A.'s state-enforced cartelization of industry and labor impeded recovery. Thus, Christina Romer, immediate past Chair of President Obama's Council of Economic advisors, conluded that the NIRA "prevented the economy’s self-correction mechanism from working." See Christina D. Romer, Why Did Prices Rise in the 1930s?, 59 J. Econ. Hist. 167, 197 (1999). Moreover, writing in the Journal of Political Economy, economists Harold Cole and Lee Ohanian conclude that the N.I.R.A. and other New Deal policies, including the National Labor Relations Act passed in 1935, substantially prolonged recovery and inflated unemployment. See 112 J. Pol. Econ. 779 (2004) (For a prior version of the paper, go here.) Indeed, the article expressly identifies labor union "bargaining power" and resulting high wages as a culprit holding back recovery.

FDR, of course, did not have the benefit of the Cole/Ohanian/Romer analysis, thereby mitigating somewhat his responsibility for the unemployment and slow recovery that his policies wrought. Modern commentators who advocate such policies have no similar excuse.