How Michigan Abetted Labor Cartels and Hastened Detroit's Downfall

Paved the Way for Detroit's Demise

Trying to Turn Things Around

In 1940, Detroit was the nation's fourth largest city.   By 1950, it had the highest per capita income of any major U.S. city.  With a current population of 701,000, the city now ranks 18th in the country, behind Charlotte, N.C. (17th),  Fort Worth, Texas (16th), Austin, Texas (14th), and Jacksonville, Florida (11th), none of which was in the top 20 until 1990 or more recently.   Last week the city sought to initiate what would be the largest municipal bankruptcy in the nation's history. 

Many pundits argue (see here and here, for instance), with some force, that Detroit's redistributive economic policies are a significant cause of the city's current economic woes and resulting inability to pay its bills.  At the same time, the State of Michigan also bears some responsibility for the city's plight.   For more than half a century, the Wolverine state encouraged the formation of labor cartels, also known as unions.  By design, such cartels exercise market power and artificially raise the price of the most important input in most enterprises, that is, human labor.  By raising the cost of doing business, in Detroit and other parts of Michigan, such cartels presumably encouraged some firms to move all or part of their operations elsewhere and deterred other firms from locating in Michigan in the first place.  It is thus no surprise that, as previously discussed on this blog, states like Michigan have stagnant or declining populations, while states such as Texas, North Carolina and Florida that discourage labor cartels are booming and attracting immigration from other states.

There was a time, of course, that states had no role in setting national labor policy.  The 1935 National Labor Relations Act ("NLRA"), also known as the Wagner Act after its chief proponent, Senator Robert F. Wagner of New York, pictured above, set uniform national labor policy.  The NLRA empowered employees to form labor cartels and prevented private enterprises from firing employees who participated.  Moreover, the NLRA did more than simply facilitate “collective bargaining.”  Instead, the Act also empowered unions and firms to negotiate so-called “union security agreements.”  As previously explained on this blog, such agreements authorized firms to force their non-union employees to pay dues to the union, with the stipulation that employees who refused would be fired.  Thus, the NLRA authorized unions to fill their coffers by taxing non-union employees, thereby further increasing the effective cost of hiring such individuals, who would of course demand higher wages to offset such compelled dues.   Presumably the prospect of  obtaining such additional dues from non-union members encouraged the formation of unions in the first place, by, for instance, reducing the cost per union member of cartel formation and subsequent "collective bargaining."

The Supreme Court upheld the NLRA in 1937, claiming that forcing firms to employ union members against their will would facilitate labor peace and thus minimize disruptions to interstate commerce.  See NLRB v. Jones and Laughlin Steel, 301 U.S. 1 (1937).    On the contrary, the number of strike days doubled between 1936 and 1937, with the automobile industry, headquartered in Detroit, experiencing more than its share of labor strife.  Moreover, and as previously explained on this blog, policies like the NLRA that artificially increased wages lengthened the Great Depression by interfering with equilibrium in labor markets and encouraging unemployment.     Responding to further such strife after World War II, Congress overwhelming enacted the Taft-Hartley Act in 1947.  As previously explained on this blog,  the Act empowered states to protect non-union employees from coercive “union security agreements” by opting to become what are colloquially known as “right to work” states.  Several states, including Texas, Florida and North Carolina, have long opted for "right to work" status, with the result that labor cartels are far less prevalent in such states than in others.

Late last year, Michigan finally became a "right to work" state, at the behest of Governor Rick Snyder, also pictured above.  Before that the state, like others in the "rust belt," declined to protect non-union employees, doubling down on the sort of pro-union policies that produced the labor strife the Taft-Hartley Act was designed to mitigate.  Indeed, Michigan once went so far as to empower public employee unions to coerce non-members to provide financial support for a union's political activities, until the Supreme Court declared this practice unconstitutional.  See Abood v. Detroit Board of Education, 431 U.S. 209 (1977). 

In the short run such pro-cartel policies made perfect sense for Michigan and many of its citizens.  During the 1940s and 1950s, the “Big Three” automakers dominated the automobile industry, with no sign of effective challenge in sight. See James M. Rubenstein, Making and Selling Cars: Innovation and Change in the U.S. Automotive Industry, 188 (2001) (reporting that the Big Three's combined market share was 94 percent in 1954, 1955 and 1959).    So long as unions negotiated for similar wage increases from each such firm, each of the Big Three could simply pass along such higher costs to consumers, the vast majority of whom were citizens of other states.  Indeed, one suspects that Detroit and surrounding suburbs derived much of their 1950s and 1960s prosperity from this combination of tight oligopoly and cartel-induced above-market wages, nearly all at the expense of citizens in other states and foreign countries.  To that extent, Detroit's vaunted prosperity during the middle of the 20th Century was in part an illusion, bought at the expense of millions of other Americans who paid excessive prices for the city's main export.  Over the long run, of course, market entry, encouraged by free trade, undermined Detroit's grip on the American auto market, so much so that General Motors could not survive without an ill-advised federal bailout and Chrysler is now a subsidiary of Fiat and thus no longer an American company, let alone a Detroit firm.  It is thus no surprise that the state still suffers an unemployment rate of 8.7 percent, significantly higher than the national average.

None of this is to say that Michigan could have maintained the complete preeminence of the Big Three by becoming a "Right to Work" state in, say, the 1950s.  Some erosion of Detroit's share of automobile production was predictable no matter what.  Still, by resisting labor cartels much sooner than it did, the state could have checked the power of some unions and prevented the emergence of others.  In this way Michigan could have made Detroit and the rest of the state more hospitable to private investment and resulting economic opportunity, countering the inevitable reduction in the Big Three's share of world-wide automobile production.  Perhaps the financial ruin of the state's largest city will encourage additional efforts to remove undue regulatory burdens and resist the imposition of new ones.   Those who hope to encourage economic growth in Michigan can start by defeating proposals to raise the state's minimum wage to a rate nearly 50 percent above the federal minimum.  Otherwise, the downfall of Detroit may prove a harbinger of the entire state's economic future. 

President Obama's Strange Critique of Michigan's Right to Work Law

 Wolverine Fiercely Protecting the Right to Work (Finally)

Michigan has the nation's highest rate of unionization and one of the nation's highest rates of unemployment.  Many in the state and elsewhere believe that this correlation is not accidental, that is, that the state's union-friendly environment unduly raises wages and other labor-related costs and deters business investment and resulting employment opportunities.  See George J. Stigler, The Theory of Price, 279 (4th Ed. 1987) ("The labor union is for the labor market the equivalent of the cartel for the product market.").   (See this previous post discussing some data on the question.)  Indeed, as previously discussed on this blog, Michigan and other union-friendly states are losing population to states such as Texas, Florida, Georgia, Nevada, South Carolina and Utah, as businesses and the jobs they create migrate to states with tax and regulatory environments that are more friendly to productive economic activity. 

Just yesterday the Michigan Legislature added the Wolverine state to the growing list of states known as "right to work states."   In so doing, Michigan followed the lead of Indiana, which passed similar legislation in February of this year.  To precise, the legislature banned so-called "closed shop agreements," and "agency shop agreements."  Such provisions in collective bargaining agreements require a firm's employees to join a union (closed shop agreements) or, in the alternative, to pay dues to support the union's collective bargaining activities (agency shop agreements).  As a result of such legislation, Michigan workers may now choose to work wherever they wish, free of any compulsion to support unions they oppose.  Governor Rick Snyder signed the legislation into law last evening.

Support for Michigan's right to work legislation was not unanimous, with some on the Progressive Left decrying the legislation.  Chief among the detractors was President Obama, who flew to Detroit to denounce the pending legislation earlier this week, in a speech otherwise devoted to fiscal policy.  The Huffington Post reported the President's remarks as follows:

"And by the way, what we shouldn't do -- I've just got to say this -- what we shouldn't be doing is trying to take away your rights to bargain for better wages and working conditions," he added to loud applause from the audience. "We shouldn't be doing that. The so-called 'right-to-work' laws -- they don't have to do with economics, they have everything to do with politics. What they're really talking about is giving you the right to work for less money."

President Obama's attempted and failed intervention in Michigan politics is perplexing on several levels.  For one thing, the Taft-Hartley Act, which authorizes states to ban closed shop and agency shop agreements is the Supreme Law of the Land and expresses national policy of the subject.  As previously explained on this blog, that policy encourages states to decide for themselves whether compelled support for unions will enhance growth and economic opportunity within their borders.  As President, Mr. Obama must, according to Article II of the Constitution, "take care that [Taft-Hartley] is faithfully executed."       President Obama may well believe Taft-Hartley was a bad idea.  Moreover, he is perfectly free to introduce legislation repealing Taft-Hartley if he wishes.  Absent such a repeal, however, he should embrace the legislation and respect Michigan's choice.

Moreover, the President's account of the Michigan legislation is, simply put, false.  The legislation in no way limits "rights to bargain for better wages and working conditions."  On the contrary, the legislation leaves each and every Michigan worker perfectly free to affiliate with a union and thus bargain collectively for higher wages and better conditions.  All the legislation does is prevent unions and the firms with which they bargain from compelling individuals to subsidize a union as a condition of pursuing his or her chosen vocation.

Finally, the President's claim that "right-to-work" legislation  is about "politics" and not "economics" does not withstand even cursory scrutiny.  According to economists who have studied the question, rampant unionization of American industry during the mid-late 1930s hampered economic recovery and lengthened and deepened the Great Depression.  (See here and here for previous discussions of these data.)  To put a finer point on it, federal imposition of labor cartels distorted the allocation of the nation's resources and reduced employment, as many predicted at the time.  Millions of Americans became poorer as a result.  While coercive imposition of trade unions on American business raises the wages of some workers, other workers and, ultimately society at large,  suffer. 

Update (4:50 PM, December 12):  Over at CNN, William Bennett has penned an Op-Ed praising Michigan's choice of Right-to-Work status.  In so doing, Bennett echoes some of the arguments made above.  In particular, Bennett offers an effective rebuttal of President Obama's claim that right to work laws are all about politics and not about economics.  According to Bennett:

"[C]ontrary to President Obama's thinking, right-to-work laws are directly related to economics. Right-to-work laws give employers the freedom to hire non-union workers and negotiate contracts with more than one party. For this reason, right-to-work states are more attractive to private business than non-right-to-work, and could increase private-sector wages.  For example, on CNBC's annual list of the best states for business, nine of the top 10 states are right-to-work states. It's no coincidence that foreign automobile manufacturers often build new plants in right-to-work states like Tennessee and Alabama, rather than Detroit -- the "Motor City."  Perhaps Michigan's new right-to-work status will unlock employers from burdensome union contracts and attract new private enterprise to Detroit, which is predicted to go bankrupt by the end of this year. After all, Gov. Scott Walker's union reforms in neighboring Wisconsin helped eliminate the state's budget shortfall."