Why Jessica Irvine is wrong about unions

by on 4 June, 2012

DSCF2068Justin Campbell discusses the role of unions in our economy:

In a recent blog post Jessica Irvine (Economics writer for the Sydney Morning Herald) wrote the following:

"In a perfectly competitive market, there'd would be no point in unions because employers wouldn't underpay workers. They couldn't. Competition would drive them to pay workers a wage representing the value of their marginal product. If a company failed to, there would be no shortage of other firms willing to pay more. Wages would equilibrate.

In such a model, companies are price-takers, not price-makers. But, unfortunately, this is far from the reality in which many industries are dominated by one or a handful of sellers. And because workers take time to train, many are, in the short term at least, limited to a particular industry, or set of industries, to which they can sell their labour.

The result is that it is possible for certain companies to underpay their workers – that is, pay them less than the value they have created, plus compensation for inflation."

While this is certainly the public imagine the unions like to foster using examples such as, "workers that empty bedpans." The reality is organised labour is far more likely to be skilled workers who are in a position to seek economic rents for their labour by withholding it. The union member is far more likely to be a public servant, teacher, skilled tradesman or a member of a professional association such as doctors.

Where Irvine's analysis is largely wrong is that the less skilled the labour, the more competitive the labour market. Take for example workers in disability support work (an industry I use to work in), new workers regularly enter and exit the industry. After receiving their induction and shadow shifts the new worker is fully productive within a week. Of course the worker continues to learn after a week, but largely they are able to perform their duties after a week of training. If they feel they are not able to earn the income they wish or do not enjoy their work their labour is highly substitutable to other industries. The worker can switch to childcare work, retail or hospitality ect.  So regardless of whether the industry is dominated by a handful of employers, the worker has little fixed costs preventing them from retraining and enter another industry. Equally the employer is able to find other workers with no previous experience in the industry and within a week have a productive worker. It is precisely the competitive nature of the labour market in such industries that keeps the price of labour low. I would argue the monopsony market Irvine describes largely doesn't exist.

Compare this with the situation for doctors or registered nurses. Both roles take years of training, employers can only hire from a labour market of trained professionals. The barriers to entry are high to these labour markets as the worker has to undertake years of study and professional bodies keep the supply of workers artificially low by controlling who can and cannot enter the profession. For example, in both medicine and nursing the professional bodies have been successful in reducing competition from foreign trained professionals. Such bodies have also been successful in reducing the supply of substitutes for their service by lobby government to control who provides their services. For example, many medications require a doctor's prescription where a pharmacist could make this determination without requiring a doctor. These conditions make it possible for organised labour to gain economic rents which increase the cost of goods and services reducing the real income of many of the low skilled workers unions claim to represent. In this example it's the fact the labour market is uncompetitive that allows workers to earn economic rents through unionisation.

Where organised labour can help low skilled workers is through negotiating terms of work. The hiring and firing of low skilled workers tends to be more transactional and people are hired under standard terms. This is due to the high transaction costs involved. It would be very costly in time and effort for a director of nursing of an aged care home to negotiate conditions with individual workers. In most cases it would be very difficult for an individual worker to negotiate an early start time and roster days off. By organising workers can negotiate collectively with the employer lower the transaction cost of working conditions. Compare this with a doctor who could negotiate their own hours of work with the head of medical centre. So yes there are some benefits of unions for low skill workers, however those benefits could be achieved through workers councils or company unions such as exist in Germany and Japan. The reason why such arrangements tend not exist in this country is most likely because of the political situation. One side of politics is hostile to any organised labour and the other actively promotes industrial trade unions.

Justin Campbell is currently studying a Master of Economics at the University of New England and is a member of the Australian Libertarian Society. He currently works as an employment consultant and has over five years experience in the employment/recruitment industry. In 2008 Justin ran as an Independent in the Brisbane City Council election and maintains an educational blog/website www.econstudent.org.

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