Labour and the American Middle Class

I’ve been pondering Erik’s post on the difference between pity-charity liberalism and bottom-up liberalism, and I think he’s hit upon a key distinction between traditional liberals and liberaltarianism, and it’s a difference that will need to be resolved if the liberaltarian project is to succeed.

The distinction is how to support average incomes: by letting the free market do its thing and use welfare to help those who are left in the cold, or by empowering workers with strong bargaining rights and keeping employment high.  I lean toward the former, and I do so because I have serious reservations about the ability of powerful unions to bring net aggregate benefits to workers, and I’m highly sceptical of the concept of full employment.

But before I get into that, I’d like to take a second to consider the concept of the “disappearing middle class”.  This wasn’t raised in Erik’s post, but was brought up by some of the commenters

This graph shows real (i.e. inflation-adjusted) household median income since the late ’60s.  An up until the late ’90s it shows an upward trend, and then stagnation after that.  If more than half of Americans were getting poorer median income would have to fall, so I find it impossible to square this graph with discussions of a disappearing middle class.  The stagnation of the past decade is a definite concern, but stagnation is not decay.  The middle class is not backsliding, it just not getting richer as fast as it should be.  However, just because the middle class isn’t disappearing doesn’t mean something isn’t going on, so we’re still left with the question of how to address low incomes: growth and welfare or unions and employment?

Starting with full employment, my problem is that there’s very little a government can do to help out on that front.  The only reliable tool the government has to “create jobs” (a phrase I utterly loathe) is to establish make-work jobs that achieve little more than taking someone off the unemployment rolls (that’s not to say all government jobs are make-work, far from it, but if you’re evaluating a government activity based on how many government jobs it’s going to create, then make-work jobs are what you are creating).  This is just dishonest welfare since it is a welfare check that purports to be something else (it also dampens the recovery speed of your labour markets since people who think they have jobs are less likely to look for a job).  Apart from that, all the government can do is encourage more economic activity (something it can do only to a small extent).  As such all “full employment” polices reduce to some combination of growth-promotion and welfare anyway.

The meat of my disagreement with bottom-up liberalism is with the power of unions to do good.  Now I have nothing against unions, I’m not a member of the unions that covers government workers in New Zealand, but they seem to me to be a fine organisation that represents their members without advocating for insane conditions either.  There are some things a union can do, such as protecting workers from petty tyrant bosses who fail to realise that misusing your workforce will not help you in the long run.  But when it comes to increasing pay, there are some pretty big limits as to what they can accomplish.

Union bargaining is a strictly allocative activity, it doesn’t produce wealth, it moves it from one party to another.  I don’t mean that as a dismissal, I merely want to point out that if party A is better off because of an allocative activity, it’s worth figuring out who was made worse off before breaking out the champagne.  There are only so many places higher wages (or more lucrative benefits) can come from:

1. Other Workers.  Unions can make their members richer by effectively colluding with employers against non-union workers (or the workers of other unions).  I’m not going to dwell on this one since it’s clearly not a win for workers in aggregate and the larger the fraction of the workforce that is unionised, the harder it is to pull off in any case.
2. Returns to Capital.  This is where I think the proponent of bottom-up liberalism think the higher pay is going to come from.  Basically profits go down, wages go up.  Simple, right?  Unfortunately I don’t think there’s a lot of room here.  Profits as a percentage of assets invested (which is the right way to measure profits) aren’t that high, and in any case capital markets are extremely liquid.  If you try to push down returns to capital in a given sector, capital will flow to another sector, or another country, or capital will flow from investment to consumption.  So all you end up doing is shrinking the industry you work in.  Unless of course the market is significantly less competitive that perfect competition, but in that case case the extra wage income is really coming from…
3. Monopoly Rents.  Monopoly rent is the technical term for the profits a monopolist (or indeed any firm in a less than perfectly competitive market) makes above and beyond the profit that justifies staying in business.  Now there’s nothing wrong with a union trying to grab some of that rent for their members (it’s not like the monopolists have any moral claim on it), but bear in mind that monopoly rents are an inefficient transfer from consumers to producers, and in aggregate consumers and workers are the same people (more or less).  So while it is true that union power is good for workers given the existence of monopoly rents, the best pro-worker policy to pursue is one of more competition, not stronger unions.  In fact more competition will probably weaken unions since it will deprive them of a major source of money they can use to enrich their members.  It’s telling that unions in the US had their heyday when competition was restricted by government much more than it is today and the one industry that is still heavily unionised ins the one with the largest competitive barriers – government.

This leads me to conclude that unions are at best a second-best method for improving the lot of workers.

Having read all of this you may well ask “Well if you’re so smart what would you do to help workers?”, and that’s a fair question, but I think I’ve wittered on enough for one post, so I’ll save that for a follow-up post, some time in the next week.

Edit: Erik points out that his conception of bottom up liberalism isn’t about unionism, but rather about diminishing corporate privileges and increasing competition.  This is wholly different from what I’m talking about in this post, so this should be seen as more of a counterargument to the principle of unions as wealth creators in the abstract, and not of bottom-up liberalism as such.