Can Free Markets and Unions Thrive Together?

One of the more common second-order views held by libertarians is that unions and free markets are antithetical to each other, and indeed that unions are inherently hostile towards free markets.  This view goes a long way towards explaining why libertarians as a group tend to be overwhelmingly hostile towards unions, and indeed rarely put any meaningful effort in towards cooperating with unions even where union policy preferences might otherwise closely align with libertarian preferences.  To be fair, it is also worth pointing out that many (though not necessarily most) liberals seem to share the fundamental assumption that the survival and strength of private sector unions is dependent on a large amount of state intervention in the economy.

This second-order view, however, is simply wrong and without evidence to support it.  Kevin Carson and I previously attempted to address this question last year.  In those posts, we explained how unions are placed at a disadvantage by virtue of state intervention, even in some cases where that state intervention is ostensibly pro-labor. These posts traced the history of labor legislation in the United States and showed how federal law has historically been used to suppress unionization in the private sector and the effectiveness thereof, particularly in the wake of the Taft-Hartley Act.  Additionally, these posts explained in detail how the strength of unions is very much dependent on their capacity for unpredictability, which government intervention of any sort tends to undermine.  Indeed, even prior to the Wagner Act of 1935, when the only federal legislation

Despite this case study of the US, it became clear in comments to my post last week that more than a case study is needed to refute these widely-held assumptions, which, as one commenter stated, are premised on the notion that “As long as there are no barriers of entry, a competitor can always enter the market with non-union wages and drive the union out.”

Fortunately, there is data to demonstrate that unions are quite capable of thriving in free markets, and indeed can do quite poorly in highly regulated markets.  We have reliable data on unionization rates in most developed countries thanks to statistics compiled by the OECD.*

Additionally, every year, the Heritage Foundation publishes a ranking of nearly every country in the world on its “Index of Economic Freedom,”** with each country also receiving a raw score.  By comparing unionization rates of OECD countries with their Heritage Foundation scores, we can get a pretty good idea of whether and in what direction labor union strength is correlated with the prevalence of free markets  (as defined by right-leaning conservatives and libertarians).

Using OECD data for 2008 – the last year for which complete data are available – and the Heritage Foundation’s 2009 index (which would be based upon data for 2008), here’s what we get:

The lines I’ve inserted into the graph represent the OECD averages.

Looking at the numbers more closely, we wind up with a slightly positive correlation between union membership and economic freedom of approximately .19.***

This is hardly a strong correlation, and I probably would not make the claim that it shows that unions succeed most when markets are, broadly speaking, free.  However, it does seem to rule out the commonly held notion that unions are inherently opposed to freer markets or that strong unions mean less free markets.

Importantly, indicia of tight or loose restrictions upon labor unions are not included in the Heritage Foundation’s evaluations.  Although the Heritage Foundation does evaluate a category described “labor freedom,” this category is more appropriately described as “employer freedom,” since it deals  entirely with direct restrictions on employers, such as minimum wage, difficulty of hiring and firing, hours limitations, and severance pay and notice requirements.  Yet even on this specific aspect of economic freedom (as defined by Heritage), we wind up with an ever so slightly (and almost certainly statistically insignificant) positive correlation of .007.

In such situations, we are basically left with case studies to understand why it is that unions seem to thrive or die off in a given country.  And on that, the history of labor law in the United States is largely a history of government going out of its way to impede unions.  Right to work laws and the federal prohibition on closed shop agreements deeply impair freedom of contract.  Prohibitions on secondary boycotts, wildcat strikes, minority unionism, and the like impair freedom of speech and association, regardless of what the Supreme Court might say.  As relevant, these restrictions and many others – such as the effective requirement that unions can organize only after a prolonged election campaign**** – undermine the ability of workers to organize in a way that actually allows them to take advantage of their greatest leverage over their employers: their ability to be unpredictable, taking advantage of management’s need to plan.

All of this of course leaves the question: why would a business, in a relatively free and globalized market, ever choose to utilize more expensive union labor, and how do they survive?  As the graph above would seem to demonstrate, there are no shortage of businesses that make exactly that decision and yet somehow survive.

The answer to the first half of the question is obviously that, in such a market, where labor has the leverage afforded by unpredictability and surprise, the business may actually have no real choice – in such circumstances, the alternative may very well be to close the business forever.  As I wrote in my thread last week:

Imagine, if you will, an unannounced wildcat strike that takes the employer by surprise.  How long will it take that employer to hire a new set of employees?  Who is going to train those new employees?  How long will it take before those new employees are reasonably competent?  How much money will the company lose in the meantime?  Enough to go out of business or will it at least be shut down long enough that its reputation is permanently tarnished with its customers?  At that point, doesn’t it make more economic sense to cut its dividend or executive salaries or capital investments in order to pay a little more for labor? Doesn’t it make even more sense to cut those other items a bit more and to perhaps become a closed shop in order to get the union’s agreement to never again try any kind of work stoppage or wildcat strike or slowdown for the duration of the agreement?

I’d also add that even where a firm looks to move its operations to a locale where unions cannot or do not exist in any meaningful fashion, it takes time to transition.  Where labor can strike without notice, en masse, before that transition is well underway, it can effectively make the employer choose between calling off or limiting its move or going out of business entirely before the transition can be completed.

As for the second part of the question, ie, how can firms remain competitive, the answer is that competitor firms in such a marketplace with few restrictions on organized labor will have difficulty driving the unionized company out of business without succumbing to the same pressures that drove the original company to unionization in the first place.  At some point, workers at the competitor firm will inevitably start to wonder why they’re not getting paid comparable wages to the company that they’re trying to drive out of business even as management reaps increasingly obscene profits, resulting in unionization efforts, slowdowns, strikes, etc. that do serious harm to the competitor.  Of course, this competitor firm can avoid these problems by paying a competitive – or even superior – rate in the first place.  And indeed, it turns out that there is no shortage of evidence to suggest that unions raise wages at nonunionized firms.

*The OECD calls this statistic “Trade Union Density” if you would like to check my numbers.

**Obviously, a concept as amorphous and subjective as “Economic Freedom” is impossible to measure objectively and completely.  However, the Heritage Foundation’s general view of “economic freedom” is obviously one that would comport with that of most libertarians and conservatives, at whom this post is primarily directed, and the Index of Economic Freedom is also useful in that it is based upon a broad array of objectively measurable data.

***If anyone wishes to calculate the statistical significance of this correlation, which I expect is relatively weak, I’d be happy to e-mail them with the raw data so they don’t have to re-do my work here.

****Yes, this is me reversing my long-held opposition to EFCA and card-check.