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Are Right to Work Laws Good for the Economy
Twenty-Two States and Guam Have Right-to-Work Laws
This Hub is in response to a Hubber's question Do you think right-to-work laws are good for the economy or not?
Before answering this, it is important to define what is meant by right-to-work laws and what is meant by the term good for the economy.
As of this writing (March 2016) twenty-six states plus the U.S. Pacific territory of Guam have right to work laws on their books.
Actually, residents of five of these states have chosen to not only support the concept oft right-to-work but have gone a step further and voted to enshrine the right to work as amendments to their state constitutions rather than relying on simple statutory law.
In addition to state right to work laws, all employees of the Federal government, regardless of the state in which they reside, enjoy the same basic benefits that right to work laws provide.
Sen. Robert Taft - 1947 Taft-Hartley Speech
Taft-Hartley Act and Right to Work Laws
So called right-to-work laws are state laws enacted in accordance with the provision in the Federal Taft-Hartely Act of 1947 which allows states to enact laws giving each of their residents the option of choosing whether or not to join or be forced pay dues to a labor union in order to work.
The Taft-Hartely Act is the unofficial name given to Public Law 80-101, 61 Statute 136 which was enacted on June 23, 1947 when the, Republican controlled House and Senate overrode President Harry Truman’s earlier veto of the legislation.
The Taft-Hartley Act is actually an amendment to the National Labor Relations Act (commonly known as the Wagner Act) of 1935.
The purpose of the Taft-Hartley Act was to restrict some of the powers granted to unions in the earlier Wagner Act that that many felt gave labor unions undue power and were contributing to the extreme labor-management strife that was disrupting the economy at that time.
Closed Shop and Union Shop Labor Contracts
Among other things the Taft-Hartley Act outlawed so called closed shops and severely restricted the operation of what are known as union shops.
A closed shop is a situation where a union enters into a contract with an employer in which the employer agrees to hire only union workers and to fire any worker who quits the union or has his or her membership revoked by the union.
Closed shop contracts were legally enforceable contracts which gave the union full control over who could work at the firm with a closed shop contract.
Union shops were originally a slightly less restrictive form of contracts between labor and employers in that the employers were free to hire anyone of their choosing regardless of union membership.
However, once hired the person had to join the union within 30 days and remain a union member in good standing in order to continue working for that employer.
Under the Taft-Hartley Act union shop contracts were still allowed but with additional restrictions on union power. Under the act, employees of companies with union shop agreements were no longer required to join a union in order to remain employed.
Economist Friedrich Hayek on Labor Unions and Freedom
Unions, however, did retain the right to include in union shop contracts a requirement that employees who refused to join the union be required to pay union dues or at least that portion of dues that supported the union bargaining process that negotiated pay and work rules for all the employees of the company.
The act also went a step further and allowed individual states to outlaw union shop contracts within their borders just as the Taft-Hartley Act itself had outlawed the use of closed shop contracts.
It is this clause of the act that gives rise to state right-to-work laws. Nothing in the Taft-Hartley Act or state right-to-work laws forbid employees of any organization, other than members of the U.S. military, to organize or join a union.
What the act does forbid is the forcing of people to join or pay dues to an organization they don’t see any benefit in joining.
Right to Work Laws and the Economy
A generally accepted principle of economics is that resources, the raw materials needed to produce goods and services, are scarce while the material wants of human beings are unlimited.
The purpose of an economic system is to organize production in a way that we satisfy as many human wants as possible with the limited resources available. The free market has proved to be the best way to accomplish this task.
In a free market system, goods and services are allocated by price with prices being determined by the interplay of supply and demand. Consumers tend to seek the best quality at the lowest price in order to satisfy as many of their wants as possible with their limited incomes.
Businesses do the same knowing that the less they have to pay for the resources needed to produce their products the lower the price they will be able to charge for their product and still make a profit.
In order to obtain goods or services from others, each participant in a market, whether a consumer or a business, has to have something to exchange. The most efficient type of exchange is money. People exchange what they have to offer for money and then use the money to exchange for the things they want to purchase.
For most people in a modern economy the main things they have to exchange are their time and labor, with their labor consisting of both their physical strength as well as skills and talents.
All Workers Have the Right to Organize and Join Unions
There is nothing wrong with workers organizing to form a union to negotiate things like pay and working conditions.
Unions can also provide other services to their members such as training, collecting funds to help members and their families when a member is unable to work due to injury or illness, or other benefits.
Such services to members do make economic sense as well as providing members with valuable benefits for their money.
In the case of negotiating wages and working conditions, this is the economic principle of division of labor in which the members concentrate on doing what they do best which is their jobs while leaving negotiating to professionals in that area.
However, just because unions offer benefits that some workers deem valuable, it doesn’t mean that every worker necessarily sees value in union membership and therefore should be required to join a union.
How Unions Increase Wages for Members
Labor markets are no different than other markets in that they operate on the principle of supply and demand with wages being the price of labor.
Like any other good or service the greater the supply, relative to the demand, the lower the price or wage, while the greater the demand, relative to the supply, the higher the price or wage.
Unions try to increase members’ wages by limiting the supply of labor to a firm or industry thereby causing an artificial shortage and forcing employers to pay more in wages.
The result of having wages artificially forced up in this manner is that the firm is forced to either pay the increase out of its profits thereby having less to invest in growing the business or raise prices and risk losing sales.
Real Wage Increase are Result of Increased Efficiency
This doesn’t mean that firms never raise wages.
In a growing economy the demand for labor will increase naturally as new firms enter the market and existing firms expand output.
This increase in demand for labor will force firms to increase wages in order to keep their existing workers and hire more workers.
Economic growth is the result of firms and their workers becoming more efficient through firms investment in new and more efficient plant and equipment and training to increase the skills of their workers.
It is the increase in efficiency that results in increased profits, some of which go toward the increased pay and benefits needed to retain their workers in the resulting tight labor market
Union Work Rules Protect Jobs in Short Run but Inhibit Growth in Long Run
In addition to working to drive up wages for their members, unions also seek to preserve and protect the jobs of their members.
They do this by negotiating restrictive work rules that limit a firms ability to do things like redeploy workers to other tasks, shift work to other units, outsource work, etc.
For some four decades after railroads switched from coal powered steam engines to diesel powered engines to pull their trains unions insisted that the railroads continue to employ firemen on diesel locomotives. This despite the fact that, unlike steam powered locomotives, diesel locomotive did not require a fireman.
In a January 13, 2012 article in the Wall Street Journal titled The Truth About Bain and Jobs, Holman W. Jenkins Jr. describes the recent bankruptcy filing by a company called Hostess Brands, maker of Twinkies and Wonder Bread .
Milton Friedman on Labor Unions
Labor costs appear to be the main reason for the bankruptcy filing. Union contracts apparently require the company to deliver its different bakery products on different trucks driven by different drivers despite the fact that the deliveries are to the same stores.
Not only does the company have to employ and pay more drivers but it also has to own and maintain more trucks as well as being burdened by the extra fuel costs of running multiple trucks to the same destination.
This is economically inefficient. It also drives up costs which are passed on to consumers in the form of higher prices.
Consumers, in turn, have been increasingly spending their money on less expensive offerings by competing companies which are not burdened by the union mandated inefficiencies that Hostess Brands has to deal with.
Are Right to Work Laws Good for the Economy?
In conclusion, the answer to the question, Are right to work laws good for the economy?, the answer is no.
At best, unions simply transfer money from consumers to union member employees by causing prices of goods and services produced by union members to artificially increase.
This may be good for individual union members, but even here, union members are also consumers so part of the above market wage individual members receive as a result of their union’s actions is reduced by having to pay higher prices for other goods produced by members of other unions.
For society as a whole union actions to artificially raise member’s wages and protect redundant jobs results in inefficiencies in production. This means fewer goods and services and higher prices for consumers.
Are Right to Work Laws Good for Workers?
As for individual workers, so called right-to-work laws don’t prevent any worker from joining a union. What they do prevent is allowing unions to force people to join, or at least pay dues in order to work.
However, forcing people to pay for something that they neither want nor feel they need, is simply not fair.
Right-to-work laws allow people to earn a living without having to pay a third party for the right to apply and be hired and work for an employer of their choice.
What Do You Think?
Do you think right-to-work laws are good for the economy or not?
© 2012 Chuck Nugent