Wednesday, January 14, 2004

Union split

I was reading a WSJ piece today (in paper! and since they charge for the web version I don't have a link) about how old-skool manufacturing unions were working hard to get out the vote for Dick Gephardt. The article discussed how manufacturing unions disliked government/service sector unions because they were 1) jealous of how much influence they had and 2) disdained their work since it did not involve hammering sheet metal.

I don't follow the ins and outs of union politics, so this was news to me. What's interesting is that the decline of the manufacturing union is a straight forward consequence of their success. The truth of the matter is that US manufacturing output as continued to increase (and is at an all-time high) while US manufacturing employment has dwindled. This rise in output comes from productivity gains as well as capital deepening, but the falling employment statistic indicates that the capital is, well, capital, not labor. So manufacturers are substituting capital for labor as they increase total output (incidentally, as capital and labor are complements, those who remain in manufacturing probably get paid more than they did 30 years ago).

Unions are motivated by headcount -- the more people the unions have, the better they are (by contrast, public corporations are motivated by absolute profit per unit of invested capital). Unions also increase the price of labor by negotiating for higher wages and better benefits. If the price of labor increases faster than its productivity, it becomes optimal to, at the margin, start substituting capital for labor. This means that the labor input to manufacturing will shrink, even as manufacturing output grows. Shrinking labor inputs mean fewer union jobs in manufacturing. Overseas competition exacerbates this trend.

Government labor unions tend to be in services, which are 1) more protected and 2) harder to import, even if they were not protected. This means that a higher price of labor does not do much to demand for the end service, and so there is no substitution of capital for labor. Over time, this means that government service labor unions will not face the numbers problem that manufacturing unions are dealing with now.

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