Each Labor Day we celebrate the material progress of the American worker, and impressive it has been. Most jobs previously done by muscle and sweat are now done by machine. The work week averages 35 hours instead of 65. Four-week vacations are commonplace. Retirement in good health at age 62 has replaced death in harness at age 52. Since 1900, hourly pay has gone up sevenfold in real, inflation-adjusted terms. It's gone up threefold since 1947 alone.
What has been the cause of this gradual progress? Labor union officials, government regulators and other do-gooders would have us believe that they and their heroic struggles deserve the credit. Yet, as economist W.H. Hutt put it, the conditions of barns and cow sheds "have improved enormously over the century with no union pressure to bring about the improvement." In other words, all the political sound and fury signify nothing in terms of economywide improvement.
It's no surprise that output per hour of work is three times higher than it was in 1947, exactly the increase in hourly compensation. The correlation between changes in hourly productivity and inflation-adjusted hourly compensation (pay, benefits and wage taxes) is nearly perfect (0.99 out of 1.00). Real economywide gains in compensation are impossible without advances in overall productivity.
"To live well, a nation must produce well," an MIT productivity commission declared in 1989. Yet remember back in 1972 when presidential candidate George McGovern called for "$1,000 for everybody?" That was preposterous but no different than insisting on high wages for everyone. Both policies reverse cause and effect. High productivity causes high compensation, not vice versa. Competition among entrepreneurs for labor ensures that pay reflects anticipated productivity.
Today the economy is chugging along at a nice pace, benefiting nearly everyone. No union or government wage fixing can accomplish what this growth does. While the price of labor can indeed be forced up to help some beneficiaries, labor productivity cannot be boosted so easily. Instead, the result is usually a reduction in the number of jobs available. When unions, for example, successfully make labor artificially expensive, employers purchase less of it. That's inevitable because of the basic law of demand, discovered by economists only a couple of centuries ago but known by businessmen and housewives for ages.
So what policies might help American workers? We live in the information age, and the modern reality for labor markets is that adversarial unions are dead men walking. In a competitive, global economy with enormously rich rewards, only one in ten U.S. wage and salary earners in the competitive private sector remains a union member while nearly four in ten are members in the public sector, where any goods and services produced are not subject to market forces. Overpaying for anything threatens the competitiveness and survival of a business, but especially overpaying for labor because this is the biggest expense of doing business. However, in the public sector, competition is virtually absent. Just fleece the taxpayers for a few more bucks. Business can't get away with that.
Yet the old legal regime that backs unions is still in place. Federal labor policies should be changed in a number of ways, toward deregulation so that productivity can be boosted, thereby boost wages. Here's just one example: Section 8(a)2 of the National Labor Relations Act passed in 1935, outlawed so-called company unions, a form of labor representation which allows participation by employer representatives. Unions have discovered that this outdated provision, designed to protect AFL-CIO-style unions from competition, can be used to block labor-management committees that ignore unions. Yet labor-management cooperation to solve problems and improve the workplace is crucial to our ability to compete in the global economy.
The Employment Policies Foundation has shown that employee involvement systems typically improve productivity a whopping 18 to 25 percent. Yet under existing law, union-free firms in America are not allowed to implement such systems unless they agree to embrace an AFL-CIO, adversarial union. Doing so usually reduces productivity in other ways. Congress could repeal Section 8(a)2 but President Clinton would veto it. The Teamwork for Employees and Managers Act (H.R. 473 and S. 295), passed by Congress but vetoed by President Clinton in 1996, also was an excellent model. Unions benefited greatly by Clinton's veto because they don't have to compete with other forms of labor representation and labor cooperation. Clinton, in effect, vetoed a 15-25 percent raise for most American workers because he vetoed productivity gains.
Workers who want to have a voice in company decisionmaking without going through a union should be free to do so. In private businesses with 25 or more workers, 63 percent prefer cooperation committees to unions as a means of having a say in decisionmaking, according to a 1994 Princeton Survey Research Associates poll. Only 20 percent of employees prefer unions.
Until we loosen federal labor law, productivity and wages will stay depressed.