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What’s Wrong With Labor Unions?

Richard A. Epstein joins us for a discussion on labor unions. Did they really help to create a thriving middle class and the modern working life we enjoy today?

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This week, Richard A. Epstein joins us to talk about the history, economics, and legal theory behind unions, which remain some of the most powerful forces in the modern American political landscape.

Is our collective narrative about unions saving workers from evil capitalist robber barons and horrible working conditions in the Industrial era accurate? How were unions initially treated by the Supreme Court?

Are unions essentially cartels? Don’t workers need unions to equalize their bargaining power with employers?

What does the future of unions look like? Are they going extinct? What about public sector unions, and the budget obligations they put on local and state governments? What would Epstein’s ideal unionization law look like?


Trevor Burrus: Welcome to Free Thoughts from and the Cato Institute. I’m Trevor Burrus.

Aaron Ross Powell: And I’m Aaron Powell.

Trevor Burrus: Joining us today is Richard Epstein, the Laurence A. Tisch Professor of Law at NYU School of Law and the Director of the Classical Liberal Institute. Welcome back to Free Thoughts Richard.

Richard Epstein: It’s always fun to be here guys.

Trevor Burrus: So today, I would like to talk about labor unions which I think is one of your favorite topics. We have many favorite topics but labor unions I’ve heard you speak about quite a bit. Now there’s a story that we have about labor unions that goes something like this.

Richard Epstein: This “we” is the collective …

Trevor Burrus: Is the collective culture that is. In the 1890s, beginning of industrialization, there were a bunch of evil capitalists who preyed upon workers and put them into horrible working situations too many hours a week, no vacations, dangerous working situations and then with a struggle against them to unionize, they were able to secure for themselves safe working conditions, lower working hours and a better pay and that’s the reason why we have things like the 40-hour workweek and the weekend to this day and labor unions are an essential part of the American society and they keep everything sort of stable. Is that true? What’s wrong with that story?

Richard Epstein: Everything.

Trevor Burrus: Every single part of it?

Richard Epstein: I mean it is so far removed. I mean first of all, you just have to get the sort of temporal arrangements right. The labor laws that we have essentially date from – the first of the major ones is 1926, which is the Railway Labor Act, which was a catastrophe for the way in which the rails were operated because it legitimated featherbedding and then we …

Trevor Burrus: “Featherbedding,” you said?

Richard Epstein: Featherbedding, because what happened in terms of the rails is that they wanted to keep transportation going and the correct way to do that is to allow employees to fire people at will if they want to disrupt it and to punish anybody who tries to cut or block the tracks. What they did in effect is to say that workers have a vested right. They’re not allowed to go out on strike but if you wish to make any changes in work rules, you have to get the consent of the workers.

Well this particular point you’ve given guys a monopoly power over the thing and that explains why it took 30 years to get the firemen off of diesel engines because you don’t have coal anymore but you still have firemen, because you have to renegotiate the work rules. That’s a classic illustration of a situation where the abusive consequences of unionization dominate everything else. That’s the first point.

Another point on this issue is you want to trace the condition of the working person in the United States. Now there are many ways to do it. The simplest way to do it is through life expectancy as a kind of all-purpose variable that kind of measures overall level of social production and success. Basically life expectancy 1550 to 1850 is kind of about under 40 years in England and the United States.

By 1900, it turns out it has gone up to 46 or 47 years. This is of course during the period of the demonic mills and everything else going on. How do you explain the seven-year increase during this period?

Well, at the time, there were many people who said, “You know, this is just a blip. It’s going to go back again.” We’re basically Malthusians at heart and Malthus told us what to think in 1798 when he wrote his book on population. But of course things kept on going in the opposite direction.

Now what explains this kind of improvement is a complicated story but let me mention some of the facts. The first thing is people finally figured out what pollution was and why it could kill and that immediately meant that you now actually did go to public works but had nothing whatsoever to do with unions. It had to do with the separation of drinking water from sewage water starting in London and then going to other cities.

This is a very sensible public health matter. And what is it? It’s funded by the rich who pay the property taxes and the benefits are shared by the poor. So what you always see in these cases is the rich gets some direct benefits but the poor are always benevolent free riders under the situation because there’s no way to exclude from a drinking water system. Maybe small variations around the house or the local street but the huge systematic improvement turns out to be great.

Secondly when you talk about these demonic factories and so forth, remember where are these people coming from? They’re coming from farms. Well why are they leaving the farms in droves to come from the city? Well, there are no employers—demonic export people or terrible people on the farms—but farming is one of the most dangerous occupations on the face of the globe. It could be sunstroke. It could be bacteria that are in the soil. It could be long hours, back-bending labor, being kicked by a horse or whatever it is and what happens is you give up all that. You work for a dangerous planet, which is safer than the farm from which you came.

So this is a net improvement in safety and if you simply assume that everybody is entitled to a risk-free environment, well then the old manufacturing factories look very bad. But if you will compare to the older situation, they start looking better.

Then of course there’s competition in these firms and that means somebody actually can sell safety to workers by giving them better working conditions in exchange for lower wages. You see other kinds of improvements. So you get the Westinghouse air brake in the 1890s. Now all of a sudden trains can stop more rapidly and the kinds of accidents that you have for trainmen are going to be reduced because the technological complements are much better.

All of this stuff now in the first part of the 20th century goes at an accelerated rate in part because the American patent system in the late 19th century was a veritable cornucopia of invention and all this other stuff. So you get the technology, relatively free labor markets. And all of a sudden, what do you see? By 1920, life expectancy has gone from 47 to 54, even taking into account the influenza plague of 1918.

Well, how does this happen? The progressives always give this story and they can’t explain the bottom line. What it is, is that technology gains in competitive industries are shared across the landscape and workers will benefit along with everybody else. Maybe the proportions are less. Maybe they’re greater. Less in dollars but probably more in terms of utility on the grounds that the first dollars buy you a lot more than the last dollars that you get.

So these people are living much better lives and the labor unions at this point were very weak and had absolutely nothing whatsoever to do with the gains.

Aaron Ross Powell: But does that exclude the unions entirely from the story or complete eviscerate the progressive case? Because if we’ve got – we’ve got a trend going on. Things are getting better and they’re getting – we can list these factors. Technological growth and knowledge are contributing to that but that doesn’t necessarily mean that unions either didn’t – weren’t also a cause of it or weren’t an accelerant of it. So they could say, look, things would have been worse if we didn’t have unions or just because things are getting better doesn’t mean they’re as good as they could be. So we still need to fight to make them better.

Richard Epstein: Standard argument – essentially the unions – there’s one set of situations in which unions are important and those are cases in which contractual actions are not supplied by the state. This applied under segregation in the south. Essentially black organizations demanding wages under a circumstance where people were so precarious anyhow probably were a good thing.

But the moment you have enforceable contracts, from the beginning, unions were a disaster in terms of overall innovation. For one thing, by the way, they were very indulgent in the use of force against ordinary businesses. One story that I remember from the New York Times, somewhere in 1912 in which the defendant in a criminal case is yes, I did blow up the building of the factory which wasn’t unionized. But I made sure that there were no workers in it.

This is not the kind of conduct which is conducive. If you go back and you look at the struggles in the minds in 1920 and 1930 and so forth, they always reveal the same story. Nine union minds work at lower rates are the union minds. What the unions do is they try to block their shipment of goods into the marketplace which means the consumer pays higher prices, given the violence and the uncertainty.

So if you look at the Coronado Coal cases from the mid-1920s, what does Justice Taft do? Cheats a little bit on the commerce clause and says if a union blocks the shipment of coal from a non-union mind into interstate commerce, the blockade is in interstate commerce. Why does he do that? Because state enforcement against unions was very spotty at that particular point in time.

So all of these things are essentially taking place. And then how do unions start to improve something? It’s a theoretical question assuming they’re in place.

First thing is we know one thing that they do, which is the engagement of cartel-like behavior. What does that do? It raises prices and reduces output. That’s going to hurt overall growth. In fact, serious studies of the Depression, Lee Ohanian wrote one of these.

For example 2004, what you found out was that the best estimates are that the Depression went on another five or six years than it should have, more than it should have, because everything that was done by way of legislation under Roosevelt was cartel formation, whether it was in agriculture or whether it was in labor unions and so forth. These things are incredibly important microeconomic inhibitors and these are cartels backed by the state so they can’t cheat on them and the erosion is much weaker.

So unions come out with a terrible role with respect to that situation and also just take a simple measure. The rate of productivity increases in the period which was highly hostile to unions when the yellow dog contracts were enforced were very, very high.

Trevor Burrus: Yellow dog contracts are?

Richard Epstein: A yellow dog contract is a contract often required or requested by workers interestingly enough in which a worker says so long as I work for you, I agree that I will not be a member of the union and I agree that I will not promise to join a union. These contracts were enforced in a case called Hitchman Coal against Mitchell, decided by Justice Pitney in 1916 or 1917 and it’s an absolutely sound rule because what the management is trying to do is demand exclusive loyalty which will increase production.

Now what about workers and the efficiency gains? One of the things that many companies do is they actually encourage the formation of worker committees of one kind or another because they have no market power to shut you down but they can give you a flow of information which you could then use to improve your processes and the sensible firms says if we put up a suggestion box and we use your suggestion, you get a little bump in the paycheck if it’s a small thing and a big bump in the paycheck if it’s a big thing in terms of what you’re doing.

One of the things they did under the labor statute in section 8-2 at the time was they made company unions illegal. Now why did they do that? Because they knew that the efficiency gains that a company union could supply to a firm would make it more difficult for them from the outside to unionize it as part of an international brotherhood.

Indeed one of the sensible compromises that you could have in legislation is you get rid of all of the inter-firm unions which have cartel powers and you allow unions to form on a plant by plant basis because they have very little market power that they could exert. But the progressive story as told by Brandeis and Frankfurt and so forth is done with such an abysmal ignorance of economic circumstances and empirical circumstances that it shows this particular deep contradiction.

Progressives always talked about the need for empirical evidence, right? And detailed study. They didn’t do a lick of work in that direction at any time. You read the famous Brandeis Brief and Muller against Oregon. It is a series of string quotations to mindless sociological reports from the United States and Europe about the importance of government protection in labor. There’s not a single normative argument they have, a single descriptive argument there, which asks the question, “Hey, are you guys telling the truth?”

Well, how do you explain the progress if in fact what you have is a series of retrograde institutions which by your own prediction should have indicated that everything was going in reverse?

Trevor Burrus: So the point of unions, I mean we look at the sort of development of the law and we have this – because cartels, the problem with the cartels or the problems that they face are people who want to not be a part of the cartel or undercut the cartel in some way. OPEC has always had this problem …

Richard Epstein: Cheaters.

Trevor Burrus: Yeah, with cheaters. It seems like working for less is not really cheating.


Trevor Burrus: So basically unions, they arise out of the sort of – you could have a voluntary union. Say none of us are going to work but the people started working, so they started using different kinds of state-based aids and violence to try and stop people from undercutting them. In the 1890s and early 20th century, there were some decisions about unions that were supreme court decisions that were very important, that later – how was the legal status of unions initially?

Richard Epstein: Well, it turns out the original judgment on the legal status of unions both in England and the United States was all done as a matter of common law principle and it was done as a combination of torts and contract law.

If you start with the English kinds of cases, the first of the really important case that you have is a case called Allen and Flood from 1898 and there were two unions. I forget their name. One was the woodworkers and one was the iron workers and the iron workers which was the bigger union said either you fire all the woodworkers or we’re going to walk off the job. They fire him and now in fact what happens is the woodworkers sue the other union saying, “You induced this guy to fire us,” and their judge named Herschell wrote the main opinion. He said, “There’s no inducement of breach of contract in this case because you were employees at will.” So forcing them out doesn’t make a difference and this was a common law rule.

Coming to the United States, the same problem starts to arise. Only now, we have a Sherman Act in place passed in 1890. So the great case on this, unanimous in the supreme court, was a case called Loewe against Lawlor, which held that if a union goes and threatens a supplier of a given firm that it will shut its operations down by pulling off the workers so that it will no longer do business with a company which is a target of unionization. That’s a collective refusal to deal which is a per se violation of the antitrust law.

So you could see the really different kinds of situations, the sort of narrow contract approach on the one hand, giving way to antitrust approach and which was much more developed than the United States at the time than it was in England because …

Trevor Burrus: So this is just to say that the Sherman antitrust act prohibited businesses from colluding to do this and it also said labor couldn’t do it …

Richard Epstein: So at this point, the issue is so important that it’s a centerpiece. Well, one of the two or three centerpieces of the 1912 presidential campaign, in which Wilson was a strong believer in unionization. He was a progressive coming out of New Jersey in Princeton. Credentials like that never lead you in the right direction even in 1908 and he’s strongly supported and the Clayton Act was passed in 1914.

What it does is it introduces a separation between these two areas that the 1908 decision had denied. So they tighten the protections against businesses merging and so forth under section seven saying in effect we can join various kinds of merges substantially less in competition. It’s a tricky provision because it could easily be abused and unbalanced probably within that negative but not a huge one.

But section six said labor is not an article of commerce. Agriculture is not an article of commerce and therefore these guys are all exempted from collective – from the antitrust laws when they engage in their activity.

So you could see what they’re doing. They basically overturn that. Come 1920, 1921, there’s a case called Duplex against Deering and this is another one of these Pitney opinions. You could see what’s going on. There are a bunch of companies that are unionized and what they tell their – what the employers tell them is we’re not going to sign another union contract with you in an area where there’s no sort of national labor relations act unless you take this fourth plant and you unionize it.

So they start running all sorts of boycotts of the – on the secondary nature against these guys and the question is since they were aided by management, are they out from underneath the exemption and is a very tough statutory construction question and Brandeis says no, they are protected and Pitney who wrote the yellow dog contract said no, that they’re not probably the correct result both under the statute and certainly as a matter of principle.

The key thing to learn about this, if you unions are efficient, right? Then they should say, “Oh my god, this other plant is non-unionized. We have such a competitive advantage over there. Please don’t unionize.” But they said exactly the opposite.

Aaron Ross Powell: OK. So someone who is a union worker listening to this could say like, look, so there might be some efficiency losses here. But I know from experience that the union has helped out – it has helped me and it has helped the people I know and my dad and my grandfather were union laborers and at the high point of unionization in the mid-century was a time when those of us who weren’t attorneys and doctors and knowledge workers, as we call them now, could earn a good wage and could be comfortable in middle class.

As we’ve seen union membership decline and unions decline, it has become harder and harder for those of us. So you can talk all you want about long term progress and about efficiency but the union helped us.

Richard Epstein: Well, the answer is if you’re a member of a cartel and your wages are increased by virtue of union intervention, of course you can help. That’s why majority of people support the unions. We’re putting aside here the dissenters like in the Friedrichs’ case recently of which there were always some. But the thing to understand is the only way unions could raise prices is essentially to reduce the number of workers available.

So you want to do this thing systematically. You have to figure out what happens to the welfare prospects of those individuals who don’t make it into union memberships and they don’t make it into union memberships because these monopoly powers become partly inheritable by saying I’m an electrician in the union. My son will now join the union in preference to anybody else and take my slot when I start to require.

So you have to do that if you’re doing a social welfare thing. Then you got to figure out what about the cost of union goods to other individuals when they want to pay for it and those costs go down. So their fortunes are going to be somewhat reduced and the fact that you are better is true of every monopolist who makes these consumers worse off by raising prices.

Then of course unions are much more dangerous that monopolies in terms of what they do because monopolies have no reason to interrupt production because it’s only going to hurt them. Unions are bargaining with a manufacturer or an employer and they will often pursue high-risk, high-return strategies. We will go out on strike. We will disrupt production. We will get higher wages.

In the meantime, people have to do without necessities. Children can’t go on school buses. They have to stay at home. It’s just all sorts of absolutely chaotic third party effects and when I took labor law, I was told that these things ought to be ignored. I said, “Why would you ever ignore them? You guys start writing about monopolies and there’s no disruption to supply. You talk about high prices and so they’re wrong. You’re right about that. So why somehow does that thing not apply here?”

So, the answer to this is that solipsism is not the same thing as an argument which explains not why unions benefit the people who join them and profit from them, but why they are socially desirable. Nobody in the labor union tries to do this. The irony to understanding this, I’m talking about social welfare functions and how competition leads to optimality across all persons and all resources. These guys are talking about provincialism and then what they do is they turn around and say, “The problem about you professor actually is you’er a rugged individualist.”

They got it exactly backwards. They are the ones who are essentially working against the public welfare under these circumstances and the bromides that you hear from higher political figures essentially simply obscure that particular fact by using these sorts of nebulous terms, fair shot, fair share and all the rest of that stuff. You could drown on sharing this unfairness if in fact it’s just a substitute for what cartelization is.

Trevor Burrus: What about – so another one of these terms that you could draw, you could drown in, it’s used so much, is unequal bargaining power. I mean the basic idea is that – oh, and no one thinks – I mean a very – I think the common opinion – because the workers just do not have any right to – they are so hard-up for a job compared to the business, that they have no ability to actually negotiate anything. So if they wanted to work for $2 an hour, they will work for $2 an hour.

Richard Epstein: Yeah, if they want to work for 20 cents. Yeah, OK. But now what you do is start looking at wage levels in non-unionized competitive markets and you see them systematically declining and systematically going up. You see them going up all the time uniformly, roughly with productivity gains across the line. Why is that? Because it’s an illusion to think that unions are a source of protection when they’re a source of disruption, which will in the long run lower productivity in the short term, subject you to dues and the risks of strikes.

But if in fact there’s free entry into a market, if people are essentially getting too low wages and somebody else could make money, they will start coming in. Now, it could be either a new firm or it could be an old firm supplanting and supplying or somebody putting a branch office out here.

That is the most solid protection that you get because there’s no negative side with respect to that and what it does is it means that nobody can basically keep some kind of monopoly rents if the competitive firms come in at an appropriate level.

Now is there a place for talking about bargaining power and inequality? The answer is no and yes. The answer for no is essentially on the standard models of the competitive economy. The equilibrium wage is uniquely set at the point where marginal revenues equal marginal costs. So by and large, it’s a take it or leave it kind of operation, which has a huge advantage because it means that the transactions cost relative to the transaction gains are extraordinarily low.

One of the things that people like John Dewey, misguided soul that he was, said, “Gee, you get people bargaining for the good sale of goods over a back fence. That shows you got a real market.” No, it shows you got a highly inefficient market out there because it’s not thick.

What you just have to do is you now go into any one of these shops. You know, the old A&P or whatever it is and what you do is you get online behind the guy who says, “Let’s bargain over every price of every good in my market basket,” and then see how people want to murder him.

You get unique prices on a take it or leave it situation. Then everybody flies through the line because what people want is not high transactions cost. They want a high volume of transactions, which is what the major change in the supermarkets can give you.

I’ve worked for some of these companies and what they will tell you is you see four customers on a line. You know, the fourth one is going to disappear. So the manager drops everything and opens up another cashier because you don’t want to lose the sale and cleaning up something in the backroom can wait 15 seconds and so forth before you take this into account.

So these are in fact situations where there’s enormous upward pressure on wages from these things. So long as they’re backed by productivity gains, you’re not going to get around them, whereas on the other hand, if you have to pay high wages because of the union, now what you’re going to do is you’re going to start to cheat, to scheme in an effort to cut back on the wages. So you get back to a competitive level.

You don’t want to induce monopolization because what that does is it creates disruptive bargaining, holdout situations. It makes everything look like the inefficient transaction at the back fence. So in this regard, unions are an unmitigated disaster relative to a straight, smooth, competitive economy, which is why it is that the 95 percent of the labor force now, which is non-unionized doesn’t have any of the burp and hiccups that the union sector does unless these poor people are working in a union firm where a strike will disrupt their particular employment prospects.

Trevor Burrus: Now the force that unions have – the cartelization force that they have had historically is something that you wrote about recently in regard to the Friedrichs’ case which you alluded to. But the race element of unions has always actually kind of set in the background and sometimes the foreground that unions have been not very nice to racial minorities and immigrants too as a historical thing. So some of the cases and some of the issues – like you talked a little bit about unions and race and …

Richard Epstein: Oh, sure. I mean, look, the key case – this is a case called Steele against the Louisville and the Nashville railroad and it arises under the Railway Labor Act, which I mentioned earlier in this podcast, right? Where I said – in fact in 1926, what they did is they made a single union having sole monopoly power over everybody.

Prior to the existence of this statute, essentially there were competitive unions. One was black and one was white. The reason they segregated on voluntary lines is that the element of trust within the races particularly in those days was vastly greater than the element of trust across the races.

So what the employers would do is play off one union against the other and essentially the black firemen and the black helpers worked about the same amount of money as the white firemen and the white helpers in their particular union.

Once you – in a case called J. I. Case Co. introduced the situation in which the union can abrogate all previous contracts of all bargaining members. Once their majority is chosen, you don’t have two separate unions. You have one union 65 percent white, 35 percent black say. What they do is they now run a democracy. So they vote and this is what happened to say that every job in the particular union which was high-paying belong to white workers and every job that was low-paying belonged to black workers. They said to the firms, “You accept this or we will go out on strike.”

So they got 21 railroads or something like that to go along with it. Now, this is absolutely outrageous and it kind of shows you how it is a majority can vote to confiscate the wealth and prosperity of a minor, which shows you why it is unvarnished popular democracy in the union context works no better than it does in the political context and Justice Harlan Fiske Stone is a kind of a Coolidge appointee. They actually met each other at Amherst College when they were both kids and so forth.

He finally draws the line on this and he says it’s a duty of fair representation. The white guys have to represent the black guys as well as they represent their own membership and we’re going to enforce it. This is an impossible duty to enforce even when the violations are clear and they’re still fighting over this thing one way or another a dozen years later.

What it does in effect is it indicates that the power to separate is more powerful than the voice of participation. The exit right means more than that. What the unionization statute did is to kill the exit right.

In the Friedrichs’ case, now the question is, “What about exit rights and voice rights with respect to dissenters on union policy?” The problem it not as acute as it was with race, but you have exactly the same kind of interest. Some guy says, “I’m better off without a union. I’m better off without a union. I don’t have to pay use of the union. I don’t get benefits from it. I just don’t want any part of them.”

The union says, “You’re going to be a free rider. So therefore we can charge you in order to run our business,” and he says, “You’re not providing me with benefits. You’re providing me with burdens.”

So the court constantly is trying to figure out what to do with these guys and instead of treating it as the economic matter that it was in the earlier days, with low levels of constitutional scrutiny, they now are treating it as intermediate scrutiny First Amendment kind to start and it seems clear that given the drift of the argument, that the five conservative justices including for these purposes Roberts and Kennedy believe that the free rider arguments of the old union guys are outweighed by the dangers of coercion in these kinds of setting, particularly since public unions are intrinsically political and include in their bargaining activity, lobbying activities in order to change the bargaining rules so that the line becomes evanescent.

So virtually everybody on both sides with mixed emotions obviously think that the – a current system called the “agency shop” in which non-union members can be charged a fee equal to the dues for their economic but not for their political activities will go the way of all flesh.

So the libertarian elements of the First Amendment are counteracting the highly progressive and collectivist elements which dominated in the 1930s and 1940s.

Aaron Ross Powell: How did these – the problems with unions that we discussed play out differently between private sector unions which is what we talked about mostly and then public sector unions which we just touched on?

Richard Epstein: Well, the public sector unions are in many ways much more vulnerable than the private sector unions, which is one of the reasons why the 1935 National Labor Relations Act did not include them. They only came back in the 1960s.

What’s the explanation for that? Well, if you push very hard on a firm in a private union setting, unless the firm has monopoly market in its product market, somebody else is going to come and eat it for lunch. So this essentially is an open invitation to tell people, “You get too successful, you’re going to lose your job as well. Back off a little bit because otherwise, I won’t be able to survive.”

The second thing is that when you’re dealing with a union, its shareholders are private individuals, which are reasonably well-aligned in their interests with the company management. You start going into the public sector and generally speaking, you don’t have free entry into this market. You don’t have two police forces in the town of Glendale, California. You don’t even have two public school systems. You don’t have two of anybody.

So the unions could push much harder on that because they know the substitutes are gone. In addition, they are shareholders as well as things, so they could get together a political fund. They could talk to their local legislators and say, “Sure, you want to support any anti-union legislation, we’re going to make sure that you see the exit when it comes to the next election.”

The unions that teach unions the SEIU, these guys are absolutely past masters at using these kinds of techniques, so that it’s pretty clear that the large number of legislators are hostage to union guys and will therefore do their bidding. This becomes most clear on when you start talking about work rules and pensions. It’s hard to fire anybody inside a union context and the pensions come from people who retire early.

What you have to do is set aside huge sums of money because even though they get small amounts of money per year, they get it for a very long number of years. It turns out once the pension is vested, you can’t put your money in equity. You have to put it in fixed instruments so that your rate of return is going to be lower and that’s why you have these huge crises.

The unions are smart about this. They say, “Well, we’re going to give these pension benefits for all non-union employees as well.” Well, the 90 percent giving a free ride to the 10 percent, well, there’s a savage thing there. Now what they’re doing is they’re getting in a lot, right? Very cheaply from what their activities are. So if you look in a place like Illinois, the state may be ruined. The city may be ruined by the course of the public pensions that they have to bear.

Taxes are going up. Civil services are going down and the courts which have always taken a very dim view of vested rights and economic areas have systematically in Illinois and in California taken the position that every union contract gives you vested rights from the time that you take the job. So you have this one set of contracts which would always be suspect or the ones that are fully enforced, so that any sensible reform legislation like Measure B in San Jose is going to be struck down by the courts. This is an absolutely tragic situation and it all comes out of the Progressive Era carried over from the industrial unions where it was a bad mistake to the public unions where it’s catastrophic.

Trevor Burrus: Wait. Are you saying that the obligations to the unions that could sink the budgets of and states can’t be renegotiated?

Richard Epstein: That’s correct and without – they can be renegotiated. They can’t be unilaterally changed.

Trevor Burrus: OK.

Richard Epstein: So what happens is under California in a case called Kern the rule says as follows: You’re allowed to change unilaterally the amount of money that you give to workers so long as the present discounted value of the package is not reduced, which means that you could get a one percent improvement.

But if you come out and you say, look, I have to lay off lots of current preachers, policemen, close parks, not buy books for libraries, do all the things that cities do, their answer is, “We always come first.” That element is absolutely indefensible. Whenever you’re trying to figure out how it is you do budget in society, you may give certain areas priority over the others.

They will never be absolute and pensions which are overvalued in the first place would never be the area in question. So what we have here is a national disgrace with respect to this kind of issue. I mean, look, there are a lot of questions which are subtle and close with respect to labor relations but all of these ones as far as I’m concerned are just clearly in one direction and it’s the opposite direction for which our political wisdom runs and that’s why you have the huge catastrophe we have today.

We start with the assumption that the progressive story of 1910 is true and then we live its dire consequences today when it turns out to be manifestly and abjectly false.

Trevor Burrus: Well, it seems that labor union policies we have – I think the private sector is down to seven percent or so workers.

Richard Epstein: Under six percent.

Trevor Burrus: And so private sector unionization is going down but we created this policy in 1935, which as you mentioned – if you can embellish on this, it is based in a type of New Deal thinking that is frankly bizarre and quite insane and something that no one would propose today.

Richard Epstein: That’s right.

Trevor Burrus: I mean I don’t think Paul Krugman would propose the kind of cartelization measures of the New Deal …

Richard Epstein: I’m sorry to say that may be true of the ineffable Mr. Krugman but it is not true of the Democratic Party. The Employee Free Choice Act is a provision that was done in order to have mandatory union membership on car checks and then to have compulsory bargaining so that if they bargain through impasse and arbitrator opposes the contract on the manufacturing.

That is the law in California with respect to the agricultural sector and you see massive coercion and that’s what they’re trying to do in this public sector because they realize and they’re right about this, is they – you know, under current law, not withstanding all of the unconscionable advantages that unions have in terms of exclusive representation immunity from the antitrust law and the like, a well-run management will always be a well-run union when it comes to major reorganizations. You will never find a reorganization like the General Motors and the Ford plants of the 1930s.

You look at the typical situation. Unions went about half the elections but these are typically elections in units which have 100 or 200 workers, nothing more. One of the things that happen if you try and unionize and get tough on the small firm in a big terrain, it turns out that that firm which is unionized does not last very long. So those workers would back out on the street.

So the success in unionization rate gives you a two-year advantage. It doesn’t give you a 20-year advantage and so forth. They’re trying to reverse this and they’re trying to reverse it with an eye on those things, which don’t get exported. There’s no way that you could have the dishes bussed from India when you’re running a fast food restaurant. The hotel clerks that do this stuff, salesmen and salespeople. All of these people are essentially on ground people. There will be some erosion at the edges. You could buy things online and all the rest of it. But the hope is that they will be able to get large unionization.

The response will be what it is to high minimum wages. Firms will try to reorganize their capital structure in order to reduce these things from happening, so they will have fewer positions, greater automation. They will change the mix of goods that they sell mainly to the upper end. So that what they could then do is find gainful ways to employ workers of higher income who are less likely to want to join unions anyhow.

So this is a short term palliative which would be another long term disaster. It almost passed when Obama came into office in 2009. At this particular point, so long as the republicans hold either house in congress, it’s the way. But make no mistake about it. The progressive’s attitude is that the areas that we see today are not because their monopoly power was too great and the disruptions were too large. It’s because their power is too weak judged by declining unionization.

The clear point is that what has happened in recent years is when workers understand that if they succeed in unionization, their short term gains are offset by their long term instability. They don’t want to join. That’s why the UAW can’t sell anything in the south because it’s managed by strikes and various kinds of protective provisions to take General Motors from a workforce of about 500,000 in 1979 and reduced it to less than 10 percent of that amount when they went bankrupt in the mid-2000s. So this is essentially that they’re about – they don’t learn from their mistakes because if they learn from their mistakes, they would all be out of jobs.

Trevor Burrus: But it seems like this is really dangerous with public sector. I mean when you mentioned some of these. But if you look across Europe and you kind of get an idea – I often say that sometimes you can tell if a country is kind of sliding into an economic collapse by the number of people who work for the government basically, which are probably unionized and also the youth on employment rate. But these public sector unions with the cartelization and the monopoly in two sides, it’s just right off the rails of – at some point.

Richard Epstein: But look, even in Spain and so forth, it’s worse than that because one of the advantages you have in a non-unionized sector in America, you still have contracts at will. You’re willing to hire – you can fire. In the European system, essentially to price somebody out of a job is a major national hearing and that means the reluctance to hire high risk, unskilled, young workers is very, very great.

But the minimum wage is doing this in the United States. I mean youth unemployment amongst black kids now is about 40 percent or more. In 1948, at the height of segregation, it was the same as the rate of unemployment for white kids. They were both vastly lower than they are today.

So it’s not that the unions do everything wrong. It’s that when unionization is combined with other kinds of requirements, minimum wage laws, mandatory pay rules, whatever it is, and they essentially – they price out the low and middle class.

Somebody who’s earning $150,000 a year will be hurt by these statutes. They may lose $2000 or $3000 in net benefits from these restrictions. But if you’re earning $18,000 a year and somebody wants to impose a $6000 charge on you, you’re out of business and everybody knows that Apple is never going to worry about this stuff. Tim Cook could bloviate all the wants about the importance of free and open access. They make $4000, $5000 per employee. Walmart makes $16,000 or $14,000 and most of that surplus is coming from the high end employees. Minimum wage wipes out the surplus from low wage workers.

They know this. The unions don’t know it. Bernie Sanders doesn’t know it because they don’t bother to study anything about industrial organization. They just assume that whatever we decree, firms will follow because everybody knows that employers are stupid even though they’re evil and they were simply unresponsive to changes in costs and benefits because they have infinite wealth. I mean that’s the kind of way they talk and it’s shameful.

Aaron Ross Powell: This isn’t strictly on unions but talk of minimum wage. Maybe think of it – I often wonder why it is that progressives were the ones who were pushing the strongest for a minimum wage and are typically big fans of government subsidies of things. Lean on the minimum wage as a solution to low-pay for low-skilled workers as opposed to say outside wage subsidies.

Richard Epstein: Well, they’re wrong and what you said is more sensible. There’s a danger with subsidies of course and it’s a political risk because they have to be put on budget and people will know it. Whenever you put something in the terms of a minimum wage law, there’s no budget appropriation and the fact that it turns out that there are fewer profits, fewer wages and therefore less revenues to the government means that in the end it is a budgetary issue, but it’s not going to be a process for the committee structure in congress in exactly that particular fashion.

So what they’re doing in effect is they’re picking an inefficient political – inefficient political means which has an inefficient economic consequence, which probably explains it. The tragedy is that if you tried to ask the republicans to talk about this, most of them are completely inarticulate on the problem. It’s not that they think wrong. It’s that they don’t know enough to actually put the arguments out.

The typical Republican response to any change in labor regulation is not “This is a terrible thing because it reduces the scope of voluntary exchanges. Well, we think we should go from one to four, rather than from one to eight.”

You start doing those half measures. All they do is they double their demands and they’re exactly where they want to be anyhow.

Trevor Burrus: So what does Richard Epstein’s ideal unionization law look like? Does it even exist?

Richard Epstein: Well, contracts – well, with any and all employees shall be legal. It’s all that you need to do and it would be nice to back it by constitutional protection. So if you go back to the period I’m talking about, the same year that they decided Loewe v. Lawlor which said in effect that unions are subject to the antitrust laws, they also struck down a collective bargaining statute in the case called Adair v. United States and then seven years later in the case called Coppage v. Kansas, my friend Pitney again, right? I mean the guy is very consistent, struck down the similar statute passed by Kansas, which was actually a hot bit for some reason of labor law reform, all the bad variety during this particular period.

If you could go back to that particular frame of mind and stop thinking about exploitation and start thinking about mutual gain, you will no longer believe that contracts of employment are the equivalent of theft, which was the way you began the discussion, right? You said, well, these progressives know that you will have to take anything when they give you a job. Do they really think that workers who are hard-strapped for money are going to be – take a contract which will leave them in expectation worse off afterwards than they were before?

That’s the fantasy and all of the history of this particular period shows increased vitality of labor markets, higher rates of participation, greater number of women coming into the workforce. Actually even some modest improvements on the part of black workers which required a lot more to do given segregation and so forth and they just don’t understand the history.

Trevor Burrus: Do you allow voluntary unions just like …

Richard Epstein: Well, I mean if people want to join together and form a union, sure, I will allow them to form this thing, so long as they don’t have market power, i.e. like the collective refusals to deal. But I won’t force any management company to deal with them. If they can present an attractive piece, that will be fine.

In fact, as I said, there is an incentive to have company unions in these cases because a lot of times, workers may have an instinctive distrust that an organization will help them overcome and that means in effect that they can basically do better in coordinated activities than they could have done without a union. Most firms understand that. I mean yeah, I’ve been an employer.

Every time I have a particular problem, I’m quite happy to put together a worker’s committee if I think they’re going to be able to solve this thing and to give them a charge and the important thing that you do as a boss is you actually endorse and support their efforts and you can’t do that if it’s a union because they’re always stealing information from you in order to figure out how to run the next collective bargaining negotiation.

So what happens is unions kill cooperation down at the molecular level. They create the lousy form of labor regulations that a good employer will try to avoid.

Trevor Burrus: Thank you for listening. Free Thoughts is produced by Evan Banks and Mark McDaniel. To learn more, find us on the web at