The Relevance of Labor Unions

There is a tendency of progressive to assume that unions, instead of being self-interest monopolies, are beneficial to society simply because they are composed of many members. I would argue that unions are much more of a reactionary and destructive institution similar to medieval guilds. Unions function in a similar way to other monopolies – They seek to restrain supply (workers) in order to extract a higher return. They restrain competition, harm consumers and other workers (to the extent they use coercion and the law). Furthermore they distort the economy by making labor costs for their particular industry too high, thus encouraging employers to make their production unnecessarily more capital and less labor intensive. Anyway you do the math this is a net harm to society and by definition to the people who make up it. In the short-run it can be advantageous to the workers who are able to join the union. Typically they are able to extract unnaturally high returns from their employers for a while. In the long run, you would expect unionized businesses to become less and less efficient and, in a competitive market, run out of business.

Look at the industries in the United States that are most heavily unionized – Domestic Automakers, Steel, Airlines, Education, and Other Government. If you were to make a list of the most dysfunctional industries/institutions of U.S. society, these all would be quickly mentioned.

Let’s examine more closely the example of the U.S. Auto Industry. For a long time, the Big Three were able to get by with unionized workforces. They paid unnaturally high wages to their employees, with restricted access to the jobs; they were able to do this because competition between the Big Three was quite gentlemanly (to be polite). This collapsed when foreign competition became much more intense. The U.S. companies were exposed as lumbering inefficient oligopolists. Some might argue that everything was better with limited competition – some workers were able to receive too high wages and the American companies did well. Those points are true, but only if you recognize that the oligopolies and unionized workers did well at the expense of all other Americans. One of the reasons this has been allowed to persist is it is difficult to see the costs. We drive much better cars than we did 30 years ago, and we would have even better, cheaper, more efficient cars available if this weird market distortion was not allowed to persist for so long. This is a definite cost we have all paid for this arrangement.


This is really the classic problem of concentrated benefits and diffuse costs. Even though the costs are significantly larger than the benefits. The workers and the companies don’t care very much that their benefits come at the expense of everyone else. However, they do notice quickly when a similar situation in the steel industry directly harms them.