Wednesday, September 11, 2013

The "Coase Theorem" and Labor Unions

Copyright, The New York Times Company

Labor unions are organizations of workers through which workers collectively bargain with their employer(s) over wages, fringe benefits, working conditions and other ingredients of employment contracts.

Labor unions tend to support candidates from the Democratic Party more than they support Republicans, and “liberals” are thought to be the ones who would acknowledge socially productive activities by unions.

A supposedly conservative view is that, with the help of special legal exemptions from antitrust laws and their ability to put workers on strike, labor unions harm economic efficiency by restraining competition in the labor market. From this perspective, unions are harmful because, among other things, they interrupt production with strikes, waste resources with “featherbedding” rules that require employers to hire employees for useless or nonexistent tasks and ultimately reduce employment by forcing employers to pay high wages.

Professor Coase, who died on Labor Day at age 102, explained how the legal assignment of property rights might not be that important for determining how resources are used in the economy. His idea became known as “The Coase Theorem,” and he received the Nobel Memorial Prize in Economic Science in 1991.

Although Professor Coase was supposedly conservative (he resisted this label, but the University of Virginia urged him and other economists they deemed to be conservative to leave), his conclusions arguably support many of the liberal views of unions.

Professor Coase’s property rights logic suggests that reassignment of ownership of some production processes and decisions from owners and management to workers – as is often the case under union-negotiated contracts – should not significantly change how businesses are run. That means that unions should avoid strikes and oppose featherbedding and for the same economic reasons that union-free shops do. Union wage demands would not reduce employment, at least in the short run.

In this “bargaining” view, unions would achieve efficient outcomes by bargaining over many aspects of the employment relationship, and not just salaries. A bargaining union would not accept featherbedding, for example, but instead would offer to give up featherbedding in exchange for something else (perhaps cash, or the creation of an additional productive position), because the featherbedding costs the employer more than it benefits the union members. If unions do too much to shrink the size of the economic pie, it’s difficult for them to enhance the lives of their members. Indeed, reasoning like Professor Coase’s had, in the union context, already been examined by labor economists like Wassily Leontief at Harvard.

The important difference between economic approaches to labor unions is not liberal versus conservative but “monopoly” versus “bargaining.” Milton Friedman took the monopoly view when he looked at the American Medical Association, which he understood as a union of medical doctors that restrains competition. Robert Barro took the bargaining view in his argument against Keynesian interpretations of wage rigidities.

Although it does not mention the Coase Theorem, “What Do Unions Do?” by Prof. Richard Freeman and Prof. James Medoff offers the most vivid explanations of the productivity consequences of unions. Strikes and featherbedding are rare in unionized industries. More typically, they said, unions enhance productivity by, among other things, reducing turnover and supporting training programs that make workers more productive.

One can argue whether it makes sense to give special legal protection to labor unions, but Ronald Coase’s results remind us that it is easy to exaggerate the consequences of those provisions.


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