Why Wages Rise: 1. Labor Unions?

MARCH 01, 1956 by F. A. HARPER

Dr. Harper is a member of the staff of the Foundation ]or Economic Education.

Wage rates are higher in the United States than in any other country. and they are about five times as high here as they were a century ago, in purchasing power.

Many explanations of this phenomenal rise have been attempted. Dr. Harper proposes, in successive issues of THE FREEMAN, to analyze the causes and the non-causes. In this first installment he deals with the proposition that labor unions have caused wages to rise.

The recent joining of the two major labor unions in the United States met with mixed emotions. On the one hand, such concentration of power anywhere in society frightens those who know its evil consequences. But on the other hand, the move is accepted as part of the long-time progress of unionization which is commonly believed to be the cause of our high and rising wages. “So,” say many, “the fruits are worth the risk.”

The belief that unions cause wages to rise seems to be borne out by simple observation: In repeated instances it is observed that a labor union demands a rise in wages for its members. An argument ensues between the union and management; there may even be a strike. Sooner or later a wage rise is granted—if not for the full amount requested, at least for a major part of it. Other firms then have to meet this new rate or lose workers. So it appears, ipso facto, that wages in general are raised by union activity.

Such a close-up observation, however, may lead one to see things that are not so, as the proverbial fly on the chariot wheel believed that it propelled the vehicle. One must stand off a bit from the publicized union activities if he is to gain a true perspective on whether they cause average wage rates to rise. One needs, for this purpose, a telescopic view by which to compare the long-time trends of wage rates with changes in union membership.

On the accompanying chart, hourly wage rates in the United States are shown by the upper line. Wages will now buy nearly five times what they would a hundred years ago. The chart is constructed so that a constant rate of change in real wages would appear as a sloping straight line. Progress in an advancing economy seems to work that way, so that wages tend to rise in the manner of compound interest.

Wage trends in the United States over the past century have fallen into three distinct periods: a yearly increase of 1.27 per cent for the period 1855-1895, a yearly increase of 0.55 per cent for 18961916, and a yearly increase of 2.47 per cent for 1917-1955. The reason for these changes in trend is a large question, which will be considered here only as it relates to union membership.

The lower line on the chart shows union membership in per cent of all “gainful workers” in the United States. Here too are three distinct levels: A negligible union membership prior to 1900, then a rise at the turn of the century to a level of about 6 to 9 per cent which prevailed from 1903 to 1936, and then a sharp rise to a little over one-fourth of all workers as members of unions for the past ten years.

So the trend in wage rates and in the proportion of workers who are union members have each had three distinctive periods during the past century. But if we compare the two lines carefully, no noticeable relationship between the two is to be found. Neither wage rates nor union membership could be predicted from the other, with any accuracy whatsoever. Try it. After covering the lower line, try to draw one to represent union membership based only on this evidence about wage trends, and vice versa. By comparing your estimate with the facts, I’m sure you will agree that changes in wage rates are quite unrelated to changes in union membership.

1. Assumption: If unions were presumed to be the cause of rising wages, one would expect wages to have been at their lowest point—and to have remained at about the same low point—from 1855 to about 1900, when union membership was negligible.

Fact: Wages rose appreciably over the period. They doubled within a man’s working lifetime.

2. Assumption: Whatever the cause of the rising wage rates in the earlier period when union membership was negligible, one would expect it to have continued. But he would, in addition, expect the rise to be accelerated with the rise in union membership about the turn of the century.

Fact: The rate of rise in wage rates from 1896 to 1916 was less than half that of the previous fifty years.

3. Assumption: One would expect the sharpest rise in wage rates to come when union membership was having its most rapid in-crease—from 1936 to 1945—and then to have leveled off when union membership stopped rising.

Fact: The rate of increase in wage rates which began at the close of World War I continued with amazing consistency for the entire period from 1917 to 1955.

From this evidence one must conclude, I believe, that wage rates show no clear response whatever to changes in union membership.

If one says that the two lines are related but there is a lag in time of some 15 to 20 years, the evidence would be that rising wage rates cause union membership to rise, not vice versa. In any event it is the opposite of the theory that unions cause wage rates to rise. Consequences do not happen before their causes.

And so this popular illusion that rising wages are due to the growth of labor unions must be discarded if there is to be any room for attention to other possible causes.

As a preview to the answer as to what makes wages rise, I will merely say here that wages can be paid only out of what is produced.

Something other than your joining a union is what increases your hourly economic output—now five times that of your great-grandfather’s a century ago.


Economists and Politicians

Ludwig von Mises

There are no ivory towers to house economists. Whether he likes it or not, the economist is always dragged into the turmoil of the arena in which nations, parties and pressure groups are battling. Nothing absorbs the minds of our contemporaries more intensely than the pros and cons of economic doctrines. Economic issues engross the attention of modern writers and artists more than any other problem. Philosophers and theologians deal today more often with economic themes than with those topics which were once con­sidered as the proper field of philo­sophical and theological studies. What divides mankind into two hos­tile camps, whose violent clash may destroy civilization,- is antagonistic ideas with regard to the economic interpretation of human life and action.

Politicians proclaim their utter contempt for what they label as “mere theory.” They pretend that their own approach to economic problems is purely practical and free from any dogmatic prepossessions. They fail to realize that their policies are determined by definite assumptions about causal relations, i.e., that they are based on definite theories. Acting man, in choosing certain means for the attainment of ends aimed at, is necessarily al­ways guided by “mere theory”; there is no practice without an un­derlying doctrine. In denying this truth, the politician tries in vain to withdraw from the criticism of the economists the faulty, self-contra­dictory and a hundred times refuted misapprehensions directing his con­duct of affairs.

The social function of economic science consists precisely in develop­ing sound economic theories and in exploding the fallacies of vicious reasoning. In the pursuit of this task the economist incurs the deadly enmity of all mountebanks and charlatans whose shortcuts to an earthly paradise he debunks. The less these quacks are able to ad­vance plausible objections to an economist’s argument, the more fu­riously do they insult him.

Plain Talk, September 1949


March 1956

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