The fundamental principle behind “Unionization” is to establish an institution with bargaining powers from the government to artificially manipulate factor costs of production. Though these labor unions portray themselves as savior and messiahs of the poor laborers, they work to further the interest of the few at the cost of many. The idea of a union is to reduce production and to keep the unemployed from finding work and the low-paid from competing for higher-paying jobs. Through collective bargaining power and government sanctioned force, these Unions compel private players to bow down to the demands and maintain a proxy-control over the production and wages. Unions make high wages higher for some, but they make costs higher for other people and thus reduce the goods and services that consumers, including workers, can buy in the marketplace.
The unions do not help the relatively poor. They help the aristocrats of labor at the expense of low-income workers. They get privileges for their members at the expense of other workers or would-be workers and they raise prices for all consumers.
To understand it from the economic point of view, one must understand the fundamental principle behind prosperity. What drives prosperity? It’s higher production of the product in demand. Higher production will drive down the value per unit of consumption. And higher production will drive higher employment. So a combination of workers can only raise wages if they can raise the value or the quantity of the product that they are producing. Now, of course, if the quantity produced is smaller, keeping other things constant, the value per unit is greater. This lower quantity will be available to fewer consumers and thus will provide less human satisfaction. It naturally follows from the above, that the only other way they can increase the relative value of the marginal unit of labor is to reduce the units of labor employed and the quantity of goods produced in that industry.
Without the power to keep new entrants out of the industry, Unions can do little to (artificially) raise the market value of what their members produce. Although it is clear that this artificial rise is against the interests of the consumers or the new entrants in the labor market, it benefits the established labor Unions. It is rationing of mediocrity in the industry.
The corollary follows that by artificially reducing the quantity of production and artificially raising the marginal value of their labor, the Labor Unions are not helping the workers in general but actively acting against their interests. Workers lose jobs from industries where they could be most productive. Unions can protect their members from the competition of other workers and new entrants into the labor market merely by raising wages because, with an increased cost of the marginal unit of labor, the employer cannot employ more people.
Unions are self-interest groups. They do not care about the workers. What they gain for their own members, from such artificial manipulation, results in a loss to new entrants and all consumers as consumers will have to pay higher prices per unit for a smaller quantity of goods and services.
This control also determines rates at which a company or industry expands or contracts. In a free society, if the wages in an industry were lower than those forced by the Unions, the industry would expand. Expanding means paying higher wages to attract the more workers needed. It also means producing more goods that consumers demand and adding more value per unit of production or lowering prices per unit of production so the same wages will buy more.
Artificially increasing the wages (minimum wage laws) never work
One should beware of the Keynesian fallacy that wages must be raised in order to provide workers with the purchasing power to buy their production. Higher living standards require more production, not more money. Workers can only buy what is produced. If production is reduced because fewer workers are hired, increasing money wages does not provide any more goods. There is no way to increase the purchasing power of one worker by increasing his wages without at the same time decreasing the purchasing power of other workers.
INCREASED MONEY SUPPLY MEANS NOTHING IF PRODUCTION IS LOW, IT WILL ONLY RESULT IN INFLATION.
It is the lack of understanding of this simple concept, that drives socialists to ruin economies and countries again and again.
Free market competition protects workers
The unemployed and the ones at the bottom of the economic ladder are the prime victims of Labor Unions. Just like the free market system protects employers from a Unionised thuggery of employees, it also protects employees from any exploitation from employers. It cannot be denied that employers would always like to pay lower than the market wages. Adam Smith in Wealth of Nations admitted this principle. However, in the free market, they are unable to do so. It is just not possible for all employers to get together and agree to hold wage rates down for any length of time. Once one employer finds he can profit by breaking such an agreement he will probably do so. If none breaks the agreement and if you have a free market society wherein anybody can become an employer, new employers will soon appear, to take advantage of the situation by offering workers more. If the employer pays a wage lower than the market wage, that is less than the product of the worker can bring in the market, his profits will be such that he can expand his production and his number of employees. If he fails to do so and fails to raise his wage rates in doing so, he will invite new competition. In either case, market competition will raise the wage rates to the value produced by the marginal employee. And there is always a marginal employee.
Given the conditions which the employer faces, he must pay workers pretty much the values that consumers place on their contributions. If the employer pays a higher wage, he suffers a loss. If he does not then reduce his wage rate, his number of employees, and his production to what he can sell at a price that covers his costs, he will eventually be forced out of business. No businessman can long pay costs which he cannot get back from consumers.
Free market capitalism is the most efficient system. Free markets protect workers from any exploitation. Unions punish workers who do not tow their line and increase unemployment.
Based on the Essay of Percy L. Greaves, Jr. (How Wages are Determined).