Carping at Megan again, sorry by mattsteinglass
June 17, 2008, 2:13 am
Filed under: Economics

So the charming but tragically pro-business-CW Megan McArdle responds to Ezra Klein and Kathy G. on whether unions make your firm less productive. Kathy G. and Ezra say they don’t. Megan says the evidence Kathy G. cites doesn’t say what she claims it says. There follows a bunch of speculation about how unions might or might not make your firm more or less productive, which doesn’t seem to me to be particularly heuristic, and then:

And the German experience belies the notion that “cooperative management” actually makes plant operations productive enough to compete with non-union shops; German companies are relocating east as fast as their hot little feet can carry them.

This is kind of silly. First, it’s anecdotal and vague, but more importantly, wages in Eastern Europe are half those in Germany. To the extent that German firms are relocating to Eastern Europe, you have no idea to what extent this is driven by lower union participation in Eastern Europe and to what extent it’s driven by lower wages. The latter factor most likely dwarfs the former.

I think Ezra’s most persuasive argument is that if you are looking for an explanation of why business types oppose unions, the simplest, most powerful and most elegant explanation is that unions take away profits and redistribute them to workers rather than letting business types pocket them and take them home. Whatever justifications may be presented in terms of reduced productivity should be examined with an extremely jaundiced eye.


6 Comments so far
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The European Union’s economic policy is meant to cause things like German firms to move east.

It’s not some failure of German economic planning.

Comment by christophercolaninno

Right, but wages are lower because productivity is lower. The pro-union argument is that unions raise productivity above its natural non-union rate; there’s no evidence that this is true.

Comment by janegalt

How does the fact that non-union workers in Eastern Europe are less productive than union workers in Germany show that unions make workers less productive? The data runs the opposite direction from your argument.

In fact the lower productivity and lower wages of Eastern European workers are a legacy of Communist underdevelopment; they’re less expensive than Germans for more or less the same reasons Chinese or Indian workers are, which have nothing to do with unions. And the pro-union argument isn’t necessarily that unions on the whole make workers more productive, it’s that there is no evidence that they make workers less productive.

Comment by mattsteinglass

Right, right. Think of it this way. The natural equilibrium of salaries (never perfectly reached, but roughly) between countries is that they equalize where the worker salary adjusts fully for the lower productivity. That’s why jobs in low-productivity industries tend to relocate–the western wages don’t equalize.

Germany, however, is losing highly skilled jobs in things like the auto industry. There’s a reason that American cars face competition from Japanese and German cars, but not Chinese or Indian cars–auto manufacturing is highly skilled labor with a large capital base. When you lose those jobs, that’s telling you that the union wage/productivity ratio is above the market rate.

Comment by janegalt

Differences in productivity largely account for differences in wages across the spectrum of entire economies, but they don’t come close to accounting for those differences in particular industries or firms. A Vietnamese software engineer is perhaps half as productive as an American software engineer but is happy with a salary perhaps one-sixth as high. That’s because of purchasing power parity: a Vietnamese software engineer can make a PPP-adjusted salary of $100,000 that’s only $20,000 in nominal dollars. In other words, since the rest of the economy is so much cheaper/less productive, the parts of it that are relatively productive can underbid OECD competitors by a large margin. Carve out high-productivity zones within those low-productivity economies — usually inside special industrial zones with their own transportation and telecom infrastructure, etc. — and you can achieve huge efficiencies on labor costs. Unless I’m mistaken this is pretty much the whole story of globalization.

Wages in Rumania are lower than those in Germany because the Rumanian economy as a whole is less productive. This means everything costs less. But the Rumanian workers you hire at your new BMW plant are going to be much more productive than the average worker in the Rumanian economy, because they’re going to be making BMWs. That means you can pay them double the average Rumanian salary and half of a German autoworker’s salary and they’ll still feel richer than a German autoworker. And if you only need to hire 1.5 times as many Rumanians as Germans, you’re saving a quarter of your labor costs.

The fact that US computer and software firms are carrying out most of their expansion abroad these days, in countries like India, China and Vietnam, even though computer factories and software firms in the US are largely non-unionized, tells me that shifts in these industries from richer countries to poorer countries don’t have much to do with unionization levels.

Comment by mattsteinglass

I’m guessing that Megan’s anti-union stance might have to do with the time she spent living in Philly.

Comment by Chris

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