When Cities Get Into the Hotel Business: A Labor Ultimatum

May 22, 1990

719 Words
For release May 23 and thereafter
Digital mug shot available on request

By Dr. Eric Schansberg

A hotel and clothing union is pressuring the Indianapolis City Council to require workers at a municipally subsidized convention complex there to vote on whether they want to belong to a union. Otherwise, the union will not be able to guarantee “labor peace.”

What should a council do?

Before we start, there is the question of whether such a convention center or hotel should have been subsidized in the first place by taking money from taxpayers and giving it to a corporation.

There are various ethical and practical arguments against such subsidies. First, in what cases is it appropriate to take money from Joe Six-Pack to give to another individual or to a company? Second, was the subsidy necessary to attract the business? If not, it's a complete waste of money; if so, why is Indy building something the market considers inefficient?

In any case, it's difficult for an economist, let alone a politician, to know for sure.

We do know that taxpayers are unlikely to protest this sort of subsidy. Why? Because it is the case with most government interventions that costs are subtle and small per person. Meanwhile, benefits are concentrated and obvious to the recipient. This is a recipe for income redistribution by politicians from the general public to interest groups — a recipe cooked up by every level of government thousands of times a day. In regard to our hotel, city officials are likely to enjoy the perceived economic development benefits and the almost certain political benefits for merely handing out largesse to interest groups.

Now to the question of the moment: Given a public subsidy — of $48 million or of 48 cents — can the members of a city council impose restrictions on the way in which a convention center or hotel is built and operated?

Sure. Strings can be attached within the context of a "private-public partnership." Presumably, the extent of the string should be correlated to the proportion of the subsidy. It would be absurd to argue for massive intervention in the face of an only modest subsidy (but we're talking about government here; the absurd may be a standard of performance).

Beyond the council members’ ability to impose restrictions on the way in which the hotel is built and operated, should they impose such restrictions?

A council could do everything from mandating the equivalent of union membership for employees to setting a "living wage" policy — or a wide variety of other regulations (e.g., how Muslim maids are allowed to dress, cite a recent example in Indianapolis).

There are a number of reasons, however, to avoid such interventions. In the context of this particular project, a regulation could increase costs and spur inefficiency.

For example, if the city promotes the equivalent of a union, then wages will be artificially higher (above and beyond the union dues that will be paid). This is what one expects from any cartel — an economically defined group of suppliers who restrict entry in order to profit from their monopoly power. OPEC is a cartel in a product market, resulting in artificially high prices. Unions are a cartel in labor markets, resulting in artificially high wages. Cartels are a good deal . . . if you're in the cartel.

Or what if the city establishes a "prevailing wage" during the construction of the hotel — or a "living wage" during the operation of the hotel? Again, wages will be increased above the competitive outcome.

Some might protest that workers will be exploited by the hotel owners. But the relevant labor markets are competitive, so workers must be paid an appropriate market wage. (Could the hotel get away with paying its secretaries, construction workers and managers only $6 per hour?) If its employees are not paid a competitive wage, they are free to choose to work elsewhere — and will do so.

Beyond this particular project, a city council sets a bad precedent with subsidies and significant labor regulation. If it is willing to take money from taxpayers to give to corporations in this context, why not in other situations as well? If Indianapolis government interferes with critical workings of this project, future entrepreneurs will know to expect more intervention and higher costs.

This is not an effective strategy if a city council intends to promote fiscal prudence, sound government or economic growth.

D. Eric Schansberg, Ph.D, an adjunct scholar of the Indiana Policy Review Foundation, teaches economics at Indiana University (New Albany). He is the author of “Turn Neither to the Right nor to the Left: A Thinking Christian's Guide to Politics and Public Policy.” Contact him at eschansberg@inpolicy.org.


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