Who Are the Losers in Indiana’s Closed Shop?

January 9, 2006

Indiana Writers Group column for Jan. 11 and thereafter
544 words

by Eric Schansberg

Labor unions continue to be in the news sporadically. This summer’s 50th anniversary of the AFL-CIO merger was ironically paired with a maverick union group’s decision to break from the pack (the "Change to Win Coalition"). Then, just in time for Christmas, unionized transit workers in New York City hamstrung The Big Apple by going on strike.

Locally in recent weeks, Gov. Mitch Daniels cited Indiana’s "Closed Shop" laws as a significant reason behind Colgate’s decision to leave southern Indiana. And "right-to-work" bills have been introduced in both Kentucky and Indiana — "Open Shop" laws that would allow workers to join a firm that has union representation without being forced to join the union and pay dues.

Clearly, union representation drives up the cost of doing business. It’s more difficult to determine whether this is a deciding factor in a firm choosing to leave a state — or not to enter a state. In any case, artificially high costs cannot be helpful for promoting a state’s economic development.

Unions are a labor-market cartel whose members bind together as one bargaining unit to increase compensation. Like a cartel in a product market (e.g., OPEC), the cartel holds together by 1) promoting solidarity among members and 2) by limiting competition from outsiders.

All suppliers, whether suppliers of labor or lawn chairs, would like higher prices for what they sell. Unfortunately (for them), competitive labor and product markets work against that goal. Therefore, they try to restrict competition.

Closed Shop laws are an important element in promoting solidarity among union members. Obviously, their cartel is strengthened when people who join a unionized firm must join the union and pay dues. But unions are especially active in restricting their competition. In product markets, unions are avid proponents of trade protectionism — that is, protecting American jobs from overseas competition and protecting American consumers from the bane of lower prices.

In labor markets, unions are fond of using the law to limit their competition as well — from mandatory licensing to laws mandating a "prevailing (union)" wage for public-works projects. The use of threats and violence also are helpful for decreasing non-union competition.

Unfortunately, the political market activity of unions benefits their members at the expense of consumers, businesses, taxpayers and competing workers. Unions are clearly not pro-consumer, pro-business or pro-taxpayer. In fact, their legislative efforts drive up prices, costs, and government spending. Ironically, unions are not pro-worker, either — unless one defines workers narrowly as only those in a union.

In a word, unions are simply pro-union.

Finally, note that the relative success of the public-sector union in New York City is not surprising compared with the relative struggles of private-sector unions. In competitive markets in the private sector, firms cannot afford the higher costs of unions. Companies can neither afford to pay the compensation premiums that unions demand nor tolerate the inefficiencies that unions encourage.

In contrast, unions thrive in arenas with limited competition and the relatively high profits that follow — or in the public sector, with the deep pockets of taxpayer who aren’t paying attention.

With ever-increasing regional and global competition, private-sector unions will continue to fade. In the public sector, however, unions will continue to prosper — as yet another interest group whose members benefit themselves at the expense of others.

Eric Schansberg, Ph.D., a professor of economics at Indiana University (New Albany, is an adjunct scholar of the Indiana Policy Review Foundation. Contact him at eschansberg@inpolicy.org.


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