May 2001
Union Militancy Hurts the Poor
by Fred McMahon
As strikes spread across an economically-stagnant British Columbia, union leaders seem blind to the damage they are doing to the economy. Their rigid militancy stands in sharp contrast to the positive action that unions have taken elsewhere.
Back in the 1980s, as the Dutch and Irish economies were sinking into gloom, unions in those nations changed course radically. Once-militant Dutch and Irish union leaders demanded wage moderation from their own members. Unions said it was time to increase profits— that’s right, unions demanded wage moderation to boost profits.
Increased profits, the unions argued, would spur investment, create jobs, raise productivity, and ultimately lead to sustainable wage increases. This would help everyone, the unions said, especially the less well off who would benefit most from job and wage growth.
That wasn’t the end of union radicalism. Instead of supporting high taxes so government could pay inflated wages to public-sector unions, Dutch and Irish unions called for lower taxes, so all workers—unionized and otherwise— could take home more of their money.
Wage moderation and government cuts paid off handsomely. Dutch and Irish unemployment, which had been approaching 20 percent, has fallen to under 5 percent. Both nations now boast powerful economic growth.
The success has been so great that all sides of the political spectrum support the new policy mix. In the Netherlands, for example, Prime Minister Wim Kok, formerly leader of the nation’s largest union group and vice-chair of Socialist International, pushed through the most radical market-oriented reforms and government cuts.
British Columbia unions, on the other hand, just keep escalating their militancy. They claim to help the average worker, but their strategy might well be summed up as: "Make the poor pay."
Union members in British Columbia are much better paid than other workers. They earn a median wage of $20.50 an hour, about a third more than non-unionized workers whose median wage is $13.75 an hour. But most unionized workers are in the public sector. Everyone of us, rich and poor alike, pay taxes to subsidize these affluent workers.
High public-sector wages aren’t based on productivity or service provided. They’re based on political muscle—how much the governing party is dependent on union support, union money, and union workers during political campaigns.
If workers in a private company demand exorbitant wages, unrelated to productivity, the company either rejects the demands or goes bankrupt. When public-sector unions make unreasonable demands, the government doesn’t go bankrupt meeting those demands. It increases your taxes. And in BC, there have been a lot of tax increases.
High taxes hurt us all; they kill economic activity and jobs. People who are at the low end of the scale, struggling to enter the labour market, bear the greatest cost. Everyone, except government employees, suffers from the stagnant wages that are a result of low economic growth.
Unions have even more power when they control an essential monopoly. Public transit is a good example. Vancouver transit workers are the highest paid transit workers in Canada. The top rate for a bus driver in Vancouver is over $20.00 an hour. With generous side benefits and opportunities for overtime, the package is potentially worth over $60,000 a year.
Transit workers demanded an 18 percent increase over three years, then went on strike to back up these demands. Unions know these terms are unreasonable economically and are obtainable only because unions hold monopoly power over public transit. That’s why unions react so harshly when anyone tries to break their monopoly. Thus, when charter boat operators tried to provide a desperately-needed service for Vancouver commuters during the current strike, the union blocked the boats using tactics of questionable legality.
Private sector unions can also damage the economy, particularly when they have the power to shut down a company or even a whole sector. If a union can close down a company completely, that company may not have the option of rejecting unreasonable, profit-destroying demands. And that’s bad for the economy.
Profits had virtually disappeared in Ireland and the Netherlands—gobbled up by militant wage demands and big taxes—before unions became economically realistic. Without profits, the incentive to invest disappears, and without investment, growth is weak, and unemployment rises.
Not surprisingly, the affliction that hit the Dutch and Irish economies now plagues British Columbia. A decade ago, BC was one of Canada’s richest economies; it boasted one of the nation’s lowest unemployment rates. But economic activity in the province has fallen below the national average and unemployment is above the national average. Unfortunately, the Dutch and Irish solution won’t work here. BC unions have shown no concern for the economy as a whole.
The famous economist Mancur Olson once hypothesized that a low level of unionization was best for the economy because it allowed flexibility and freedom in the labour market. A high level of unionization, he argued, was second best, since unions would then feel responsible for the overall health of the economy. A moderate level of unionization—as British Columbia now has, where about a third of workers are unionized—was the worst situation, he said, because unions would be concerned only with trying to gain advantages for their members, regardless of how this would affect the overall economy or other members of society.
Even if the Dutch and Irish solution was workable here, it would not be ideal. Economic health hangs on a fragile agreement between unions and government. When that agreement collapses, it brings down the economy, too. One of the reasons for the great economic decline in the Netherlands prior to recent reforms was the failure of a union-government agreement in the 1970s. That failure resulted in falling economic growth and rising unemployment. Now, the Irish agreement may be becoming unhinged. The threat of inflation is growing and unions have started talking more militantly.
The best solution is a flexible labour market, where the rights of both employees and employers are protected from overweening union power. If BC is to return to economic health, the next government must re-balance labour laws so that powerful unions can no longer hold the province to ransom. Among other measures, the government should consider eliminating the right to strike in the public sector, increasing the ability of companies to bring in replacement workers, and enacting "right-to-work" legislation, which would give employees the freedom to quit or disobey their union. These policies would benefit all British Colombians, not just a privileged minority.
Fred McMahon (fredm@fraserinstitute.ca) is Director of the Social Affairs Centre at The Fraser Institute. Formerly with the Atlantic Institute for Market Studies, his most recent book is Retreat from Growth: Atlantic Canada and the Negative Sum Economy.
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