Tue, Dec 29 2009 10:11 AM Solredime

Can deflation end unions once and for all?

It is often remarked that the existence of unions is proof of the inefficiency and failure of markets to pay workers adequate wages. That workers, as a great multitude with little individual influence, must form socialistic collectives in order to provide a counterweight to the great power wielded by corporations. Moreover, since unions have virtually no power of their own, and must be granted special rights and privileges by governments; governments themselves becomes exalted as an entity both capable of, and requiring intervention in markets.

The usual counterarguments are that theoretically, wages ought to be kept sufficiently high due to competition for labour between corporations themselves. Historical examples can often be quoted to support this view. In 1914 Henry Ford almost doubled wages to $5 a day (more than 110 dollars in current terms) in order to attract workers from his competitors, and he was able to do so largely due to the incredible efficiency he had achieved using machinery and conveyor belts, technologies ironically regarded by some as altogether destructive of employment. Some go further to say that government intervention through taxation, regulation, anti-trust laws, etc., restricts competition in the first place, helping to create this problem.

And thus unions' existence is first ensured by government intervention, and then enabled through it. Yet there is something even more fundamental and sinister at work in making unions necessary, which seems to have, to my knowledge, gone largely unaccounted for.

This is the factor of inflation. All modern states exist in an almost permanent state of price inflation, infrequently interspersed with bouts of deflation, or fears thereof caused by disinflation. It is my belief, that this is the most fundamental reason for which unions can exist. If the role of a union is to raise wages for its members, and a currency is being devalued from year to year, were workers to continue being paid the same nominal wage, then their real wage would be going down. Thus, unions exert power upon employers to raise nominal wages in line with inflation. Firms themselves are often unwilling to raise wages because to do so they must also raise nominal prices – something highly unpopular.

Firms often end up absorbing a part of inflation through efficiency gains and timorousness in raising prices. We already know from game theory that oligopolistic markets face a kinked demand curve, that any firm individually raising prices will lose market share, and that the only "fair" solution to this for all firms involved would be an illegal cartel raising prices in accordance with inflation simultaneously.

If governments pursue a doctrine of inflation, then nominal prices, which are sticky upwards, will have difficulty being raised in line with inflation, causing firms to underpay employees in real terms, leading to a clamour for unions.

If, on the other hand, governments pursue a doctrine of price deflation due to a stable money supply, then as the supply of goods and services increases, their prices will fall as firms vie for market share in price wars beneficial to consumers; while employers will have a hard time reducing nominal wages, which are sticky all the more so downwards. Thus will the real purchasing power of employees rise, without the need for unions, and in accordance with productivity increases passed on through a competitive slashing of prices.


P.S. I am fully aware that a corporation itself is a collectivist legal construct manifested only through government help, i.e. limited legal liability, acts of incorporation, etc. and as such is not an entirely free market phenomenon, making socialist criticism of corporatism as an example of the inequity of free markets as a cheap straw man, if one they may be unaware of.

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