Economics in One Lesson

Do Unions Really Raise Wages?
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Economics in One Lesson
whole cost comes out of the industry’s profits without throwing any
firm out of business. Such a result is not likely, but it is conceivable.
Suppose we take an industry like that of the railroads, for example,
which cannot always pass increased wages along to the public in the
form of higher rates, because government regulation will not permit
it. (Actually the great rise of railway wage rates has been accompanied
by the most drastic consequences to railway employment. The num-
ber of workers on the Class I American railroads reached its peak in
1920 at 1,685,000, with their average wages at 66 cents an hour; it had
fallen to 959,000 in 1931, with their average wages at 67 cents an hour;
and it had fallen further to 699,000 in 1938 with average wages at 74
cents an hour. But we can for the sake of argument overlook actuali-
ties for the moment and talk as if we were discussing a hypothetical
case.)
It is at least possible for unions to make their gains in the short run
at the expense of employers and investors. The investors once had liq-
uid funds. But they have put them, say, into the railroad business. They
have turned them into rails and roadbeds, freight cars, and locomo-
tives. Once their capital might have been turned into any of a thou-
sand forms, but today it is 
trapped,
so to speak, in one particular form.
The railway unions may force them to accept smaller returns on this
capital already invested. It will pay the investors to continue running
the railroad if they can earn anything at all above operating expenses,
even if it is only one-tenth of 1 percent on their investment.
But there is an inevitable corollary of this. If the money that they
have invested in railroads now yields less than money they can invest
in other lines, the investors will not put a cent more into railroads.
They may replace a few of the things that wear out first, to protect the
small yield on their remaining capital; but in the long run they will not
even bother to replace items that fall into obsolescence or decay. If
capital invested at home pays them less than that invested abroad, they
will invest abroad. If they cannot find sufficient return anywhere to
compensate them for their risk, they will cease to invest at all.
Thus the exploitation of capital by labor can at best be merely tem-
porary. It will quickly come to an end. It will come to an end, actually,
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not so much in the way indicated in our hypothetical illustration, as by
the forcing of marginal firms out of business entirely, the growth of
unemployment, and the forced readjustment of wages and profits to the
point where the prospect of normal (or abnormal) profits leads to a
resumption of employment and production. But in the meanwhile, as a
result of the exploitation, unemployment and reduced production will
have made everybody poorer. Even though labor for a time will have a
greater 
relative
share of the national income, the national income will fall
absolutely; so that labor’s relative gains in these short periods may mean
a Pyrrhic victory: they may mean that labor, too, is getting a lower total
amount in terms of real purchasing power.
Thus we are driven to the conclusion that unions, though they may
for a time be able to secure an increase in money wages for their mem-
bers, partly at the expense of employers and more at the expense of
nonunionized workers,