Hayek's The Constitution of Liberty - Institute of Economic Affairs

h ay e k ’ s t h e c o n s t i t u t i o n o f l i b e r t y
s t o p p i n g c o e r c i o n i n e m p l o y m e n t
coercion is today the main aim of unions’ (275). Having a
monopoly of labour is crucial to this aim, for if unions effectively
control all the potential workers, employers must bargain with
them. Unions thus use coercive means ‘to force unwilling workers
into membership and to keep non-members out of employment’
(268). If governments followed the Rule of Law, they would prevent
coercive labour monopolies; but instead they have sanctioned or
tolerated hostile picketing in large numbers, closed or union shop
contracts, and secondary strikes and boycotts – all techniques
that Hayek would prohibit (274–5, 278–9). Unions get away with
coercive techniques partly because they wield great political influence
and partly because the public mistakenly thinks that union
activities benefit the entire working class. Economists can render a
public service by correcting this misconception (273–4).
Unions claim to benefit all workers by raising the general
level of wages. To refute this claim, Hayek builds on a distinction
between real wages and money wages – a distinction that
had been important to his business cycle theory and his critique
of Keynesian economics. In a 1942 essay he notes that ‘real wages’
commonly refers to ‘the relation between wages as received by
the worker and the prices of the commodities on which he spends
those wages.’ By this definition, which centres on the worker’s
purchasing power, real wages can increase if the prices of desired
commodities go down or decrease if their prices go up. Inflation
pushes up money wages but not real wages, since the price of the
goods purchased by workers also rises (1948: 252).
Hayek has no doubt that unions can increase workers’ money
wages, but can they increase real wages for all? Hayek’s answer
turns on a distinction between ‘all the employed’ and ‘all wishing
to work.’ By limiting the supply of labour, unions might be able to
increase the real wages of their own members and perhaps even
those of all the employed; but as a result some workers will be
unable to find jobs. As Hayek explains, ‘the real wages of all the
employed can be raised by union action only at the price of unemployment.’
Taking unemployed workers into account, unions
‘cannot in the long run increase real wages for all wishing to work
above the level that would establish itself in a free market.’ Besides
distorting the wage structure, the practice of excluding workers
from highly paid occupations produces inequalities among
workers and amounts to ‘the exploitation of the relatively poor
by the better-off.’ Also, while union activities can increase the real
wages of employed workers, empirical evidence shows that real
wages ‘have often risen much faster when unions were weak than
when they were strong.’ Hayek concludes that coercive unionism,
despite its claim to benefit all workers, serves the interest of a
particular group. It increases real wages for organised workers,
but pits them against others who ‘will find employment only in
the less highly paid jobs’ or else ‘will not be employed at all’ (270;
cf. 270–71).
An argument heard frequently today is that real wages have
steadily lagged behind society’s overall productivity gains, so that
for workers to receive their just share of the fruits of economic
growth, the power of unions to bargain on their behalf must be
strengthened. This argument assumes that union practices raise
productivity. Hayek undercuts it by insisting that union practices
lower productivity, rather than enhancing it. In most European
countries, unions employ ‘restrictive policies of a “make-work”
character’ that ‘necessarily reduce the productivity of labor all
around and therefore also the general level of real wages’ (271; cf.
272–3).
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