Labor Regulation—Does Anyone Benefit?

Deregulating Labor Relations, by Dan C. Heldman, James T. Bennett, and Manuel H. Johnson, Dallas: The Fisher Institute, 1981, 182 pp., $12.95.

The propensity for government to intervene in private market transactions has been nowhere more evident than in the labor market. Because what is bought and sold in the labor market (labor) is physically inseparable from its owner (the worker), and because payments to workers constitute the bulk of total income for our nation's citizens, public interest in labor-market transactions is understandable. What is not clearly understood, however, is that government regulation designed to help workers will in some cases harm them—and in other cases harm some while helping others. These undesirable side effects of regulation will occur whenever regulation is unnecessary to the efficient operation of a free labor market.

Deregulating Labor Relations is a book written to heighten the awareness among the public and among public officials that regulation of the labor market, like regulation in other markets, can impose more in social costs than it generates in social benefits. It spells out the conditions under which regulation would be justified, debunks the notion that labor is not a commodity and therefore stands exempt from the required regulatory justification, and offers a hypothesis to explain what others have called "regulatory fever" vis-a-vis the labor exchange. It provides an overview of both substantive labor relations regulation (the minimum wage, the Davis-Bacon Act, and the Occupational Safety and Health Administration) and procedural regulation (the laws governing collective bargaining), and it attempts to quantify and aggregate the social costs of regulation. In addition,the authors describe market alternatives to government regulation with respect to both collective bargaining and wages.

A book advocating deregulation must state the philosophical foundations of free markets and the possible situations in which free markets might fail to enhance social welfare. It must detail the regulatory provisions that exist, spell out their possible consequences, and try to get a fix on their actual consequences. The approach taken could be extensive, covering all labor-market regulation, or cover one program (or set of programs) intensively. Moreover, the author of such a book must choose to orient it toward the nontechnical reader or toward fellow professionals (economists, in this case). While the general outline of Deregulating Labor Relations is logical, it is too incomplete to be extensive, too superficial to be intensive, and too terse in its theoretical sections to be intelligible or convincing to the lay reader.

For an example of superficiality, 70 percent of the estimated total costs of labor-market regulation are assigned to OSHA regulations, but the essential difficulties and guesswork involved in arriving at OSHA-related cost estimates are not even mentioned. Also overlooked is the noncompliance with minimum wage and OSHA regulations brought on by weak federal enforcement—behavior that substantially blunts potential adverse regulatory consequences. The authors' flat assertion that OSHA regulation has been shown to have no beneficial effects whatever does little justice to the difficulties and disparities of evaluative research. While superficiality perhaps could be tolerated in a truly extensive review of labor-market regulation, this book completely ignores some very important, comprehensive, and expensive regulatory programs affecting labor—such as workers' compensation, pension reform legislation, the federal contract compliance program (whose efforts at eradicating discrimination are separate from the Equal Employment Opportunity Commission), and immigration policy.

The strength of the book lies in its analysis of the federal regulation of collective bargaining. The bulk of chapters three and five are devoted to this topic, and it is here that the authors' analysis is most novel and complete. They present strong evidence that the government's role in labor relations is hardly impartial, and they outline in some detail how they think the labor market would operate without the current government protection of unions.

In brief, the authors suggest that, even without current government encouragement and the right for a union to represent exclusively a given body of workers, workers would join together in collectivities and hire agents to represent them. They argue that employees need a variety of data to evaluate their labor contract with an employer, and there are economies of scale in the production of information (the per capita costs of acquiring information fall as the size of the group rises). The same argument holds for the process of transmitting offers to, and receiving counteroffers from, the employer.

It could plausibly be argued, however, that the information generated by unions is something akin to a "public good" (a good whose consumption by one does not diminish the ability of others to consume it and whose consumption cannot be easily denied to nonpaying customers). It is a standard economic tenet that public goods are underproduced by the private market because potential suppliers are aware of the "free rider" problem. If worker collectivities exist to provide services that have the characteristics of "public goods," can one justify government encouragement of unions on the grounds that a free market would underproduce these important services? Perhaps the authors have a telling line of reasoning on this issue, but it is not in their book.

Another issue ignored in their vision of worker collectivities acting without the right of exclusive representation is the possibility that such collectivities would break down into subsets and multiply over time. Labor cartels, like others, would face enormous stresses in maintaining themselves in a freely functioning market.

The failure of the authors to recognize explicitly the difficulties in forming and maintaining worker collectivities minimizes the effects of deregulating the procedural aspects of labor relations. It could seriously be doubted that unions would survive, and this observation raises the question of what role unions have in a market economy. Are unions labor cartels to be discouraged because of the social losses associated with monopoly? Are they (as the authors suggest) "firms" providing information-gathering and negotiating services that should be allowed to exist on an unsubsidized and unprotected basis? Are they entities producing useful services that would be underprovided were it not for government encouragement? Or, as suggested by Robert Macdonald in 1967, are the costs associated with trade unions the price societies must pay to secure the allegiance of blue-collar workers to the market system? These questions should be addressed, but they were not.

Despite the incompleteness and unevenness of this book, it provides useful reading for those interested in federal regulation of collective bargaining. While the authors do not provide an exhaustive or definitive analysis of this topic, they have opened a line of inquiry that few have dared to advance. For this reason alone, the book is well worth reading.

Robert Smith is a professor at Cornell University in the School of Industrial and Labor Relations.