Economic Progress, Unskilled Labour, and Unions

Over at Babbling Brooks, Damian has an interesting post about the Wal-Mart store closure specifically, and about economic progress in general. Andrew over at Bound by Gravity echoes Damian, adds his own 2 cents, and gets some interesting comments.

While they both make some good points, I think they are confusing two separate issues - both of which are important in their own right, so I felt it was worth a post to try and sort things out.

The first issue is whether it wouldn't be better for people at Wal-Mart to be "doing something far more productive, and far more rewarding with their working lives."

To which I would say, of course. Our economic strength is a measure of how much value everybody creates. So to make progress, either people have to find better ways to do what they already do - or they have to stop doing what they are doing, and do something new which adds more value.

This is in essence the 'Creative Destruction' which Joseph Schumpeter described brilliantly in 'Capitalism, Socialism and Democracy'¹, the process whereby old ways of doing things are destroyed by new ways - crafts are destroyed by assembly lines, switchboard operators are destroyed by automation and so on. In each case, society has an obligation to compensate those who have been left behind, both on moral grounds since they are the inevitable sacrifice we make to keep the system working and on practical grounds since the progress only continues if enough of the displaced people take things into their own hands and go find a new way to add value. But society also has an obligation not to prevent this creative destruction from happening, since it is the driving force which moves people from low value added jobs to high value added jobs.

Damian and Andrew connect this to Wal-Mart by suggesting that since working at Wal-Mart (for example) doesn't seem to add much value, society will be better off without these jobs. And since unionization would lead to higher pay and make these jobs more attractive to people, it is therefore a bad thing.

From my point of view, the exact opposite is true. Much in the same way that labour saving innovations will prosper much more in a society without slaves or cheap domestic servants, innovations (such as automated checkouts) will start to be used when the cost of what they are replacing (unskilled labour) gets high enough. So the surest way to make progress towards eliminating the dead-end, low paying jobs that Wal-Mart provides is to pay the people who do them as much as possible - thus giving Wal-Mart the greatest incentive to find ways to eliminate these jobs.

The second idea is the question of, given that these Wal-Mart jobs exist what is the appropriate amount for the workers to be paid?

To answer this question, I see two relevant numbers. The first is the supply point. That is, what is the minimum amount that Wal-Mart needs to pay to attract people to do the job. The second is the demand point. That is, how much can Wal-Mart afford to pay the workers and still make an acceptable return on investment.

Clearly, it is in Wal-Mart's interest to push wages as close to the supply point (as low) as possible. And clearly it is also in the workers interest to push wages as close to the demand point as possible. The natural advantage that Wal-Mart has in this battle is two-fold:

First, Wal-Mart is a single entity which makes decisions with one voice whereas the workers are all individual decision makers who decide what's best for them individually.

And second, because the jobs are unskilled, the supply of potential workers is larger than the demand for them (if it wasn't, we'd be at risk of inflation and the central bank would raise interest rates to restore this condition). So the individual workers are unable to push for more money because if they do, Wal-Mart will just say take a hike, we have other people who will work for what we offerred you.

This is why a union is needed - in order to level the bargaining playing field and allow the workers to keep for themselves a greater share of the value which they create.

As a final point, I think we should be careful to distinguish between work which is unskilled and work which doesn't add much value.

As the invention of the assembly line showed, it is possible at the same time to both vastly reduce the amount of skill needed to make something and at the same time vastly increase the amount of value added in the process. So while you might look at someone who's just standing by the door and greeting you as you come in and instinctively say, 'that person isn't adding much value', you have to consider that Wal-Mart's profit last year was over $9 billion and with no workers it would have been 0 (actually an enormous loss due to fixed costs, depreciation, etc.) - so clearly, even though the individual jobs are simple, the collective effect is to create a lot of value.

As for the specifics of this case, I can certainly understand why Wal-Mart did what it did. Like most people I can recount any number of union horror stories, and my experience with unionized workplaces is that they are usually pretty unpleasant and inefficient. And I don't know the details of the negotiations so it is possible that the union demands were outrageous and would indeed have made the store unprofitable. What I suspect, as do most people I'm sure, is that Wal-Mart could have afforded to reach a mediated settlement but that they chose instead to take a loss on this store to send a message to all the other ones.

What I find shameful about their decision is that for better or worse Canadian society has been constructed to allow unions to form and for all the problems I see with them, I'd still be awfully nervous about the future of labour conditions and income inequality in this country if they ceased to exist. By closing the store, Wal-Mart is saying that it doesn't want to play by the rules of Canadian society - and while it's (probably) not technically illegal for them to close a profitable store just because it has a union, it is certainly a violation of the spirit of the rules which we expect all companies to follow if they want to operate here.


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¹ I highly recommend 'Capitalism, Socialism, Democracy' (actually just the first part on capitalism, the parts on socialism and democracy aren't as good) to everyone (it's not long and it's quite readable). Schumpeter brilliantly defends capitalism against both 'left-wing' people who would rather see socialism instead and against 'right-wing' people who idolize the perfectly competitive marketplace as an ideal we should be striving for. It's definitely one of the books which had the biggest influence on my own ideas.