Unions and monopolies, and exits

Matt Yglesias has a neat post up:

(Hat tip: E.D. Kain.)

Here’s the deal:

You may not like Miller or Bud Light, but Miller and Anheuser-Busch both run unionized breweries. And as Loomis notes, one consequence of the cartelization of the American beer brewing industry was to generate monopoly profits for the large breweries. This was good not just for “Miller executives” but for all the stakeholders in the enterprise. When a unionized firm is in a non-competitive marketplace, the union is in a strong position to force the firm to share some of the monopoly rents with the workforce. When the market becomes more competitive, not only does the unionized firm lose market share but the union in general loses leverage.

Unions and monopolies go together like tequila and stripp– er, I mean, like peanut butter and strippers.  I mean chocolate!  Peanut butter and chocolate!

Suppose you have a one-industry town — built around “the plant” or “the mill” or some such, because capital is hard to come by and the first guy to come along with enough of it did the regulatory-capture dance with the local authorities.  It’s not hard to see how, in a world with high transaction costs, Mean Mr. Capital — who has a monopoly on local jobs — can run roughshod over the poor, honest, hard-working laborers: there’s very little other work in town, and leaving is difficult.  They must buy jobs from the monopolistic employer.

But as Bryan Caplan points out in terms of marriage “markets”, there are actually two markets in this town: one in jobs, and one in labour.  If the locals set up a union, that union has a monopoly on labour.  If Mean Mr. Capital wants workers for his widget factory, he has to deal with the union.  Now there’s an equilibrium where power is roughly balanced between labour and capital.  If MMC Inc. is (one of) the only producer of widgets in the widget market it serves, both MMC himself and Widget Workers Local 314 can get fat and happy off of those monopoly rents.

Things start to fall apart, though, once market participants can exit this hot little three-way.  In particular, if the widget market opens up — like the beer market in Matt’s post above, or more generally the global manufacturing market since, I dunno, 1970 or so — those monopoly rents MMC Inc. was accruing from its widget sales start to disappear.  This leads to excitement in the labour market.  Similarly, if MMC Inc. can easily build a new factory in South Carolina, free from the tyranny of WWL 314, the union’s in a spot of trouble, and if another widget plant opens up in Exampleville — or perhaps a frobnitz factory with a reasonable amount of carry-over, such that frobnitz jobs are substitute goods for widget jobs — MMC Inc. will have to cough up more benefits and compensation in the next contract review if it wants to keep the favour of WWL 314.

Extending this argument to public-sector unions is left as an exercise for the interested reader.


3 Responses to “Unions and monopolies, and exits”

  1. August 19, 2011 at 05:43

    This made me think of Paul Graham’s An Alternative Theory of Unions essay. Something of a second phase effect after the company town model broke up.

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