12/13/2012 12:25 pm ET Updated Feb 12, 2013

Collective Bargaining Is Price Fixing

When a group if businesses decides to "fix" their prices, that is not compete against each other, they violate the antitrust laws and the owners can end up in jail. When a group of workers do that by authorizing a labor union to bargain "collectively" with their employer over pay, they are fixing the price for their labor. But this is not an antitrust violation because Congress exempted labor unions from the reach of the law. Yet that doesn't mean the workers and their union are not fixing their prices. They are agreeing on an hourly wage that is higher than the market wage for that labor. So if company A has been organized by a labor union, the union will no longer accept the wage the company was previously paying its workers, say $10/hour. It will demand significantly more, say $15/hour plus generous health and retirement benefits. Meanwhile Companies B and C, which are not unionized, and compete against Company A, will continue to pay their workers the market price of $10/hour.

We call this "collective bargaining." That is a polite term for fixing the price of labor above what A would otherwise pay, the market price. It might be good for A's workers, but only in the short-term. Company A cannot stay in business and pay above market wages. It will be forced to raise its prices in order to compete with B and C. But in a competitive market, A cannot raise prices without losing its customers to B and C. So A goes bankrupt.

This is what happened to the Big Three automakers. For decades they had a monopoly in the U.S. car market. Americans did not buy many foreign-made cars until the 1970's. When the market opened up, it turned out many Americans preferred foreign cars because they were superior in quality, style and gas mileage. The Big Three were so hidebound by collective bargaining agreements they were unable to keep up with research and development and the quality slipped. A huge portion of the U.S. auto market was lost to foreign manufacturers, many of whom produce their cars in this country at non-union plants in the South.

The National Labor Relations Act, a product of the Depression, desperately needs reform. Workers are no longer (if they ever were) helpless and unable to negotiate their own pay. The country is replete with plaintiff-friendly wage and hour lawyers looking for cases against employers who fail to pay wages, cheat workers out of overtime and vacation pay, and otherwise don't honor their obligations to their employees. (And these cases are taken on a contingent-fee basis, meaning the workers do not pay unless successful. If they are, the Fair Labor Standards Act awards double damages and attorney fees.) Unions are extremely inefficient, collect dues from workers without their consent, and otherwise operate under an extortion-based business model that I have described. The unionized firm is effectively bled to death while the union is enriched through mandatory (in 26 states, now minus Michigan) dues from the workers.

Workers should be paid the market price for their labor, be paid on time, get time-and-a-half for overtime, and will now have health benefits as provided by federal law. But collective bargaining jacks up the price of labor too high and makes no economic sense unless our labor policy is to enrich unions at the expense of workers.