Free Staters are taking over New Hampshire. Or not.

Diane Lacy, President of the NH State Employee Association (via Skip Murphy):

let’s be clear; the speaker [of the NH House, Bill O'Brien] is not exactly our typical Republican. He is a Free Stater. These people, these sponsors that are going out there with the legislation are Free Staters. They are not the typical Republicans.

...

We’ll have a conversation with our neighbors, all of our communities, about the values that are important to NH because one thing is clears: NH is being taken over by the Free Staters and we are not going to stand for it.

I don't know what Diane Lacy is smoking.

A Free Stater is a person who has moved to New Hampshire as part of the Free State Project. The Free State Project is "an effort to recruit 20,000 liberty-loving people to move to New Hampshire. We are looking for neighborly, productive, tolerant folks from all walks of life, of all ages, creeds, and colors who agree to the political philosophy expressed in our Statement of Intent, that government exists at most to protect people's rights, and should neither provide for people nor punish them for activities that interfere with no one else." (According to the website.)

Bill O'Brien is not a Free Stater. And it's pretty easy to figure this out, since he's been living in New Hampshire since before the Free State Project was founded in 2001.

(There is a small group of people who lived in New Hampshire at that time, who are technically Free Staters. They did this by signing the statement of intent before New Hampshire was chosen in 2003. Bill O'Brien did not do this. And most people who did this are Libertarian Party activists and hardcore libertarians, which Bill O'Brien is not.)

If Lacy had stated that Bill O'Brien was a Tea Partier, on the other hand, that would be plausible.

And what about sponsoring legislation and taking over New Hampshire? I've seen persuasive arguments that Free Stater state representatives are having some influence on NH politics. They certainly seem to sponsor plenty of legislation. But with only 12 or 15 representatives, out of 400, that influence is very limited.

Not only that, but many Free Staters actually oppose the right-to-work legislation Lacy is concerned about. Here's the 2004 platform of the Libertarian Party on this issue:

The Principle: We support the right of free persons to voluntarily establish, associate in, or not associate in, labor unions. An employer should have the right to recognize, or refuse to recognize, a union as the collective bargaining agent of some, or all, of its employees.

Solutions: We oppose government interference in bargaining, such as compulsory arbitration or the imposition of an obligation to bargain. Therefore, we urge repeal of the National Labor Relations Act, and all state right-to-work laws which prohibit employers from making voluntary contracts with unions. We oppose all government back-to-work orders as the imposition of a form of forced labor. [Bold added.]

If Diane Lacy wants to return to reality, I recommend this article about changing Republican politics by Betsy Russell in the Idahoan Spokesman-Review. It draws on the views of four political science professors.

Can you guess what they say?
Hint: it starts with "T", and ends with "Party".

The fallacy of composition, union version

Earlier, I used an equation and some data from Richard Freeman and James Medoff's book What Do Unions Do? to estimate the deadweight losses created by New Hampshire unions.

But I committed a subtle fallacy of composition, which biases my estimate downward. (The fallacy of composition arises when someone assumes that the part -- in this case, New Hampshire -- works the same as the whole -- the United States. It doesn't.)

I also want to clarify what exactly deadweight losses are, because, in retrospect, it seems that my earlier essay could easily be misinterpreted.

This is a diagram of the unionized labor market:



The demand curve slopes downward because, as the wage decreases, employers want to buy more labor. The supply curve slopes upward because, as the wage increases, more people want to work in this sector.

In a perfectly competitive market, the wages offered and the amount of labor hired would be set at the intersection of the supply and demand curves. If the wage were higher, the available workers would outnumber the available jobs, and employers would find that they could lower wages and still get all the labor they need. If the wage were lower, the available jobs would outnumber the available workers, and employers would have to raise wages in order to attract more workers into the market. This feedback effect leads employers to offer the wage where the two lines intersect, where the quantity of labor demanded and the quantity of labor supplied are equal.

But if workers bargain as a union, instead of accepting the competitive market wage, they can set the price-- in effect, choosing any point they'd like on the demand curve. Higher wages, however, come at the expense of fewer jobs, since employers want fewer workers at the higher wage.

This creates the deadweight loss. Some workers would like to work at the competitive market wage but cannot, and the businesses that would be happy to hire them at that wage are unable to. The potential benefits from employment that go unrealized are deadweight losses, and these losses are represented by the red triangle. The area of this triangle is what I was trying to find.

To arrive at the earlier conclusion, I used data from the federal level to estimate the elasticity of demand (a measure of the shape of the demand curve), but this is not similar to the elasticity of demand in the New Hampshire market by itself. The New Hampshire market in isolation has a higher elasticity of demand (that is, a flatter demand curve, meaning employers are more sensitive to changes in wages), because employers have the option of crossing the border into a different state. To do the same thing on the U.S. level would require leaving the country entirely, which is more difficult.

If the earlier graph represents my earlier estimate, the revised estimate should look more like this:



This graph shows that the union wage differential leads some businesses move to different states, so that the demand for New Hampshire union labor is lower. This increases deadweight loss, first because there are more people who would like to work at the market wage, but can't. Second, when businesses leave the state to avoid the higher union wages, the businesses do better, but the costs of moving are pure deadweight losses, as opposed to the higher wages, which redistribute wealth from employer to employee (businesses shift from blue to smaller red losses).

The takeaway from all of this is that my earlier estimate, that the deadweight losses due to unions were .05% of New Hampshire GDP, is probably too low. Watch out for that fallacy of composition.

Apples, oranges, and right-to-work

Don Ewing at GraniteGrok argues that right-to-work laws decrease unemployment, increase personal income growth, and increase private sector employment.

But Don forgets that correlation does not imply causation.

In real life, states with right-to-work laws differ systematically from states without them, and this invalidates the comparisons.

Wikipedia has a convenient map of right-to-work states (in blue):



Clearly these states are not randomly distributed across the map, leaving plenty of room for geographical factors to influence the numbers (notably unemployment rates).

The personal income measure used by the BEA— I think this is what Ewing was referencing— is the sum of all income earned, meaning that immigration patterns influence the growth rates. (A growing population leads to a higher total personal income.) And, according to research by Harvard economist Edward Glaeser, among others, one of the main determinants of immigration is the elasticity of the housing supply— that is, how easy it is to build new houses as the price of houses increases. For all we know, personal income growth in right-to-work states is being driven by the housing market. The same applies to growth in private sector employment.

Or the differences could be driven by one of a thousand other factors.

From what I've seen, using statistics to tease out the effects of particular state policies is ridiculously hard to do, and requires a much stronger statistical background than I have. This is a lot of the reason why I didn't even broach the subject in my union essay.

A quick search for an academic analysis of the issue found only this paper by Thomas Holmes. By comparing bordering counties in different states, he finds that a business-friendly regulatory climate increases the share of employment in manufacturing by about one third. But this study looks only at manufacturing, and only at counties on the borders of states (which means the estimate is inflated by an unknown amount). And the contribution of right-to-work laws to business-friendly regulatory climates is unknown.

So we can guess that right-to-work laws will increase the share of our employment in manufacturing by anywhere from zero to one-third. Which doesn't get us very far.

Should libertarians support unions?

As a result of pending anti-union legislation, I have been researching union issues for the last few weeks, especially with respect to libertarian philosophy. Historically, libertarians, in a political coalition with business interests on the right, have opposed unions, but is there room to ally with liberals here?

In order to answer this question, we need to understand the proposed changes.

The first is hidden at the very bottom of the intimidating, hundreds-of-pages-long HB2, which addresses all sorts of vaguely budget-related issues. (It took me something like 20 minutes to find the actual text of the amendment. So when critics complain that the legislating process in this case has not been very open or democratic, they have a good point.)

462 New Paragraph; Impasse in Collective Bargaining. Amend RSA 273-A:12 by inserting after paragraph VII the following new paragraph:

VIII. For any collective bargaining agreement entered into by the parties after the effective date of this paragraph, if the impasse is not resolved at the time of the expiration of the parties’ agreement, the terms of the collective bargaining agreement shall cease and all employees subject to the agreement shall become at-will employees whose salaries, benefits, and terms and conditions of employment shall be at the discretion of the employer.

This reverses paragraph VII of RSA 273-A:12 Resolution of Disputes, which applies to public employee labor relations:

VII. For collective bargaining agreements entered into after the effective date of this section, if the impasse is not resolved at the time of the expiration of the parties' agreement, the terms of the collective bargaining agreement shall continue in force and effect, including but not limited to the continuation of any pay plan included in the agreement, until a new agreement shall be executed. Provided, however, that for the purposes of this paragraph, the terms shall not include cost of living increases and nothing in this paragraph shall require payments of cost of living increases during the time period between contracts.

It is not clear that this has any relation to libertarian philosophy.

Currently, if contract negotiations fail, the government automatically extends the old, expiring contract. Basically, all government labor contracts have an implicit evergreen clause. If this amendment becomes law, failed negotiations will revert, instead, to a situation where government employees can be fired at the whim of their employer. (Though, as Diana Lacey explains, the change will not apply to current contracts, giving unions a perverse incentive to ride out their current contracts until someone alters the law to allow evergreen clauses again.)

So no one is having their freedom restricted or extended. The government is simply altering the way it does business.

From a more practical perspective, this would take away bargaining power from public-sector unions. Do we want that? Not necessarily. Chesterfield Democrat Tully Fitzsimmons points out that the government, besides being a coercive monopoly, is also, in many cases, a monopsony-- that is, the only buyer in a market. And unlike private employers, the government does not have to follow its own labor contracts. Legislators can alter the contracts as they wish. Union bargaining power may be required to balance these unfair advantages.

(Interestingly, economic theory suggests that a market with both a monopoly and a monopsony, known as a bilateral monopoly, can be more economically efficient -- less wasteful -- than a market with a monopoly alone, or only a monopsony. It is not clear, though, that this is happening between public-sector unions and government employers, given the current state of government workers. What is clear is that union bargaining power redistributes wealth from the government to government employees. Beast-starvers, take note.)

Another argument from those opposed to public-sector unions is that the unions lobby for more government. And this is true. But, as Grant Bosse has explained, contrary to some claims from the left, this will hardly end public-sector unions. So it's a moot point.

The second piece of legislation is HB474, the right-to-work bill.

The bill is sold as an expansion of individual liberties. However, the fine print reveals that it "prohibits collective bargaining agreements that require employees to join a labor union." In other words, this is a "positive" liberty, which requires the government to intervene in private affairs in order to provide it-- closer to the right to health care than the right to free speech. In 2004 the platform of the Libertarian Party opposed right-to-work laws for this reason.

I've heard three main arguments anti-union libertarians use to excuse their interference with consensual agreements in this case.

One is economic-- unions, they say, are cartels of labor. They drive up prices, restrict employment, and redistribute wealth from poorer workers (who are now unemployed) to more established workers.

To help evaluate these arguments, I turned to What Do Unions Do?, a book by Richard Freeman and James Medoff, both pro-union labor economists. (A group of more conservative-minded economists recently devoted another book to reviewing this one, and found that it was generally correct.)

It turns out that the redistributive effects are progressive (for those who care about that sort of thing). And union-induced inflation is small.

Freeman and Madoff agree that unions are basically cartels of labor, but they argue that the harmful aspects of labor unions are subject to considerable economic restraints. In a competitive market, if a union raises wages, it will simply put its employer out of business. Knowing this, the union focuses less on using its monopoly power to raise wages and more on economically benign improvements to workers' experience in the workplace. In less competitive markets, unions are sometimes able to gain more influence. (Other times large employers will use their market power to undermine union efforts.) Occasionally unions are able to organize the entire workforce of a competitive market, and coordinate wage demands between them, but this is rarer.

According to Freeman and Madoff, the economic loss resulting from union efforts in 1980 was about 0.3% of U.S. GDP. In New Hampshire today, unionization levels are lower (The Center for American Progress says 12.4%), and the union vs. non-union wage gap is lower. Using the same methodology, I estimate that the current economic losses in New Hampshire due to unions are approximately 0.05% of NH GDP, which is the equivalent of about $22 per person per year ($28.5 million).*

Of course, even with right-to-work laws, unions will still be around. The Sentinel has argued that the proposed law would have relatively minor effects. If we err on the side of a larger effect, halving the economic costs of unionization, that still only creates the equivalent of $11 per person, or $14 million. (My math has been a little crude, but this should be a decent ballpark estimate of the effect of the bill.)

To put this in a different perspective, libertarians were willing to pay $2.85 per person ($3.7 million) in lost federal money in order to forgo seat belt laws. (And arguably much more.) How much are collective bargaining rights worth in comparison?

(The Center for American Progress' paper also notes that a decline in unionization would hurt the economy by lowering the income of some workers. This is true, in the short run, if you accept modern Keynesian macroeonomics. But the sword cuts both ways-- if the economic losses from union monopoly power are small, then the short-run gains are also small.)

A second argument in favor of right-to-work is that the government already intervenes on labor's side in a variety of ways, so it's only fair that it intervene in favor of business, to correct the imbalance.

A quick perusal of my handy labor economics textbook shows that the empirical side of this argument is true. Employer rights are abridged by the Norris–La Guardia Act and the Wagner Act. (Though the Taft–Hartley Act later added some restrictions to unions.) However, I don't find this argument persuasive. The important question is, do we prefer the situation under the current law, or would we prefer the outcomes produced by a right-to-work law? What does it matter that the government has already changed some things?

The last argument is political. Unions lobby for bigger government, and a right-to-work law would presumably undermine their lobbying strength.

On the federal level, Freeman and Madoff find this to be true, to a degree. Unions generally do not succeed in promoting specifically pro-union legislation, due to strong business resistance, but they do help pass (allegedly) pro-worker legislation, such as minimum wage increases and workplace safety laws. And even under a right-to-work system, unions will still be around, and they'll still lobby the government (only less intensely). Based on the information available, it is probably impossible to predict if a right-to-work law would be one step back for two steps forward, or two steps back for one step forward.

So what's the takeaway for libertarians?

Much as I'd like to, I can't make an airtight case for the libertarian support of unions. At the same time, the anti-union case itself leaves much to be desired.

Are union issues full of potential for liberal-libertarian cooperation? I don't know. There's plenty of room for libertarians on both sides of the debate.

---

* Mathematical note:

To arrive at their estimate, Freeman and Madoff use the equation

½ × (union wage effect)/100 × (decline in employment in union sector due to wage effect)/100 × (fraction of labor force in unions) × (the fraction of total costs associated with labor) = (deadweight loss)

"This formula estimates the size of the triangle under the demand curve for union labor, which provides an estimate of what the social loss would be if all output were produced under collective bargaining, and then multiplies this amount by an estimate of the fraction of all output produced in unionized settings." (Freeman and Madoff, What Do Unions Do?, 1984, p. 267)

The equation is taken from Arnold Harberger, 1971, "Three Theorems of Applied Welfare Economics".

David Madland and Karla Walter, at the Center For American Progress, cite the union wage effect in New Hampshire as 7% (p. 2 of the .pdf). However, as far as I can make out, this estimate does not include fringe benefits, which implies that it is biased downward. It also does not account for the positive effects that union wages have on the wages of non-union workers, which would further bias the estimate downward. Finally, they note that, for other, more technical reasons, they expect their estimate to be biased downward (see note 2 on p. 4 of the .pdf). Rather than try to correct for this somehow, I decided to substitute it with federal-level data. I found this in a Cornell study, which in turn took the data from Barry Hirsch and David MacPherson's Union Membership and Earnings Data Book (p. 12 of the .pdf). They estimate an effect of 14%.

I was also unable to find data on the unemployment induced by higher union wages. To estimate it, I assumed that the amount of unemployment is proportional to the increase in wages. Freeman and Madoff's data suggest that the percentage of union-induced unemployment is about 2/3 of the percent wage increase (that is, a price-elasticity of demand of -.66). Therefore, a 14% wage increase implies a 9.3% decline in employment (14 × 2/3 = 9.3). I do this because I'm guessing that the elasticity of labor demand for union employers in the past will be a decent guide to current labor demand elasticities, because union members will still be employed largely by the same types of employers. This is a slightly dubious approach, as relevant conditions might have changed since their 1980 estimate. Fortunately, according to my labor economics textbook (Filer, Hamermesh, and Rees, 1996) the long-term price-elasticity of demand is about -1 for the entire labor market, with skilled workers generally having a lower elasticity (that is, greater than -1) and unskilled workers generally having a higher elasticity (less than -1) (p. 167-168). Since skilled workers are disproportionately represented in labor unions, this lends plausibility to my estimate. (Because I am assuming that higher wages cause declines in employment, this estimate does not account for possible employment gains in situations of bilateral monopoly, and this is a source of a possible upward bias.)

The unionization rate is taken from the Center for American Progress paper (p. 2 of the .pdf).

I found the "fraction of total costs associated with labor" (that is, labor's share of output) using data from the U.S. Bureau of Economic Analysis, which can be found via the NH Economic and Labor Market Information Bureau.

$58.036 billion (total state income) / $35.343 billion (wages, salaries, and benefits) = .609 (labor's share of output)

The final equation is thus:

½ × .14 × .093 × .124 × .61 = 0.00049

Naturally, since I have substituted a federal-level wage gap estimate for what should be a state-level measurement, and because I had to make an educated guess about union-induced unemployment, this number will not be exactly correct. It should be perfectly adequate, however, for its uses in this article.

These numbers imply deadweight losses of about $28.5 million:

$58.036 billion × 0.00049 = $28.5 million

About 1.3 million people live in New Hampshire, implying about $22 of deadweight loss per person:

$28.5 million / 1.3 million people = $22 per person

[This is a slightly polished version of an essay originally posted on Free Keene.]