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Competition Laws and Industrial Action - Part I

Sam Vaknin, Ph.D. - 10/18/2006

Should the price of labor (wages) and its conditions be left entirely to supply and demand in a free market - or should they be subject to regulation, legislation, and political action?

Is industrial action a form of monopolistic and , therefore, anti-competitive behavior?

Should employers be prevented from hiring replacement labor in lieu of their striking labor-force? Do workers have the right to harass and intimidate such "strike breakers" in picket lines?

In this paper, I aim to study anti-trust and competition laws as they apply to business and demonstrate how they can equally be applied to organized labor.


A. THE PHILOSOPHY OF COMPETITION

The aims of competition (anti-trust) laws are to ensure that consumers pay the lowest possible price (the most efficient price) coupled with the highest quality of the goods and services which they consume. Employers consume labor and, in theory, at least, have the same right.

This, according to current economic theories, can be achieved only through effective competition. Competition not only reduces particular prices of specific goods and services - it also tends to have a deflationary effect by reducing the general price level. It pits consumers against producers, producers against other producers (in the battle to win the heart of consumers), labor against competing labor (for instance, migrants), and even consumers against consumers (for example in the healthcare sector in the USA).

This perpetual conflict miraculously increases quality even as prices decrease. Think about the vast improvement on both scores in electrical appliances. The VCR and PC of yesteryear cost thrice as much and provided one third the functions at one tenth the speed.

Yet, labor is an exception. Even as it became more plentiful - its price skyrocketed unsustainably in the developed nations of the world. This caused a shift of jobs overseas to less regulated and cheaper locations (offshoring and outsourcing).

Competition has innumerable advantages:

1. It encourages manufacturers and service providers (such as workers) to be more efficient, to better respond to the needs of their customers (the employers), to innovate, to initiate, to venture. It optimizes the allocation of resources at the firm level and, as a result, throughout the national economy.

More simply: producers do not waste resources (capital), consumers and businesses pay less for the same goods and services and, as a result, consumption grows to the benefit of all involved.

2. The other beneficial effect seems, at first sight, to be an adverse one: competition weeds out the failures, the incompetent, the inefficient, the fat and slow to respond to changing circumstances. Competitors pressure one another to be more efficient, leaner and meaner. This is the very essence of capitalism. It is wrong to say that only the consumer benefits. If a firm improves itself, re-engineers its production processes, introduces new management techniques, and modernizes in order to fight the competition, it stands to reason that it will reap the rewards. Competition benefits the economy, as a whole, the consumers and other producers by a process of natural economic selection where only the fittest survive. Those who are not fit to survive die out and cease to waste scarce resources.

Thus, paradoxically, the poorer the country, the less resources it has - the more it is in need of competition. Only competition can secure the proper and most efficient use of its scarce resources, a maximization of its output and the maximal welfare of its citizens (consumers).

Moreover, we tend to forget that the biggest consumers are businesses (firms) though the most numerous consumers are households. If the local phone company is inefficient (because no one competes with it, being a monopoly) - firms suffer the most: higher charges, bad connections, lost time, effort, money and business. If the banks are dysfunctional (because there is no foreign competition), they do not properly service their clients and firms collapse because of lack of liquidity. It is the business sector in poor countries which should head the crusade to open the country to competition.

Unfortunately, the first discernible results of the introduction of free marketry are unemployment and business closures. People and firms lack the vision, the knowledge and the wherewithal needed to sustain competition. They fiercely oppose it and governments throughout the world bow to protectionist measures and to trade union activism.

To no avail. Closing a country to competition (including in the labor market) only exacerbates the very conditions which necessitated its opening up in the first place. At the end of such a wrong path awaits economic disaster and the forced entry of competitors. A country which closes itself to the world is forced to sell itself cheaply as its economy becomes more and more inefficient, less and less competitive.

Competition Laws aim to establish fairness of commercial conduct among entrepreneurs and competitors which are the sources of said competition and innovation. But anti-trust and monopoly legislation and regulation should be as rigorously applied to the holy cow of labor and, in particular, organized labor.

Experience - buttressed by research - helped to establish the following four principles:

1. There should be no barriers to the entry of new market players (barring criminal and moral barriers to certain types of activities and to certain goods and services offered). In other words, there should be no barrier to hiring new or replacement workers at any price and in any conditions. Picket lines are an anti-competitive practice.

2. The larger the operation, the greater the economies of scale (and, usually, the lower the prices of goods and services).

This, however, is not always true. There is a Minimum Efficient Scale - MES - beyond which prices begin to rise due to the monopolization of the markets.

This MES was empirically fixed at 10% of the market in any one good or service.

In other words: trade and labor unions should be encouraged to capture up to 10% of their "market" (in order to allow prices to remain stable in real terms) and discouraged to cross this barrier, lest prices (wages) tend to rise again.

3. Efficient competition does not exist when a market is controlled by less than 10 firms with big size differences. An oligopoly should be declared whenever 4 firms control more than 40% of the market and the biggest of them controls more than 12% of it. This applies to organized labor as well.

4. A competitive price (wage) is comprised of a minimal cost plus an equilibrium "profit" (or premium) which does not encourage either an exit of workers from the workforce (because it is too low), nor their entry (because it is too high).

Left to their own devices, firms tend to liquidate competitors (predation), buy them out or collude with them to raise prices. The 1890 Sherman Antitrust Act in the USA forbade the latter (section 1) and prohibited monopolization or dumping as a method to eliminate competitors.

Later acts (Clayton, 1914 and the Federal Trade Commission Act of the same year) added forbidden activities: tying arrangements, boycotts, territorial divisions, non-competitive mergers, price discrimination, exclusive dealing, unfair acts, practices and methods. Both consumers and producers who felt offended were given access to the Justice Department and to the FTC or the right to sue in a federal court and be eligible to receive treble damages.

It is only fair to mention the "intellectual competition", which opposes the above premises. Many important economists think that competition laws represent an unwarranted and harmful intervention of the State in the markets. Some believe that the State should own important industries (J.K. Galbraith), others - that industries should be encouraged to grow because only size guarantees survival, lower prices and innovation (Ellis Hawley). Yet others support the cause of laissez faire (Marc Eisner).

These three antithetical approaches are, by no means, new. One leads to socialism and communism, the other to corporatism and monopolies and the third to jungle-ization of the market (what the Europeans derisively call: the Anglo-Saxon model).

It is politically incorrect to regard labor as a mere commodity whose price should be determined exclusively by market signals and market forces. This view has gone out of fashion more than 100 years ago with the emergence of powerful labor organizations and influential left-wing scholars and thinkers.

But globalization changes all that. Less regulated worldwide markets in skilled and unskilled (mainly migrant) workers rendered labor a tradable service. As the labor movement crumbled and membership in trade unions with restrictive practices dwindled, wages are increasingly determined by direct negotiations between individual employees and their prospective or actual employers.

(continued)