Labor Unions, Part II

By Brad Thomason, CPA

 

In our last installment we spent some time looking at union labor through the lens of that basic commercial question: is the price demanded consistent with the value delivered?  Today I’d like to expand beyond what I would call the pure commercial unions (like auto workers, teamsters, construction workers and others directly involved in what we think of as traditional vocations) into more esoteric areas like the arts and sports.

Let’s start with the arts.  I would submit that although the comparison is similar, it has some additional factors to account for.  Specifically, by what means are we going to quantify the value being delivered?  I think most people buy into the idea that any society benefits from a rich cultural and artistic tradition, in ways that nothing else could fulfill.  Or to turn that around, I think most people intuitively understand that life would be more mundane and less interesting if there were no art going on (and I’m including everything from the low to the high, Comedy Central all the way to the Bolshoi and The Met).  So art undeniably has value.

But what value?

That’s a tougher question once we move outside of commerce.  Why?  Because in commerce you have a clear measure of whether or not the job was done or not done; and we can measure in common terms the specific cost of paying for it whether it comes from ABC or XYZ.  If a fork lift driver can get things off a truck in a timely manner without dropping the load, he has done the job.  It’s pass/fail.  There are no degrees of quality or style to have to deal with.  And if ABC demands one price, and XYZ demands a lower one, we know what we need to know about the value proposition.

But in the arts things are less clear cut.  Quality is in the eye of the beholder, and what one “seller” delivers is likely to be very different than what another delivers.  So common denominator analysis goes out the window, and as such quantitative pricing comparisons fail too.

If we as a society value art then it is more reasonable to pay some flat amount to get it, than is the case in a commercial setting.  To me, the argument about people needing to be able to earn a basic living, is more compelling in the artistic sphere.  If a group of writers, producers, actors and support personnel show up to put on some sort of show, we don’t know going in if it’s going to appeal to us.  But at a broader level, if we want to live in a society where such things are possible, it seems more reasonable to “rig the game” so that they at least have a chance to try.  We do that by making sure they can pay the bills back at home while they make the effort.

So when the output is something that is harder to value, but nonetheless clearly valuable, I think the concept of union labor is subtly – though importantly – different.

Now let’s look at sports.

The thing that dominates the discussion in sports is not that there is a union scale for all of the staff members who make the production possible, but that the stars demand wages that are dramatically greater than just about any other worker can demand.  Is this reasonable?

To answer that question I think we have to back out of the union discussion for a second and look at the more fundamental question of where value comes from in the first place.

If you ask most people where value comes from they will tell you that value is a function of utility.  In other words, value comes from the fact that something is useful.  This seems reasonable, but is only partially correct.

For something to have any value at all it does indeed have to be useful.  But the degree of value that something has is a function of its scarcity.

Let me say that a little differently:  Things that don’t have any use generally don’t have any value either.  But usefulness is a pass/fail test.  Once something has been deemed to have a value (i.e. it is useful), utility goes out the window in determining what that value is.  To actually come up with the value we have to look to scarcity.

Want proof?  The two most useful things on planet earth are essentially free:  air and water.  If you are human (and assume most of our readership is…) then there is nothing that is any more immediately useful to you.  But unless you are trying to stockpile them or move significant quantities from point A to point B, they are essentially free.

All of the things in life that are expensive are rare.  All along the scale, the abundance or dearth of a substance determines where it falls on the price list.  Gold costs more than lead because there’s less of it.  Ditto diamonds versus river gravel.

Which brings us back to pro athletes.  We like watching sports, so it serves a purpose:  the utility test is met.  The number of people on planet earth that can drive a fork lift is dramatically greater than the number of people who can hit a 95 mph fast ball over the left field fence.  Value derives from scarcity.  Big league sluggers are more scarce.  Ergo it is reasonable that they make more money than fork lift drivers.  And that is exactly what happens in real life.

As a union proposition I would say that pro athletes function much more like oligopolistic businesses than traditional workers.  But we are still dealing with individual performers wanting what they think is a reasonable cut for coming to work.  The fact that they as a group have abilities that far exceed the average person’s is what creates the backdrop for what they earn.  The ability difference is wide, the scarcity gap is wide, and the pay gap is symmetrically wide too.  Because they can do something that very few can pull off, they get to demand a bigger paycheck.

So in conclusion, I think that labor unions are governed by the same rule that impacts everyone in the commercial sphere:  Value and cost have to match up.  Whether or not a given union is a good thing or a bad thing will be determined by the way it relates to that exchange.  There are substantive differences in the value propositions of unions involved in traditional trades, the arts and sports, respectively.  It is these differences that drive the levels and methods of compensation in each of these arenas, the general acceptability of these groups by society at large, and ultimately the long-term viability of these entities as market participants.

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