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Fellows with Friedman

Unions And Free Market Labor

Edward Lazear

Edward Lazear’s study analyzed income data from 162 countries over multiple decades, coupled with measures of economic freedom, size of government, and transfers, to determine how various parts of society fare under capitalism and socialism. The main conclusion was that the poor, defined as having income in the lowest 10 percent of a country’s income distribution, did significantly better in economies with free markets, competition, and low state ownership. More impressive was that moving from a heavy emphasis on the government to a free market substantially enhanced the income of the poor. 

Additionally, a rising tide lifts all boats. When the median income in a country rises by 1 percent, the income of the lowest 10 percent also rises by about 1 percent. Furthermore, the wealthiest 10 percent do not increase their income at the expense of the lowest 10 percent. The reverse is true. Incomes of the poor move with the incomes of the rich, not in opposite directions. Even when the income of the richest 10 percent grows more rapidly than the income of the poorest 10 percent, causing an increase in income inequality, the poor tend to be better off in absolute terms. China is an extreme example. There, the ratio of income of the top 1 percent to the bottom 10 percent rose from 8:1 during the 1980s to 40:1 by 2010. But during the same time interval, the income of the poor increased fivefold.

The Nordic countries are essential cases, because they couple free markets with large government sectors and high levels of government transfers. The evidence supports the argument that big government and high transfers benefit the poor at least at a point in time. There is little doubt that an explicit program of transfers to the poor raises the poor's income. There is an additional critical fact, however. Only rich countries engage in significant redistribution to their poor. The median income in countries that rank in the top half for transfers is about 2.5 times higher than the median income in countries that rank in the bottom half for transfers. Generosity does not appear to be system specific. There is no tendency for countries with more state ownership to engage in higher transfers.

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Lee Ohanian

Lee Ohanian argues that income should not be redistributed away from the highest earners. He finds redistribution counterproductive, as it does not sufficiently recognize that our top earners create enormous surpluses for society. Bill Gates at Microsoft, Steve Jobs at Apple, Fred Smith at FedEx, Sam Walton of Wal-Mart, and many others who started new businesses have directly and indirectly created millions of new jobs, created new industries, and transformed our society. And these individuals have received only a tiny fraction of the economic value that they have created.

Society, however, should care about creating economic opportunities for the lowest earners. For the last thirty to forty years, workers with low levels of human capital have been swimming upstream against technology. Technological improvements over this period complement skilled workers, raising their marginal productivity, but are substitutes for low-skilled workers, reducing their marginal productivity. This means that increasingly sophisticated technologies that keep making capital goods better and cheaper will continue to place downward pressure on the wages and opportunities of the lowest earners.

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Richard Epstein

Richard Epstein argues against unions. According to him, public-sector unions face no parallel risk of new entry when they seek to organize teachers and other state and municipal employees such as police officers, firefighters, and prison guards. For these services, the state usually operates as the sole supplier. Hence, the union's corresponding power is extraordinary, and it is made even more potent because legislators elected with strong union support let powerful union forces sit on both sides of the bargaining table. The effort to limit union power by forbidding strikes and forcing compulsory arbitration offers no solution to the problem: unions can still demand top dollar and unsustainably large pensions, which helps explain why so many state and local pension funds are in such desperate shape. A decision that lets dissident workers out from under the union thumb is an essential counterweight to these dangerous manifestations of union power.

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