Alexander MacDonald explains why unions support The FAST Act, which has raised the minimum wage to $20 an hour for fast-food workers in California.
The Federalist Society
Starting this month, California's fast-food workers will earn a minimum of $20 an hour. The new minimum wage is a byproduct of the FAST Act, a sweeping law regulating the Golden State's fast-causal restaurants. Though the law was effectively written by labor unions, it offers no obvious path to unionization. Instead, it applies equally to union and nonunion workers alike. Labor leaders say they backed the law not to organize workers, but to protect them from "exploitation" and "poverty wages." That is, they supported the law out of disinterested benevolence—a desire to help all workers regardless of union status.
But the real story is more complicated. The FAST Act may not bring unions any more members, but it will raise prices at nonunion businesses. And by raising those prices, unions can protect their economic flanks. They can stop worrying that consumers will abandon high-cost union services in favor of lower-cost alternatives. Instead, they can freely demand more money for their members without eroding their competitive positions.
It's not unusual to hear union leaders talk about social legislation as part of a broad, pro-worker movement. Unions have been taking credit in this way for years. They often claim that they created the 40-hour workweek. They also say they created the weekend. They even take responsibility for workplace-safety laws, prevailing wage requirements, and "protective" import tariffs.
And there is some truth to this story. Since the mid-19th century, unions have lobbied for laws limiting work hours and raising wages. Later, in the Progressive Era, unions supported laws for workers' compensation and unemployment insurance. They also pushed for old-age and disability benefits. They even supported broad federal legislation like the Social Security Act and the Fair Labor Standards Act (not to mention the National Labor Relations Act).
Decades later, they backed an even broader range of laws, far removed from their historical concerns with wages and hours. These laws included civil-rights legislation, such as Title VII of the Civil Rights Act, and protected-leave laws, such as the Family Medical Leave Act. And today, unions often go even further, calling for minimum staffing in nursing homes and trains, labor protections for foreign workers, and even minimum pay for independent contractors.
At first glance, these efforts are hard to explain. Unions make their living by collecting membership dues. And members don't pay dues out of charity; they pay when they think they'll get a better deal from the union than they could get on their own. So broad social legislation would seem to do little to help unions. In fact, it would seem to undercut their value proposition. Why would anyone join a union if union-level standards are available by law?
One explanation is broad-minded benevolence. Unions might be less concerned with their own interests than with the interests of workers in general. At least, that's how unions usually explain it. In a recent interview about the FAST Act, SEIU president Mary Kay Henry said she supported the law because it would "raise wages for everyone." And that, she said, was a good thing: it would put more money in workers' pockets, and those workers would spend the money at local businesses. The new spending, in turn, would drive more sales and more hiring. In other words, the law was a dash of financial magic: a perpetual-motion machine that would drive profits and wages ever higher.
But for those who don't believe in magic, a more plausible explanation can be found in basic economics. In economic terms, unions serve one main function: they bargain on behalf of their members for higher wages. Sometimes, they can extract those wages from corporate profits. But not all employers have wide profit margins: in competitive industries, their margins may hover just above zero. So if these employers have to raise wages, they may also have to raise prices. And if they raise prices, they may drive away customers.
Economists call this phenomenon the "demand curve." The curve gets steeper or flatter depending on price sensitivity. If customers keep buying at higher prices, the curve is flat. But if they stop buying, the curve is steep. And steep curves are most common when customers can easily find other products. For example, if apples get expensive, people can buy oranges. If American carmakers charge more, people can buy from foreign manufacturers. In short, consumers can "substitute" other products for the expensive unionized one.
And customers aren't the only ones who substitute. Employers do it too. For example, when wages rise, they may buy labor-saving equipment. The equipment helps them keep total labor costs down by cutting work hours. A common example is a self-checkout machine. A grocery store may have to pay unionized clerks a higher wage; but if it buys a few self-checkout machines, it can schedule fewer clerks.
These kinds of substitutions blunt unions' leverage. If unions raise wages too high, prices rise. High prices make substitutes more attractive. And when substitutes take over, union members lose their jobs. That effect is an iron law of the market; there is little unions can do to change it. The only question is how they deal with it.
Sometimes, they try to deal with it by organizing all the viable alternatives. They may try to organize every employer in a local sector and bargain for uniform standards. That way, every employer pays union wages, and no one can find cheaper substitutes. But that tactic has limits. Organizing is slow, expensive, and porous. A union might spend years organizing local employers only to lose a few elections and fail to close off the escape hatches. Or worse, even if the union organizes every existing employer, a new employer might enter the market and undercut the unionized firms. There simply is no way to fully block substitutes through organizing.
So more often, unions try to stop substitution by outlawing it. That strategy doesn't (usually) involve banning other products outright. Instead, it involves raising costs. For example, a union might lobby to raise minimum wages. High minimum wages don't stop people from buying nonunion products; but they do make nonunion products less competitive. More subtly, a union might lobby for new safety or minimum-staffing rules. Those rules don't directly raise wages. But they do require companies to pay for new equipment and redundant workers. And because the rules apply across an industry, they raise costs uniformly. Every employer, union or nonunion, has to operate closer to the union baseline.
This logic explains most union lobbying for social legislation. In theory, social legislation would seem to undercut a union's main value proposition. But in practice, it protects the union's flanks. The union doesn't have to worry that employers and consumers will react to higher prices by looking for cheaper substitutes. All the substitutes are just as expensive. So the union can demand higher wages without worrying about market competition.
That rationale explains the FAST Act and similar laws. Unions push for these laws not out of a high-minded belief in the dignity of work. Rather, they push for the laws to protect their business models. Their models are built on eliminating market competition for labor; so any law that raises and flattens labor standards supports their goals. They're not irrational to push for these laws, but they're not benevolent either. Like the firms they seek to organize, they are pursuing their own interests.
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