Union members have done very well on pumped up union wages, but their gain does not match the loss for the rest of us. As a community/nation, we are better off with an open, union-free labor market.
The market wage is better than a higher, union-negotiated wage because it keeps more people working, and when more people are working, more is produced. More production means more income. Higher workforce participation means the income is distributed more evenly.
Let's say that a manufacturer is making a car that sells for $20,000. The company is paying its assembly line workers the market wage - the minimum necessary to keep a full work force. The union "negotiates" a $2 an hour increase. This forces the company to add $400 to the price of the car. The market is competitive for cars in this price range, so sales go down by 10%. Production is cut back and 10% of the employees are laid off. The remaining workers are doing fine with their increased hourly wage, but since fewer cars are being produced, their wage increase does not make up for the income loss suffered by the laid off workers. The total income of the original workforce is less and it is unevenly distributed. The laid off workers' now have zero income so that the others can enjoy their $2 per hour increase.
It is not just the unemployed who are hurt by unemployment. Unemployment compensation is paid for by the rest of us, as is any other financial assistance needed by the jobless, like food stamps and welfare. And the desperation and poverty caused by prolonged unemployment leads to other costly social problems, like broken marriages and crime.
Yes, market wages are lower than "bargained" wages, and one might be concerned that the employer won't pass along to the customer the cost savings. That could happen if the industry is not competitive, so it is important to make sure that no one company or group of companies dominates the market unfairly. Competition prevents excess profits. Society benefits when a free market is guaranteed for business as well as labor.
Although we are all better off when workers are paid at the market rate, some workers are not going to be satisfied with a $15 an hour factory job. That should compel them to get the training or education that qualifies them for a higher-paying job. Working the same hard job for the same employer all one's life is nothing to take pride in. Loyalty to an employer has no place in a free market economy. Workers must look out for themselves and their families and find the job that uses their education and talent to the fullest, and brings them the most money and satisfaction. Society benefits when workers have high earnings, but only in an open labor market where earnings are a true measure of output value.
The market wage principle applies to salaried workers as well, including managers and executives. The salary for any position should be no more than necessary to attract qualified applicants. Regardless of the level of the position, the people doing the hiring should have a list of minimum qualifications for the job, even if it is a simple as “looks good in a suit, able to operate a Blackberry, and has no criminal record”. The offered salary should then be set no higher than necessary to attract a reasonable number of qualified applicants. Corporations like GM might find that they can get CEOs for $200,000 rather than $12,000,000. (The CEOs of the nation's 500 biggest companies were paid an average of $12.8 million in 2007.)
For any type of job, demand is going to vary due to various circumstances. In order to fill vacancies, an employer might find that he has to offer a higher wage than he is paying his current employees. Those current employees will get a pay increase to bring the rate up to what new hires are being paid, and they can thank the market for their good fortune. But the down side is that they must be prepared to take a cut in pay when the market goes the other way. When there is a surplus of workers with a certain skill, current workers must accept a pay decrease to match the going rate. It is the duty of the employer to maximize profits, and if he can lower wage rates and still get all the workers he needs, it is morally proper to do so. By decreasing wage costs, he can keep the price of his product low and sell more, allowing him to maintain or increase the number of employees. This is critical in an economic downturn, when displaced workers need jobs. In his inaugural address, President Obama mentioned “the selflessness of workers who would rather cut their hours than see a friend lose their job . . .” Cutting hours cuts production (and income). It would be better for those workers to take a pay cut rather than a reduction in hours, because it would allow prices to be reduced and sales to increase, enabling the employer to maintain or increase his workforce.