fedgazette

Do Unions Work?

What are the economic pros and cons of labor unions?

Douglas Clement - Senior Writer

Published May 1, 2001  |  May 2001 issue

Hailed as saviors of the common man and derided as communist conspiracies, unions have long invited controversy. But what really do they do? What impact does organized labor have on the American economy? And do unions serve useful purposes not measurable in economic terms?

Compensation

Unions argue that they improve the economic well-being of labor by increasing wages and benefits for union members. Indeed, that seems to be the case. Economic theory suggests that unions attempt to exercise market power by constraining competitive forces that might otherwise force wages and benefits down. If the fruits of productive enterprise can be thought of as a pie divided between labor and capital, unions hope to slice the pie in labor's favor. Often, they're able to do so, producing higher wages for union members than nonunion workers receive in the same industry. (To the degree that higher labor costs are subsequently reflected in higher product prices, wage increases will be transitory in real terms, disappearing as inflation eats into them.)

But economists point out that a union slicing the pie to labor's advantage by constraining the labor market is no different than an industrial monopolist increasing profits by fixing prices: It distorts factor costs and creates market inefficiencies that ultimately harm an economy's resource allocation. In general, most economists say, the ability of labor unions to raise wages above competitive levels has a net negative impact on society.

In special cases—for example in a "company town" where labor mobility is restricted and there are just one or two employers-a labor union can counteract the monopsony power of the employer(s), resulting in more efficient resource allocation and a net benefit to society. Fortunately, such instances are not as widespread as they were when the Ninth District saw some of its most bitter labor-management confrontations in Wisconsin lumber camps and the iron and copper mines of Minnesota and Montana.

While such cases are less common nowadays," some employers nonetheless continue to have a net power advantage over workers that is exercised to the latter's disadvantage, in the form of excessively long hours, low wages or intense pace of work," noted Bruce Kaufman, labor economist at Georgia State University. In those settings, labor unions can help address the imbalance of power and set a floor under labor standards (for example, maximum work pace and overtime hours).

Productivity

Some research has indicated that labor unions improve productivity by providing training for workers, reducing turnover and improving labor-management communication. Other studies have found a negative union effect. Richard Freeman, a Harvard University economist, points out that union productivity effects tend to vary by sector. "About two-thirds of the studies show [improvement] and about one-third show there might be negatives," he said. "Your best guess would say it's a wash."

But even the studies showing productivity increases find that the higher wage costs paid to union labor exceed productivity increases, Freeman added, so "what is absolutely clear is that profits fall, which motivates management obviously to keep the unions out." In other words, unions don't increase the size of the pie as much as they cut into management's part of it, so management's natural response is to fight unionization.

Equality

Little empirical work has been done to estimate the impact of unions on wage disparity among workers, but what there is indicates that unions tend to reduce inequality among wage earners. Recent work by David Card, a Princeton University economist, indicates that declines in private-sector unionization may account for as much as a fifth of the rise in male wage inequality over the past 25 years, with little effect on female wage inequality. In the public sector, where union density has increased, "unions have been a significant force in forestalling the rise in wage inequality among ... workers of both genders," according to Card.

Other studies show that union involvement in apprenticeship programs helps raise graduation probabilities for women in skilled trades above those for women in programs sponsored by employers alone.

Employment

Although unions improve compensation for their members, they tend to limit the number of jobs in an economy. They can do so either directly, by enforcing a constraint on the number of workers that can enter a profession or company, or indirectly, by pressuring employers to raise wages. Having to pay higher wages will persuade employers to seek less labor-intensive production techniques and hire fewer workers. Several studies set in Australia, Canada, Britain and the United States have estimated that employment growth in union firms is from 2 percent to 4 percent lower than that in nonunion companies, while a few studies have found no effect or limited impact.

Thus, unions benefit their members, but may have a negative impact on jobs for those outside the union; moreover, maintaining the wage premium encourages unions not to expand membership, a factor that can eventually lead to declines in union density.

Noneconomic effects

Unions also play roles that are less integral to the economics of the workplace: political lobbying, pension management, social support, worker education and legal representation. Arguably their most important noneconomic function is to provide a voice for labor in the workplace. While speaking out against abusive conditions or even suggesting changes in work methods can be difficult or dangerous for an individual employee, workers' unions can speak out for employees with relative impunity. Unions, noted Freeman, are one of the few democratically elected bodies to provide participation and representation for workers.

Labor scholars have proposed a variety of alternatives to current American labor unions that would allow increased employee "voice" while limiting the "rent-seeking" behavior that results in management opposition and economic inefficiency. But none are optimistic that labor laws or labor unions are likely to change substantially in the near future.

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