Labor unions have long been a central issue of economic debate in the United States, and since their emergence in the mid-19th century, the role of unions in industry has changed very little given the changes to the make-up of our economy. Although employer abuses of power aren’t nearly so blatant or extreme as in the early days of unions, the need to protect workers’ rights and ensure fair wages and benefits still exists. Employees should be able to take problems directly to management. They should be able to miss work without being fired and have a say in how much they are paid or the benefit packages they receive. Labor unions and other collective bargaining strategies make these things possible.
Of concern is not whether unions are good for union workers, but whether they are good for the economy as a whole, namely the labor market. Economists often ask critical questions such as: How do labor unions affect non-union workers’ wages? Do higher wages for union workers lead to more unemployment? Are union workers more or less productive than non-union workers? The focus of this paper will primarily be on the effect of unions on labor productivity and how productivity might suffer or in fact gain from unionized labor. It’s important to investigate as to whether the gains of union workers both in compensation and opportunity are not at the cost of the firms’ productivity and profitability, or perhaps that of non-union workers.
Union participation has been in steep decline since the 1970’s when 27% of U.S. workers were covered by union contracts. Now, only 12% of the labor force consists of union members. Compare these figures to countries like France, Belgium and Sweden, and one can see how substantially small U.S. unionization is when these countries have over 90% union participation. Such comparisons are helpful when looking at U.S. productivity growth and how it compares to productivity in heavily unionized nations over time.
Many believe that unions achieve their goals not only by taking away from the profits of firms but by also making those firms less productive. Those critics go to great efforts to explain away perceived productivity gains in unionized industries and companies. One possibility is that because unionized workers receive higher pay than non-union workers, they work harder than if they were paid less. Others argue that unions will only keep productivity high so long as they are a relatively small portion of the workforce. If everyone has a high-paying union job, there is no incentive for workers to strive and work hard to keep their prime union positions. Unions have, in the past, been blamed for keeping wage rates above equilibrium levels, leading to unemployment or at least less employment in unionized sectors of the economy. This would cause an excess supply of union members over available work, which gives the least competent room to fall out of the labor pool, as well as forcing them to compete with each other to hold the available jobs. Naturally the effect of this would be greater labor productivity attributable to unions.
So perhaps, to the extent to which labor unions do increase productivity, they do so by forcing less competent workers out of the labor market, because they are not worth union pay. Another reason for this effect may be the significant reduction in transaction costs when finding and retaining labor, such as in construction trades, where it is more efficient to call the union and have them send over 50 guys instead of hire them individually. To me, however, this is a strong argument for the legitimate ability of unions to increase productivity, not a phenomenon to be written off for the sake of arguing against unions.
Draca, Machin, and Van Reenen explore the effects of higher wages demanded by labor unions on a firm’s productivity and how they might reduce the firm’s profitability. They cite a significant...