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The Role of Unions

By and ·November 3, 2019
University of Minnesota and Brigham Young University

The Issue:

High profile labor strikes over the past two years — from teachers picketing in several states to the United Auto Workers strike at General Motors, among others — have put unions in the spotlight. This media attention can distort the public's view of what unions do, since fewer than 2 percent of labor-management negotiations involve work stoppages but over a third of union-related headlines involve these kinds of disruptions. The presence and strength of unions can have ripple effects in the economy, impacting the wages of non-union workers, the productivity of firms, and the distribution of income.

The Facts:

  • There has been an uptick in strike activity recently in the United States, following several decades of decline. The prevalence of work stoppages in the U.S. involving at least 1,000 workers has declined in recent decades. Starting in 2018, however, this trend reversed. The number of workers involved in major work stoppages increased from 25,000 in 2017 to 485,000 in 2018 (see chart). 
  • The reduction in strike activity over the past decades happened in the context of declining union membership. While a growing share of U.S. workers say they would prefer to have a union at work, only a small and declining minority do. Since 1979, the share of American workers belonging to unions fell from 24 percent to 11 percent. Unions engage in a broad range of activities, primarily collective bargaining with management over terms and conditions of employment as well as other forms of collective action in relation to employers and to public policymakers. Because unions narrow the scope of unilateral management control over workplace rules and because they are associated with a reduction in owners’ profits, there tends to be managerial resistance to workers’ unionization efforts. The majority of employees represented by a union in the U.S. today work in the public sector, where employer resistance is weaker. There are 7.6 million private sector workers in a union (6% of private-sector workers) and 7.9 million public sector workers in a union (34% of public-sector workers) (see here).
  • Unions tend to raise workers’ total compensation and to lead to a less uneven distribution of compensation within firms. The portion of the value created by a job that goes to the worker will tend not to fall below what the worker could earn in another easily-available position nor rise above the total value the job creates for the employer. Where exactly compensation falls within this range depends on negotiations and bargaining power. Union members leverage the extra power of bargaining as a group to increase their compensation and improve their working conditions, especially for the lowest-compensated workers (earnings for the highest-paid workers may fall). Indeed, under unionization, average compensation tends to rise and the spread in compensation between workers within a firm tends to fall (see also here and here). Unions often raise compensation in the form of fringe benefits proportionately more than wages (see here and here). The increase in the share of jobs’ value claimed by workers through unionization tends to reduce the share claimed by investors: A public corporation’s expected profits fall by an average of 10 percent after its employees vote to unionize. Unionized workers also claim value otherwise going to executives (see here and here). 
  • Do unions hurt firms? Under classical labor-market theory, where each job will pay an amount equal to the worker’s contribution to the organization’s bottom line and anyone who wants a job can immediately find one with the same value, compensation is dictated by the market price and any firm is powerless to influence it. In this setting, unions only act as labor monopolists, constricting labor supply, raising labor compensation, reducing productivity, reducing profits, and creating inefficiencies. However, modern labor economics recognizes that labor markets tend not to work this way. Most workers cannot immediately and costlessly find a new job of equal or greater value. This allows a gap between what a worker contributes to an organization’s bottom line and the worker’s compensation. Most employers exercise some wage-setting power. In this context, the increased bargaining power that unions provide workers means that unionization might reduce profits (even if they raise or do not impact labor productivity) by enabling workers to claim a larger share of the existing pie as well as any productivity gains.
  • Unions can have a variety of impacts on firm productivity and efficiency. Both in theory and in reality, unions affect organizational productivity in both positive and negative directions and the overall effect varies (see here and here). In some cases unions can harm efficiency. When unions use labor-market monopoly power to raise compensation or job security costs high enough, employers reduce employment below efficient levels and some workers will lose job opportunities. By reducing profit rates, unions can weaken incentives for investors to put capital into a company and, thereby, slow productivity growth. Yet unions can also serve to increase efficiency through increasing worker voice and countervailing employer market power. They can focus bargaining on the average rather than the marginal workers’ priorities, solve coordination and commitment problems, and increase investment in worker skills, thereby, increasing productivity growth. Where an employer exercises market power to suppress compensation, a union can counterbalance this and lift compensation towards more-efficient levels. Unions sometimes also cooperate with employers to raise an industry’s profitability at the expense of taxpayers or consumers.
  • The presence and strength of unions impacts the distribution of income at the national level. Whether considering inequality in total family income or in labor income only, stronger unions reduce income inequality. Union-driven compensation increases spill over to raise compensation for nonunion workers among competing employers. In addition, the ownership of corporations and the claim on profits this brings is highly concentrated. The wealthiest 1-percent of American families own 795 times more per family on average than the less-wealthy half of American families (see chart below). By shifting firm value from company owners to workers, unions reduce income inequality. Indeed, the decline in the share of American workers belonging to unions since 1979 helps explain rising inequality in labor income. For instance, one study finds that it explains 40% of the increase in earnings inequality between top-earning and typical male employees.

  • Unions make workers' voices heard in public-policy fights. Where workers are less unionized, there are fewer elected officials from working and middle class occupations, lower rates of voter turnout, and more-conservative policies (see here, here and here). Public policy affects workers’ economic well-being through setting the rules and boundaries of legal economic activity: unemployment-insurance benefit levels, minimum wage and health and safety standards, health insurance standards, public pensions, age-restrictions on labor, eligibility for overtime pay, protections against discrimination, and education and tax policy. With agreement from just a very few individuals, wealthy individuals and corporate managers can write very large checks to mobilize resources into policy fights and they spend many billions of dollars every year to influence policy. In contrast, unorganized workers do not have the same ability to promote policies that would benefit their interests. A small group of workers can mobilize only scant resources. Via unions, larger groups of workers define shared policy priorities, pool resources, and mobilize these into policy fights (see here). Unions also promote the exercise and enforcement of workers’ rights (eligible workers are more likely to receive unemployment insurance benefits if they were in union jobs for instance; there is evidence of positive effects of union certification on workplace-safety enforcement; and of benefits from authorities partnering with labor organizations for co-enforcement of labor standards).
  • Unions in the public sector raise distinct questions. Similar to the private sector, collective bargaining in the public sector generally results in higher compensation, especially in the form of fringe benefits and pensions. Unions’ political power implies a channel of influence on management in the public sector that is less direct in the private sector, giving economists additional concern about negative impacts on productivity in the public sector. For instance, while one study found that teacher unionization may have positive impacts on student achievement in the more-competitive charter school sector, another study found that students who attended public schools in states where teachers began collectively bargaining suffered reductions in later-life earnings.

What this Means:

In recent decades, changes in labor protections at home, automation, and new rules for international trade have all put pressure on American firms, workers and unions to change and innovate. Capital and management harnessed new technologies to increase the scope of their coordination nationally and globally. The role of traditional unions shrank and economic inequality grew. Workers today recognize that many years of economic expansion make them harder to replace and other jobs easier to find, increasing their willingness to risk their current job by joining together to demand better terms from their employer and helping to explain the recent surge in strike activity. Though the institutions may change, the reality that workers share joint interests vis-a-vis employers and can benefit from acting together will endure. Their demand for labor organization is not going away. Workers are inventing new ways to organize and act together, often harnessing cheaper forms of communication. We expect more activism, innovation, and increasing scale of worker coordination ahead.

Topics:

Labor Markets / Manufacturing
Written by The EconoFact Network. To contact with any questions or comments, please email [email protected].
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