What Is at Stake if Unions Wield Greater Clout?

By , and ·March 10, 2021
University of Minnesota, Brigham Young University, and University of Minnesota

The Issue:

After decades of decline, union activity is experiencing a surge in the United States. The coronavirus pandemic has prompted many organizations to re-write the rules of the workplace and raised awareness of the low pay and risky conditions faced by many workers deemed essential under the public health crisis. At the same time, some of the country's biggest employers have seen their profits swell — widening the injustices perceived against a decades-long backdrop of rising inequality. And the killing of George Floyd has ignited a willingness to challenge structural causes behind racial economic disparity. With renewed fuel from these factors, drives to unionize in some of the nation's largest tech companies are grabbing headlines while policymakers advance legislation that would provide protections for workers trying to organize, and the Biden administration strongly signals its support for unions. How would greater union strength impact the U.S. economy?

Unions can have ripple effects in the economy that go beyond their impact on members' compensation and working conditions.

The Facts:

  • Renewed union vigor is surfacing along different fronts. On March 9, the House of Representatives passed the PRO Act, which would vastly re-shape labor law by removing numerous employer advantages, although the legislation is unlikely to advance in the Senate. Workers at an Amazon warehouse in Bessemer, Alabama, are voting on whether to become unionized. In addition to being one of the largest employers in the country, Amazon has successfully fought previous unionization attempts in the United States. Other recent, large organizing efforts at Nissan and Volkswagen in the South — a region that has been historically resistant to unionized labor — failed, so success at Amazon in Alabama would represent a change in momentum that could propel other workers to unionize. Workers in other tech companies and the gig sector have also seen inroads from unionization. Google workers have formed the Alphabet Workers Union, and though it’s not seeking collective bargaining rights, it’s aligning itself with the labor movement and advocating for workers and social justice. Uber and Lyft are considering a limited, controversial form of collective bargaining. President Biden has promised to be “the most pro union president” and made the strongest public statement of the importance of workers’ rights to organize and form unions of any U.S. president in history. If confirmed, Marty Walsh would be the first union member to be Secretary of Labor since the 1970s. 
  • Heightened interest in labor unions is set against a backdrop of long-term declining union membership. While a growing share of U.S. workers say they would prefer to have a union at work, only a small minority do. Since 1979, unions have lost one-third of their members and the share of American workers represented by unions fell from 27 percent to 12 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 likelihood of union representation is much greater in the public sector, where employer resistance is weaker. In the public sector, 38 percent of workers are unionized (7 million workers) compared to 7.2 percent in the private sector (8 million workers) (see here and here).
  • Unions tend to raise workers’ total compensation and to lead to a more even 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 (albeit not necessarily immediately when an establishment switches from nonunion to union) 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). 
  • Unions can improve racial justice. Black workers have higher unionization rates than workers of other races and ethnicity, the union effect on household income and wealth is stronger for nonwhites, and de-unionization has increased the racial wage gap. Black workers also benefit from grievance procedures, standardized hiring and firing practices, and other policies that can help mitigate discriminatory practices. Admittedly, labor unions have an uneven history with civil rights, but recent results show that labor unions reduce race resentment among their white members. 
  • 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, magnifying the aggregate effects on inequality. In addition, the ownership of corporations and the claim on profits this brings is highly concentrated. The wealthiest 1-percent of American families own 996 times more per family on average than the less-wealthy half of American families. 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. 
  • 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 (a recognition that was also central to the old institutional labor economics school). 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.
  • 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 and more conservative policies (see herehere 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 lobby and 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 can also enhance their members’ civic skills and engagement, leading to higher voter turnout, participation in other political activities, and charitable giving
  • Unions help public policies work. Labor unions promote the exercise and enforcement of workers’ rights. Eligible workers are more likely to receive unemployment insurance benefits if they are in union jobs, there is evidence of positive effects of union certification on workplace-safety enforcement, and labor rights violations are lower in areas with higher union density. The benefits from authorities partnering with labor organizations for co-enforcement of labor standards is particularly strong among vulnerable workers. Union members also pay more taxes than comparable nonunion workers, and receive less in public benefits.

What this Means:

The presence and strength of unions can have ripple effects in the economy — impacting the wages of nonunion workers, the productivity of firms, and the distribution of income — and beyond. 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, worker power declined, and economic inequality grew. The global pandemic and upsurge in concerns with social justice have laid bare the inequalities in the employment relationship leaving many workers struggling to make ends meet but willing to take risks to join together and demand better terms from their employer. 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 an increasing scale of worker coordination ahead.

  • Editor's note: This article contains updated selections from "The Role of Unions" posted on EconoFact by Aaron Sojourner and Brigham R. Frandsen, November 3, 2019.

  • Topics:

    Employment / Inequality
    Written by The EconoFact Network. To contact with any questions or comments, please email [email protected].
    More from Econofact