In this unit, our attention is focused on the economic effects of unions and collective bargaining, looking at these questions:
1) Are unions able to gain a wage advantage through collective bargaining?
2) What are the implications for productivity and allocative efficiency?
3) Do unions affect profitability?
4) What is the impact on the distribution of earnings?
5) What are the macroeconomic affects of unions (employment, price level, labor's share of national income)?
The Bureau of Labor Statistics (BLS) data indicate that the average
hourly earnings of union members was $16.30 (1997) compared to $13.10 for
The question is not quite so simple. For example, think about a unionized
firm operating in a competitive environment. What would happen if this
firm paid its workers a wage greater than its competitors? A wage advantage
would imply a higher average cost of production than the market determined
product price which would create economic losses for the firm and eventually
force it out of the industry.
This explains why unions are anxious to organize complete industries,
not individual firms and why they fare better in industries where products
are sold in imperfectly competitive markets.
But even if we measure a wage difference accurately, how do we know
that the union is responsible for the difference? Do unions cause higher
wages or just organize more successfully in industries that pay higher
Strongly unionized industries usually have larger plants and are more
capital intensive than weakly organized industries. The fact that unionized
plants tend to be larger raises the possibility that supervision and monitoring
may be more costly in such firms, causing employers to seek out and hire
superior workers. Similarly, capital-intensive production often requires
more highly skilled workers who naturally command higher wages.
Measuring the Wage Advantage
Unionization may affect wage rates in nonunion labor markets, pushing
them upward or downward and creating a bias in the measurement of the union
wage advantage. The pure union wage advantage is the amount by which
the union wage exceeds the nonunion wage that would exist without the union.
This difference is expressed as a percentage (Wu-Wn/Wn)* 100.
The best that can be done in this regard is to compare the wages of
workers of a specific kind in unionized markets with the wages of workers
in nonunionized markets. But in making this comparison, the previously
mentioned conceptual difficulties must be considered. In addition, the
union wage may result will induce more productive workers to join union
firms. The following different "effects" describe various ways union wage
setting may affect nonunion wages and may influence the quality of the
<click here for slides on figure 11-2>
Union wage advantages vary greatly by industry, occupation, race, gender, and state of the economy. Although no unassailable generalizations can be drawn from the studies hat try to sort out these differences, the following comments seem to be defensible.
Union workers enjoy a greater variety and higher overall level of fringe
benefits than nonunion workers.
Efficiency and Productivity
How do unions affect the allocation of resources? Unions might affect
efficiency both negatively and positively.
Unions might exert a negative impact on efficiency in three basic ways.
First unions often impose work-rules that reduce efficiency within the
firm. Second, strikes can reduce the aggregate output of the economy. Finally,
the union wage differential distorts the wage structure, causing a misallocation
of labor between union and nonunions firms and industries.
here for slides on figure 11-3>
Qualifications This model of allocative efficiency stemming
from the union wage differential is fairly simple and the text calls attention
to several other factors that might cause the efficiency loss to be greater
or less than the model suggests.
1) Unemployment If some of the workers who lost their jobs because of higher wages in the union sector decided to remain in that sector in the hope of reemployment, a larger net loss in output will result. In addition, to the extent that the "threat" and "product market" affects increase nonunion wages, workers will be displaced in that sector as well as in the union sector.
2) Job Search Costs Job search takes time and entails both out-of-pocket costs and foregone earnings, and the migration that may be involved in the shifting from the nonunion sector is costly.
3) Bilateral Monopoly To the extent that the bargaining is occurring with a monopsonistic employer, union wage determination may "correct" the underallocation of labor resources that such an employer would find profitable.
4) Investment behavior and productivity growth Unions may also have dynamic effects, reducing firm and industry profitability, by exerting a retarding effect on investment and economic growth.
Other economists believe that unions make a positive contribution to productivity and efficiency. Their arguments include the following:
1) Investment and Technological Progress Union wage increases may accelerate the substitution of capital for labor and hasten the search for cost-reducing (productivity-increasing) technologies.
2) Unions as a Collective Voice The collective voice mechanism of unions contribute of labor productivity by voicing worker grievances and through their effects on labor turnover, worker security, and managerial efficiency. Grievances can be voiced by the union rather than individual workers. The collective voice may be effective in correcting job dissatisfaction that otherwise would result in worker turnover. In addition, the wage differential will reduce quit rates.
3) Seniority and Informal Training The union insistence on the primacy of seniority enhances worker security, making workers more willing to participate in informal O-J-T, which enhances worker quality and productivity.
4) Managerial Performance Union wage pressure may precipitate a shock effect that is favorable to productivity. Confronted with a strong union and higher wage demands, firms may be forced to adopt better personnel and production methods to meet the union's wage demands and maintain profitability. This, of course, assumes that profit-maximization is NOT the objective of firms. That is, the market mechanism in not really effective at disciplining managers to maximize profits.
Virtually all empirical studies associate unionization with diminished
profitability. Is this redistribution from profits to wages desirable?
There are two polar scenarios. (1) If the unionized industry is highly
concentrated or "monopolistic", then the evect of a union may simply be
to transfer unwarranted "excess" profits from capitalists to workers, with
no negative effects on productivity. (2) If there is competition in the
industry and profits are "normal", then the reduction in profits will impair
investment in capital and technological progress, and in the long-run firms
will leave the industry.
Distribution of Earnings
Increasing Inequality Those who argue that unions increase
inequality in the distribution of wages contend that unions (1) simultaneously
increase the wages of union workers and depress the wages of nonunion workers
through the spillover effect; (2) raise the wages of skilled blue-collar
workers relative to unskilled blue-collar workers; and (3) increase the
demand for skilled labor within unionized firms. When unions force employers
to pay above-equilibrium wages, the long run response is to hire higher
quality workers. This constitutes a shift in the structure of labor demand
away from low quality and toward high-quality workers. The net result is
a widening of the dispersion of wages or, in short, greater wage inequality.
Promoting Equality Other aspects of union wage policies
suggest that unionism promotes greater, not less, equality in the distribution
of earnings by; (1) promoting uniform wages within firms, (2) promoting
uniform wages among firms, and (3) reducing the white-collar to blue-collar
Other Issues: Inflation, Unemployment, and Income Shares
Inflation -- Economists generally agree that union wage determination
is NOT a basic cause of inflation. Most inflationary pressures are caused
by excess aggregate demand or supply shocks.
Unemployment Because of the downward inflexibility of wages
created by unions, wage reduction cannot cushion the impact of recession
on unemployment. In addition, unionism is associated with lower turnover,
which tends to reduce unemployment and, by raising wages, unions may increase
unemployment by attracting additional workers into the labor force.
Labor's Share There is no significant evidence to suggest that unions have been able to increase labor's share of national income (at capital's expense).