Chapter 11: The Economic Impact of Unions

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 Union Wage Advantage

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 non-union workers.

Preliminary Complications

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 wages?

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 unionized workforce.

  1. Spillover Effects ­ The spillover effect refers to the decline in nonunion wages that results from displaced union workers supplying their services in nonunion labor markets. The higher wages achieved in the unionized sector of the labor market will be accompanied by a loss of jobs, and displaced workers will spill over into the nonunion sector and depress nonunion wages. To the extent that the spillover effect occurs, our measured union wage advantage, will overstate the pure union wage advantage.

  3. Threat Effect ­ In contrast, some analysts argue that some market forces such as the spillover effect are largely subverted by collective bargaining and that wage rates are determined mainly on the basis of "equitable comparisons" . More specifically, the threat effect refers to an increase in nonunion wages that a nonunion employer offers as a response to the threat of unionization. The reasoning is that nonunion employers will feel increasingly threatened with unionization when workers in union firms obtain wage increases. An enlarged union-nonunion differential will increase the incentive for the workers in the nonunion firms to organize.

  5. Other Effects ­ There may be a product market effect, which argues that an increase in nonunion wages caused by consumer demand shifting away from relatively high priced union produced goods and toward relatively low priced goods produced by nonunion workers. There is also the notion of the superior worker effect, in which the higher wages paid by union firms will cause workers to queue up for these good union jobs. Given the availability of many job seekers, unionized employers will carefully screen these prospective workers for those having the greatest ability, motivation and the least need for supervision and other worker traits contributing to high productivity.


<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.

  1. The union wage advantage moves countercyclically, increasing during recessions and narrowing during expansions.

  3. Craft unions, especially in the construction industry, have achieved union wage advantages that are much larger than average. The bargaining power of such unions is great because each craft union represents a small proportion of total costs, and skilled crafts workers can often find employment in many industries.

  5. Unions achieve higher wage advantages for blue-collar workers than for white-collar workers.

  7. Less-educated workers have higher union wage premiums than better-educated workers.

Total Compensation: Wages and Fringes

Union workers enjoy a greater variety and higher overall level of fringe benefits than nonunion workers.


  1. Fringes may be higher for the same reason that wages are, bargaining power of the union.

  3. Because union wages are higher, perhaps union members simply choose to purchase more fringe benefits.

  5. The union may simply provide an institutional structure for information gathering and dissemination about fringes.

  7. Unions are often controlled by older workers who have a general preference for more fringes.

  9. Unions reduce turnover, so the members may expect to actually use the benefits such as retirement plans and life insurance.

  11. Under collective bargaining laws, fringe benefits are a mandatory bargaining item.

Efficiency and Productivity

How do unions affect the allocation of resources? Unions might affect efficiency both negatively and positively.

Negative View

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.

  1. Restrictive Work Rules ­ One of the most common ways that unions reduce productivity is to negotiate contract clauses that restrict management's ability to organize work activity. Unions impose jurisdictional restrictions on the kinds of jobs workers may perform. Unions often insist that workers be promoted in accordance with seniority rather than ability and efficiency. Read the list of typical work rules on page 354 of the book.

  3. Strikes ­ Simple statistics on strike activity suggest that strikes are relatively rare and the associated aggregate economic losses are relatively minimal. Table 11-3 provides data on major work stoppages, defined as those involving 1000 or more workers and lasting at least one full day or one work shift. But these data can be misleading as a measure of the costliness of a strike. On the one hand, employers in the struck industry may have anticipated the strike and worked their labor force overtime to accumulate inventories to supply customers during the strike period, so that the work lost data overstates the actual loss. On the other hand, the amount lost can be understated by the data if production in associated industries ( those that buy inputs from the struck industry or sell products to it) is disrupted. As a broad generalization, the adverse effects of a strike on nonstriking firms and customers are likely to be greater when services are involved and less when products are involved. Remember, that strikes are the result of the failure of both parties to the negotiation, so it is inaccurate to attribute all of the costs associated with a strike to labor alone.

  5. Wage Advantage and Labor Misallocation ­ Figure 11-3 illustrates the effect of the union wage advantage on the allocation of labor. The higher wage achieved by the union causes a displacement of labor with reduces the wage in nonunion sectors of the economy. This movement of labor causes total output to fall as workers were more productive in their previous jobs that they are in the jobs in the nonunion sector that they are forced to migrate to.


<click 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.

Positive View

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.

Firm Profitability

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 differential

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).