Happy Labor Day: Let’s Talk About Unions
In celebration of all that labor has achieved this year, let's debunk some common anti-union talking points.
Labor has plenty to celebrate this Labor Day. In recent months, the Teamsters won a huge contract for UPS workers; the writers’ strike is going strong; and they may soon be joined by Shawn Fain’s UAW, which is making historic demands for a four-day work week and double-digit wage increases. Additionally, Jennifer Abruzzo, chief counsel at the National Labor Relations Board, ruled last week that employers who illegally interfere with union elections will be mandated to recognize the union. To top it all off, this surge in labor organizing has the overwhelming support of the American people. When polled, 71% of Americans express their support for labor unions, making organized labor one of the most trusted institutions in the country. (Amazingly, according to Gallup, support for unions has only dropped below 50% one time since they began polling in 1936).
This support for unions comes as their membership rates are near their lowest point in the last hundred years. A series of political attacks over the decades have taken away the legal protections and esteem our politicians once granted the labor movement. Union power has been eroded by a flurry of anti-union legislation (Taft-Hartley and various right-to-work bills); unfavorable Supreme Court rulings (most recently Janus and Glacier Northwest, Inc.); popular media stories of union corruption (best embodied by the legend of Jimmy Hoffa); and red-baiting, which attempts to equate all labor activity to a communist plot. But unions have also been seriously curtailed by emergent trends in the real economy and by the influence of anti-union economic ideologies that often influence the American establishment. Today, we’re going to unravel some of these anti-union arguments.
Source: Economic Policy Institute using data from Hirsch 2008
To begin, we must note that the decline of the labor movement, which truly took off in the 1970s, coincided with a bunch of inequitable changes in the American economy. For instance, it was in this decade that the yawning gap between productivity growth and worker compensation began. Neoclassical economic theory states that in a competitive market economy, wages should keep pace with productivity growth, giving workers and employers alike a stake in economic progress. But since 1979, this hasn’t held true. The 1970s also marked the beginning of many other undesirable economic trends: stagnating real wage growth, growing income inequality, and the hollowing out of the middle class. For those on the left, the debate around the benefits of unions often begins by pointing out all of the negative trends that began concurrent with their decline. But is declining union activity really responsible for all of these changes?
Source: Economic Policy Institute
In fact, these trends have several different causes, though the declining power of unions has certainly played a role in expediting them. Nearly all economists agree that unions drive up wages, so if unions were more pervasive (or powerful), it follows that the gap between worker pay and productivity would likely be smaller. Ironically, the only thing that may prevent unions from closing that gap is that they also increase worker productivity! But these simple facts are often ignored in discussions about broader topics like outsourcing and inequality. For those seeking to undermine the role of labor in our economy, these trends are reductively explained by one or two causes that are presented as inescapable economic truths that workers must simply accommodate. Income inequality and stagnating wages are attributed to differences in productivity between workers and the increasing mobility of firms. The decline of the labor movement is treated as merely coincidental, despite the fact that unions promote wage compression.
To anti-union economists, unions can only cause harm. They might win some temporary benefits for their members, but these will come at the expense of everyone else who will have to pay a higher price for the goods produced by unionized workers. And even the union members themselves will come to regret their organizing once their burdensome demands result in their jobs being replaced by machines or shipped overseas. This attitude is best epitomized by the words of Milton Friedman in his classic book Free to Choose, who explained the impact of unions as follows:
“Make labor of any kind more expensive and the number of jobs of that kind will be fewer…Raise the wage of airline pilots, and air travel will become more expensive. Fewer people will fly, and there will be fewer jobs for airline pilots.”
On its face, this looks like a simple recitation of the law of demand. But Friedman’s narrative is too simple.
First, unionization is most common in concentrated industries where firms have significant pricing power. In these industries, firms are not compelled to pass on the full costs of union demands to consumers, like they would be forced to under perfect competition. These firms set their prices to maximize profits, not to perfectly offset costs. If the elasticity of demand for a product is high (i.e. consumers are very sensitive to changes in price), firms will not be able to pass on most of these costs to consumers; they’ll just have to settle for smaller profits or find a more efficient way of doing business. An oligopolistic firm’s short-term calculation of the profit-maximizing price of a good is only marginally influenced by the decision of its workers to unionize or a union’s demand for a moderate wage increase. In concentrated markets, firms are trying to maximize profit, which is total revenue minus total costs. Total costs may be increased by the union, but total revenue is already being maximized prior to the union activity. Unless consumer demand has somehow changed in the meantime, raising prices would only counterproductively reduce total revenue. We’ve also already noted that unions drive up labor productivity, which means that they create new economic value for their employers that can be distributed between the workers themselves, their bosses, and consumers.
Second, it is difficult to give unions even a considerable portion of the blame for the large outsourcing of American jobs we have seen in the last few decades. Until recently, union-negotiated contracts have given first year workers wage increases in the low single digits. This represents a very tiny share of most firm’s total costs, not near enough for them to alter their long-term decisions. That’s why, for instance, outsourcing surged under Obama and Trump, though a new trend of onshoring has emerged in the last few years even though the labor market has been relatively tight and union activity has been relatively high. Other factors simply play a greater role in influencing the decision to outsource. The timing of this argument is also all wrong. The beginning of outsourcing on a large scale coincides with a decline in union density and increasingly docile demands from labor. Far more to blame for outsourcing are international trade deals that lower its costs, the lack of a global minimum corporate tax, and most importantly, the logistical innovations in communication and transportation that have made economic globalization a profitable enterprise.
Source: Bloomberg Law
Third, unions benefit many people outside their membership. While unions often win significant benefits for their members, non-unionized workers in heavily unionized industries also reap significant benefits from the industry standards fought for by unions. For instance, a study from the Economic Policy Institute found that “a high school graduate whose workplace is not unionized but whose industry is 25% unionized is paid 5% more than similar workers in less unionized industries.” By combining the bargaining power of several workers, unions also gain leverage when negotiating against increasingly large and consolidated firms, and thus provide a countervailing force to corporate power. Additionally, even consumers and local businesspeople can benefit from union activity. By winning workers higher wages, unions stimulate local demand since workers are far more likely to consume from businesses in their community than executives who often live far away.
Lastly, unions are capable of providing the sort of economic vision that our politicians are unable to. For a current example, take the demands being made by the UAW: a 32-hour work week, double-digit wage increases, a cost of living adjustment to protect workers against inflation, and the elimination of temp work and other practices used to segregate workers. Just by making these demands, the debate around what workers deserve has been altered. If they’re won, more workers will begin demanding them, and the benefits will spread further than the union itself ever could.
The third point is extremely important in inequality discussion. I call it the spill-over effect and research has shown: "Including the spill-over effect is important, as without taking it into account, we could be underestimating the impact of unionization on reducing wage inequality. Fortin, Lemieux and Lloyd find that in the period between 1979 and 2017, falling unionization rates can explain 40% of the increase in inequality between the 90th and 50th income percentile, which went up from 1.8x to 2.5x. The spill-over effect accounts for half, or 20%, of this rise in inequality."