Chapter 11: The Economic Impact of Unions

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Chapter 11 The Economic Impact of Unions
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• 1. The Union Wage Advantage

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Preliminary Complications

• If unions raise wages for a firm in a perfectly
  competitive market, the firm will not survive due
  to their higher costs.
• Unions try to organize all of the firms in an
  industry to prevent unionized firms being at a
  cost disadvantage.
• Simply comparing wages in highly unionized
  industries with those in less unionized
  industries may be misleading.
• Factors other than unions may explain the
  difference plant size, worker skills, etc.

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Union Wage Advantage

• If we could compare wage rates in a given
  labor market, where all conditions were held
  constant except for the presence of the unions,
  we could calculate a pure measure of the
  unions wage advantage.

• The pure wage advantage is (Wu-Wn)/ Wn 100.

• Unions may influence the wage rates of
  nonunion workers as well as the wage rates of
  their own workers in the real world.

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Spillover and Threat Effects

• The spillover effect suggests that as a union
  is able to raise wage rates from Wn to Wu,
  employment in the union sector will fall by Q2
  - Q1.

• The reemployment of these workers in the
  nonunion sector, will reduce wages from Wn to
  Ws, which means the measured wage advantage
  (Wu-Ws)/ Ws overstates the pure wage
  advantage.

• The threat effect is that nonunion employers
  raise wages from say Wn to Wt to prevent
  unionization.

• The threat effect causes the measured wage
  advantage (Wu-Wt)/Wt to understate the pure
  wage advantage.

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Product Market Effect

• An increase in union wages will raise costs
  and prices in the union sector.

• As a result, the demand for nonunion product
  and thus raise the demand for nonunion labor
  (D1 to D2).

• This will tend to raise wages in the nonunion
  sector and thus the measured union wage
  advantage will understate the pure wage
  advantage.

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Other Effects on Nonunion Wages

• Wait unemployment
• Some of the workers who become unemployed when
  union increase the wage rate in the union sector
  may prefer to wait for a job in the union sector
  rather than take a job in the nonunion sector.
• This reduces the spillover effect and its
  resulting overstating of the pure wage advantage.

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Other Effects on Nonunion Wages

• Superior-worker effect
• The higher wages at union firms will allow them
  to hire better workers.
• This causes the measured wage advantage to
  overstate the pure wage advantage.

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Union Wage Advantage

• The union wage advantage rose in the late
  1970s as union wages were protected from
  inflation with cost of living adjustments, but
  nonunion wages were not.

• The union wage advantage was relatively
  stable in the high teens from the mid 1980s to
  the mid 1990s.

• The union wage advantage has fallen from the
  high teens in 1994 to 15 percent now.

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Variations in Union Wage Advantage

• The union wage advantage is greater for the
  following
• Recessions
• Construction workers
• Black males
• Blue-collar workers
• Less-educated workers

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Total Compensation

• Total compensation is the sum of wages and fringe
  benefits.
• Union workers have more fringe benefits than
  nonunion workers because
• Union workers have higher wages and want to buy
  more fringe benefits.
• Union workers are older.
• Unions are able to express workers preferences
  for more fringe benefits.
• Union workers have greater job tenure and thus
  are more likely to collect a pension.

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• Questions for Thought

1. How is the pure union wage advantage
defined? If in a given labor market the wage rate
would be 8 without a union and 10 with a union,
then what is the pure union wage advantage?
Explain how, and in what direction, each pf the
following might cause the measured wage
advantage to vary from the pure wage advantage
(a) the spillover effect, (b) the threat effect,
(c) the product market effect, (d) the wait
unemployment effect, and (ed) the superior worker
effect.
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• 2. Efficiency and Productivity

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Negative Effects

• Restrictive work rules
• Unions may impose work rules that decrease
  efficiency or productivity.
• Limits on output.
• Time consuming production methods.
• Requiring unnecessary work to be done.
• Requiring unnecessary workers to be hired.
• Restrict the types of work that a worker can
  perform.
• These work practices also exist in the nonunion
  sector.

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Negative Effects

• Strikes
• Strikes are relatively rare and account for lt.1
  of total estimated total working time.
• Data on working time may overstate the output
  loss due to strikes since firms may build up
  inventories in anticipation of a strike.
• Data on working time may understate output loss
  due to strikes since the strike may disrupt
  production in other industries.
• The effects on non-striking firms are likely to
  be greater when services are involved.

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Strikes

• The number of work days lost has trended
  downward since 1970.

• 94 of the lost work days in 2000 were the
  result of 4 strikes.

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Negative Effects

• Wage advantage and labor misallocation
• The higher wage in the union sector causes
  workers to be displaced to the nonunion sector.
• This causes an efficiency loss because the loss
  in output in the union sector is greater than the
  gain in the nonunion sector.
• The value of marginal product of the laid off is
  greater in the union sector than in the nonunion
  sector.

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Negative Effects

• Wage advantage and labor misallocation
• Qualifications
• Unemployment
• If the workers laid off are not reemployed in the
  nonunion sector, the efficiency loss is larger.
• Job search costs
• If there are search costs with finding
  reemployment, then efficiency loss will be
  larger.
• Bilateral monopoly
• If unions are bargaining with a monopsonist, then
  the efficiency loss may be smaller.

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Negative Effects

• Investment behavior and productivity growth
• The misallocation of labor described earlier is a
  static or short-run efficiency loss.
• There may also be a dynamic or long-run
  efficiency loss.
• If unions are able to extract a large part of the
  returns to capital, then firms will be less
  likely to invest in capital and reduce
  productivity growth.
• Empirical evidence
• Unions have a small static efficiency loss on
  output

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Positive Effects

• Investment and technological progress
• The higher union wages may cause firms invest in
  capital in order to substitute for the relatively
  more expensive labor.
• Unions as a collective voice
• Unions function as collective voice for their
  members to resolve disputes, improve working
  conditions, etc.
• Workers morale increases and so does productivity

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Positive Effects

• Union workers have lower turnover due to
  collective voice effect as well as the union wage
  advantage.
• Union workers have higher productivity due to
  their greater worker experience.
• Union firms are more willing invest in training.
• Due to seniority layoff, senior union workers are
  more willing to provide informal training to less
  senior workers.

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Positive Effects

• Faced with a higher union wages, firms may have a
  shock effect on productivity.
• Managers try to increase efficiency in order to
  offset effect of higher union wages.
• Empirical evidence
• The empirical evidence regarding the impact of
  unions on productivity is mixed.

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• 3. Firm Profitability

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Firm Profitablity

• Nearly all studies find that unions reduce
  profits.
• If unions reduce profits in monopolistic
  industries, then no efficiency loss occurs.
• If unions reduce profits in competitive
  industries, then an efficiency loss occurs since
  firms will leave the industry.
• Output will be lower and prices higher.
• The empirical evidence is mixed on whether there
  is an efficiency loss.

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• 4. Distribution of Earnings

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Increasing Inequality

• Unions increase income inequality in three ways
• Increasing the wages of union workers and
  lowering the wages of nonunion workers through
  the spillover effect.
• Increasing the wages of skilled blue-collar
  workers relative to unskilled blue-collar
  workers.
• Increasing the demand for skilled labor within
  unionized firms.

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Decreasing Inequality

• Unions decrease income inequality in three ways
• Equalizing wages within firms.
• Unions try to make pay tied to jobs and not
  individual workers.
• Unions seek a wage policy of equal absolute
  dollar wage increases for workers.
• Equalizing wages across firms.
• Unions seek to standard wage rates among firms.
• This enables unions to protect their wage
  advantage.

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Decreasing Inequality

• Reducing the white-collar to blue-collar
  differential.
• The empirical evidence is that unions reduce
  income inequality on net.

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• 5. Other Issues Inflation, Unemployment, and
  Income Shares

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Other Effects

• Inflation
• Unions are not a cause of inflation like monetary
  policy.
• Unions and unemployment
• Unions may reduce downward wage flexibility and
  thus increase unemployment.
• Reduce worker turnover and thus unemployment.
• High union wage rates may increase unemployment
  by attracting new entrants.
• The evidence is unions have only a small effect
  on unemployment.

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Other Effects

• Labors share
• Unions have not been able to increase the share
  of income going to labor rather than capital.
• The higher union wages come at the expense of
  lower wages for nonunion workers.
• Union wage increases may cause firms to
  substitute capital for labor.
• Firms may avoid an impact on capital income
  through productivity and price increases.

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• Questions for Thought

1. Comment on each of the following statements
(a) Unions tie the hands of management and
inhibit efficient decision making.
(b) Unions contribute to economic efficiency
in that union wage pressure hastens the
weeding out of the high-cost, least-efficient
producers in each industry.
(c) Although unions may reduce wage
inequality, to the extent they reduce wage
differentials based on individual merit and
effort, the outcome may be rightly perceived
as both inequitable and inefficient.
(d) Unions impair the efficiency of our
economy indirectly by diminishing profits
and thereby reducing investment and economic
expansion.
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EndChapter 11