Do Labor Unions Promote the Middle Class?
David Henderson
In today's WaPost, political scientists Jacob S. Hacker and Paul Pierson argue that not only are unions good for their members but also that unions promote a strong middle class. Their main argument is that unions are a strong political force that lobbies for pro-middle-class policies. Dealing with that argument, which I think has some correct points and some incorrect, would take me too far afield from their more-narrowly-economic argument about the direct impact of unions on wages, which is what concerns me here. Here is that argument:
The reason [that unions reduce income inequality] isn't just that unions defend their members. They also create changes in social norms, such as pressures for nonunion employers to match union gains.
What Hacker and Pierson have done here is point to one effect of unions--labor economists call it the "threat effect"--but left out another that is stronger. But to see why, we need to back up and think about what unions have been in the United States since the 1930s. Unions, as economists, even many who are pro-union, have pointed out are legal monopolies. As pro-union Harvard economists Richard Freeman and James Medoff, put it, "Most, if not all, unions have monopoly power, which they can use to raise wages above competitive levels." They have this monopoly power mainly because the federal government gives them the power, not the right, to be the sole bargaining agent for workers in a plant or company, even if many of the workers don't want to be represented. These workers tend to be "the unseen."
But because the unions drive wages above competitive levels, they cause some of the workers to be put out of work. Many of these workers would have rather driven their own bargain and worked for a lower wage, but they can't do so legally. Check out this comment by Rich on my previous post on this subject for one such case.
What do these workers do? Sit and eat bon-bons the rest of their lives? No, they go out and find other work. If they find work in the non-union sector, that drives down wages there. Indeed, one of the main findings of the late H. Gregg Lewis, the famous labor economist at the University of Chicago, is that unions in their heyday, the 1950s and early 1960s, caused union wages to be 10 to 15 percent higher and non-union wages to be 3 to 4 percent lower.
But what if unions did have the effect that Hacker and Pierson claim? This "threat effect" would undercut my claim above. But to see how, let's take an extreme. Let's say that every non-union employer, seeing the threat of unionization, raises pay and benefits a little. They, just like union employers when faced with a higher wage, will employ fewer people. Then those people put out of work by unions will have more trouble finding work. The wages of those who are working will be higher--and there will be fewer of them. The wages of those who are not working will be zero. Will you have a bigger middle class? Possibly. Will you have a larger lower class with people, especially younger people, having much more trouble finding work? Definitely.
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Effect of Monopoly Unions on Income Distribution
David Henderson
In a comment on my post, Minimum Wage: The Missing Explanation, Tom West writes:
I'm not certain it's necessarily a net loss for the USA to have actually had labor laws and unionization that led to a middle class large enough to encompass the majority of its citizens during the 1950-1990 period. While the unemployment of extremely marginal workers *is* a real cost, I don't think the transfer of the "excessive" wages garnered from the labor laws to the owner class would make the USA today a better place to live for the majority of its citizens.
Tom misunderstands the effect of unions. As I noted in my post, "Do Labor Unions Promote the Middle Class?", the main effect of unions is not to strengthen the middle class but to transfer wealth from non-union to union workers.
I focused in that post on the effect of unions on relative wages. Let's look here at the effect of unions on owners of businesses that are unionized. Say a union forms and uses its monopoly power to get a higher wage. What happens next? It's true that the profits of the firms that are unionized fall. If the whole industry is unionized, then firms leave the industry until the industry returns to normal profitability. Prices of the output are higher. That means that the long-run effect of the higher wages union receive is not a transfer from capital but a transfer from consumers.
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