Unions, wages, and inequality

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For neoclassical economists (like Gregory Mankiw, in his bestselling textbook, Principles of Microeconomics), the major effect of labor unions is that they cause unemployment, by setting a wage rate that exceeds the equilibrium price for labor. According to this story, while union workers (“insiders”) may benefit, unemployed non-union workers (“outsiders”) lose out.* So, their overall conclusion is, unions ultimately hurt workers and cause increased inequality. Unions should therefore be discouraged.

Over the course of the past three and a half decades, the United States it seems has been following neoclassical economists’ advice: the overall unionization rate has fallen to 11.1 percent, while the rate for private-sector workers is even lower, 6.7 percent in 2015 (according to the Bureau of Labor Statistics).**

But the folks at the Economic Policy Institute [ht: ja] tell a story very different from the neoclassical one. As they see it, it’s the precipitous decline in U.S. labor unions from 1979 to 2013 that has played a key role in hurting workers and increasing inequality. In particular, it has decreased the wages of the vast majority of private-sector, full-time nonunion workers—and nonunion men without a college degree and nonunion men with a high school diploma or less have are the ones who suffered the most. Thus, for example, weekly wages for nonunion private-sector men would be an estimated 5 percent ($52) higher in 2013 if private-sector union density (the share of workers in similar industries and regions who are union members) had remained at its 1979 level. And for nonunion private-sector men with a high school diploma or less education, weekly wages would be an estimated 9 percent ($61) higher if union density remained at its 1979 levels (for a year-round worker, this translates to an annual wage loss of about $3,172). In general, union decline has exacerbated wage inequality in the United States by dampening the pay of nonunion workers as well as by eroding the share of workers directly benefitting from unionization. One of the key ways, therefore, to help workers and to lessen inequality is to encourage the formation and strengthening of labor unions.

What’s particularly interesting about the Institute’s analysis (in addition to their empirical estimates) is their analysis of the various ways unions help workers, especially nonunion workers. Here are some of them:

• the threat of unionization: nonunion employers worried about a possible unionization drive may match union pay scales to reduce the demand for organization
• the ripple effect: like minimum-wage increases, union wage rates for production workers can lead to increases in wages for those above them (e.g., their managers)
• the moral economy: unions help institute norms of fairness regarding pay, benefits, and worker treatment that can extend beyond the unionized core of the workforce

The problem, of course, is that since the late-1970s, the presence and effects of unions within the U.S. economy and society have been on the decline. As the authors conclude:

nonunion employers are increasingly unlikely to fear a threat of unionization. . . responding to possible unionization threats through increasing wages is one pathway through which unions raised pay for nonunion workers in past periods. With organizing efforts at a standstill throughout much of the private sector, typical nonunion employers now have little to fear. Given the ongoing attacks on existing unions, labor leaders are doing all they can to hold onto their remaining terrain.

We contend that unions’ influence on nonunion pay once extended beyond these threat effects. But their ability to maintain wage and benefit standards rested on their political and economic power, and their salience throughout the culture. . .That presence has vanished throughout much of the private sector, rendering unions unable to exert the same political, economic, and cultural influence over the working lives of average Americans, union and not.

The result for all workers, but especially for nonunion workers, has been a prolonged period of stagnant wages—and, for American society as a whole, an increase in inequality that has made the existing economic institutions increasingly fragile and, in the eyes of many, fundamentally illegitimate.

 

*This is from the PowerPoint Slides for Mankiw’s book by Ron Cronovich:

**While a much higher portion of workers in the public sector are members of unions (35.2 percent), there are many more private-sector workers (113.2 million) than government workers (20.6 million).