The Corner

Unions, What Good Are They?

In response to my post from yesterday, I’ve gotten a lot of interesting email. Lots of it was anecdotal; “Unions are great! They made me richer!” “Unions suck, they ruined my company” and so on. On the empirical side, I haven’t waded through all of these papers in any great detail yet. But readers might find this stuff interesting. The National Bureau of Economic Research (NBER) just came out with “Long-Run Impacts of Unions on Firms: New Evidence From Financial Markets, 1961-1999″. Here’s a summary from the NBER digest:

A successful effort to unionize a workplace apparently reduces the market value of affected publicly-traded firms, even if there is no immediate change in their operating performance. In Long-Run Impacts of Unions on Firms: New Evidence From Financial Markets, 1961-1999 (NBER Working Paper 14709), co-authors David Lee and Alexandre Mas estimate that the average effect of a union win at a workplace is to decrease the market value of the affected business by at least $40,500 (in $1998) per worker eligible to vote, based on monthly stock prices for 24 months before and after a vote to unionize. Their simulations suggest that a policy-induced doubling of unionization in the United States would “lead to a 4.3 percent decrease in the equity value of all firms at risk of unionization.”

The decrease in equity value associated with unionization begins at the time the union wins its election and continues for about 15 months afterward. Calculations of the effects of a union victory suggest that it produces large negative returns of 10 to 14 percent. The authors also find that the effects are quite variable, depending on the degree of support for the union. When unions win elections with a bare majority, there is almost no union effect. But when unions win by a large margin, the effect can be as large as 25 to 40 percent.

And here’s a much touted study on card check. The abstract:

The Employee Free Choice Act (EFCA), which is pending before the US Congress, would provide for union representation when an employee majority has signed union authorization cards and would create a system of mandatory arbitration if a collective bargaining agreement is not reached approximately 130 days after a union is newly certified. I critically assess the arguments presented for passing EFCA and consider the likely unintended consequences it will generate, should it be passed. I find that while card checks could be expected to increase union membership as hoped by EFCA proponents, EFCA is unlikely to achieve its main goal of improving social welfare, which should take into account possible consequences not only for union members but for all individuals. In particular, my quantitative analysis indicates that passing EFCA would likely increase the US unemployment rate and decrease US job creation substantially. The precise effect on unemployment will depend on the degree to which EFCA increases union density, but for every 3 percentage points gained in union membership through card checks and mandatory arbitration, the following year’s unemployment rate is predicted to increase by 1 percentage point and job creation is predicted to fall by around 1.5 million jobs. Thus, if EFCA passed today and resulted in an increase in unionization from the current rate of about 12% to 15%, then unionized workers would increase from 15.5 to 19.6 million while unemployment a year from now would rise by 1.5 million, to 10.4 million. If EFCA were to increase the percentage of private sector union membership by between 5 and 10 percentage points, as some have suggested, my analysis indicates that unemployment would increase by 2.3 to 5.4 million in the following year and the unemployment rate would increase by 1.5 to 3.5 percentage points in the following year.

My e-friend Paul Kersey, Director of Labor Policy at the Mackinac Center for Public Policy sent me this:

On the advantages of unions, I think the evidence points the other way. Right-to-work states, where unions cannot force membership or financial support from workers they represent, are outperforming non-RTW states by a solid margin across-the-board: in wage growth, job growth, GDP, unemployment, you name it. Union officials claim that RTW makes unions weaker. (We would debate that. We would say that RTW makes unions more acountable to their rank and file, but the bottom line is union officials don’t care much for it.) We did a study on that in 2002 and a follow-up in ‘07 and here’s what we found:

“Wilson compared right-to-work and non-right-to-work states on basic measurements of economic performance, such as gross state product growth, job creation and per-capita disposable income between 1970 and 2000. Wilson found that right-to-work states had significant advantages in economic growth and job creation. While incomes were still somewhat lower in right-to-work states, incomes were also growing faster in those states. Michigan, on nearly every economic measurement, had lagged behind.

This paper picks up where Wilson’s study left off, tracking the same measurements from 2001 to 2006. We find that little has changed — if anything the apparent advantages of right-to-work states have grown larger. The economies of right-to-work states grew by an average of 3.4 percent compared to 2.6 percent for non-right-to-work states and 0.7 percent for Michigan. Jobs grew by 1.2 percent annually in right-to-work states, compared to 0.6 percent for non-right-to-work states, while jobs decreased by an average of 0.8 percent in Michigan.

Meanwhile, the gap in per-capita disposable income continues to shrink, to the point where most right-to-work states are likely to have higher incomes than Michigan does within just a few years.

On several measurements, the trends between 2001 and 2006 were more favorable towards right-to-work states than they had been in the period covered by Wilson’s earlier study. In light of Michigan’s current economic difficulties, this leads to the conclusion that the case for making Michigan a right-to-work state has only become stronger.”

We could put together more recent info if you want it.

Meanwhile, on the other side of the question, the only empirical stuff that came in was sent by a political director of a labor union — which hardly means his arguments or data are wrong, but I thought it was worth mentioning. Here’s his email, which I’m posting as is for clarity’s sake:


“Basic economics says that as labor costs rise the incentive for capital investment increases – hence rising productivity. The opposite holds as well – when wages fall there is a relative disincentive to make new capital investments.

As real wages in the U.S. have fallen, so too has the incentive for companies to make productivity enhancing capital investments. In fact, in the U.S., where real wages are lower than they were in the 1970s, there is a perverse incentive to substitute labor for capital.

Recent data (ILO, Bureau of Labor Statistics) shows that where union density and real wages are high, for example in the manufacturing sector, productivity growth is more rapid.

The European countries with strong productivity growth have much higher unionization rates than the United States. In Ireland, for example, where 40 percent of the manufacturing workforce is unionized, productivity per hour worked rose at an average annual rate of 8.5 percent from 1980 to 2005, more than double the U.S. rate.”

The last point can be generalized. Highly unionized workers in Europe are more productive per hour worked than the USA

“In 1970 GDP per hour in the EU was 35 percent below that of the US; today the gap is less than 7 percent and closing fast. Productivity per hour of work in Italy, Austria, and Denmark is similar to that of the United States; but the US is now distinctly outperformed in this key measure by Ireland, the Netherlands, Norway, Belgium, Luxembourg, Germany, …and France.[4]”

See also:

Click to access unionpaper.pdf

pages 8-9 for explanations on how unions increase productivity. For example of a specific comparison of two America companies.

“In the service sector, Business Week compared non-union, low-wage Sam’s Club – a unit of Wal-Mart – with highwage Costco, one fifth-of whose workers belong to unions (Holmes and Zellner,2004). Business Week found that “Costco’s high-wage approach actually beats Wal-Mart at its own game on many measures.” Costco, as Freeman and Medoff (1984) found in unionized firms, has lower turnover – 6 percent annually compared to 21 percent for

Sam’s Club. “Bottom line,” according to Business Week, “Costco pulled in $13,647 in U.S. operating profit per hourly employee last year vs. $11,039 at Sam’s” (Holmes and Zellner, 2004)”

In addition, widespread wage negotiations with unionized workers can provide a more efficient way to regulate inflation than just having the Fed hike interest rates. Thus strong unions can help avoid unemployment. Basically it would be easier for the Fed to negotiate lower wages or slower growing wages directly with workers as opposed to raising interest rates and restricting all kinds of economic activity.

“. . .coordinated bargaining agreements between large groups of workers and employers and/or the government is associated with lower rates of unemployment. This system, which exists most strongly in some northern European countries like Sweden, the Netherlands, and Ireland, allows workers to directly gauge the impact of their wage demands on the economy and adjust them accordingly. It has allowed several of these countries to sustain unemployment rates that are lower than those in the United States, without any notable problems with inflation.

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