Tuesday, October 21, 2008

Unions Help Workers, Right?

So given the pretty dynamic discussion about “Card Check” that was fostered by my last post, I thought I’d throw out this bomb shell to see what happens. If this above mentioned policy gets enacted it will likely have the effect of increasing union membership; that’s the reason why unions are in such favor of the policy in the first place.

Without getting into the arguments for the right to unions and so on, I want to just look at the macroeconomic effects of unionization. Though all unions are not monolithic, the primary goal is to negotiate a wage for members that is higher then what would have been received in their absence. For any given employer then, a union has a monopoly on a firm’s labor supply. As we all know, monopolies have the ability to charge higher prices than in a competitive market. As a result, union members on average therefore receive higher wages and benefits then non-unionized labor. However, this gain is achieved at the expense of workers who are not unionized and the unemployed, as well as the general economy. The Law of Demand states that the higher wages required for the same labor reduces the total quantity of labor demanded by employers, lowering the wages and the job opportunities for everyone outside the union (as well as union members themselves through lower long term growth in wages).

So to test this theory out I looked at the relationship between union membership and general employment growth. I took a bunch of state data from the Bureau of Labor Statistics on unionized labor rates and employment growth over the past ten years. As seen by the chart below there is a negative correlation between the percent of unionized labor and the growth in overall employment over the time period. I used a ten year period in order to capture an entire business cycle and minimize the effects of one-time events such as Katrina and September 11th.

The result was that over this period, for every 10 percent of workers that were unionized, the state’s job growth rate was 2.6 percent lower. The median “Right to Work” state had job growth of 13.7 percent compared to 10.2 percent for states without these laws. This translates to a growth rate that is 34 percent faster.

*Note that the blue dots are states that are “Right to Work” meaning that it is illegal to mandate that workers join a union if a given employer is unionized. These states on average have much lower rates of unionization, and that is why unions generally oppose such laws. On the other hand, these laws are likely only able to be passed in states with low union membership.

Obviously there are many more factors that affect job growth then just unions (this is why there is a good amount of variance between the data points), including education levels, tax rates, access to infrastructure and so on. Furthermore, the two may just be correlated to some other third condition. However, on average there is relationship between the two. That put together with the logical analysis suggests that larger union states have a more difficult problem with attracting employers who wish to create jobs. A more accurate statistical analysis would require, for those math prone, a multi variable regression analysis. Lacking the software, the time and the desire to exert that effort, I have not done so, but you can look at other studies. As executive summary of one can be found here or the entire paper here. It is only one paper (and written by self desrcibed "free market economists"), but it looked at a host of variables that have an effect on growth and emperically found that after the relative state income tax rate, the second most significant variable was a state’s “Right to Work” laws, which not only has an effect in of itself, but as seen in the chart, is correlated with lower rates of unionization

Some of the outliers in that chart can also be partially explained by the type of unionization that is prevalent. There are two components of the negative effect unions have on overall employment. The first is the income effect, where the quantity demanded of labor gets reduces as the price rises simply because it would require a larger amount of the employer’s money. This effect is relatively even across states. The difference is the second component, the substitution effect, which causes the consumer to reduce the quantity demanded because they shift to alternatives at lower prices. This effect by state varies greatly by the characterizes of the unions of those states. The blue dot at the top of the graph for instance is Nevada, where the bulk of the union presence is related to casinos in Las Vegas. Because gambling is illegal in most areas int he country, there really aren’t many alternatives for operators of casinos so they have to hire this union labor. Likewise, states where the unions are dominated by municipal workers, by that very nature these employees cannot be hired elsewhere. The contrast is manufacturing unions which dominate Ohio, Michigan and other rust belt states. Their labor can very easily be moved to other states, which is why for example, Honda, Toyota and Nissan are building plants in “Right to Work” states such as Texas, Kansas and Tennessee. Even further, labor can be shipped to foreign countries, which is why for instance, GM has built most of its new plants not in Michigan but in Canada and Mexico. This is why unions generally support import tariffs in order to protect their above market wages from competition. (note also that the powers of unions to achieve higher then market wages varies by state due to the legal structure of each state).

In the end even though it would be very reductionist to argue that unions are the only negative drag on the economy, on average they are indeed a negative factor on overall employment. Both logical principles and empirical data suggest that this effect occurs. If this legislation does pass we can expect slower employment growth, slower wage growth, and higher unemployment then we would have going into the future.



So let me start off by saying I am not in favor of the "Card Check" program. I am also generally a supporter of Right to Work laws, because workers should not be forced to unionize. If belonging to a union is highly beneficial to the average worker, then it would follow that workers would voluntarily choose to join - no mandate should be, or would be, necessary. But I must make a few points regarding EJB's post.

First, for those of you who don't know me, I worked as a welder for four summers during my college days. I welded depth gauges for oil fields and submarines. Pretty sweet, I know. Paying dues to the local union was a condition for attaining summer employment with this company. Thus, I was (and continue to be) a nominal member of the union. I had my ups and downs with them. Essentially, I paid union dues but did not receive the full extent of protections and benefits that they offer full-time workers. This and their re-routing of my dues to certain political candidates bothered me. However, I also made well over the market rate for similar summer employment; a fact which can be directly chalked up to the power of the union I joined.

EJB entitles his post "Unions Help Workers, Right?" Then he goes on to show that the increase in unionization tends to cause (or at least, loosely correlates with) a decrease in employment growth. I guess I can't really argue with another chart (how the hell do you have the time to create these charts?), but I can tell you that EJB's initial premise (which is reflected in his title) is flawed. Unions don't help workers, they help their workers. Unions exist to aid their members and that's it. If we substitute my new premise (let's call it..."correct premise A") for EJB's premise (let's call this one..."painfully flawed premise B"), then his chart and data don't carry much force because unions don't - and, according to Correct Premise A, shouldn't - care about unemployed people looking for work; they are not union members.

Now, it is also obviously true that unions DO help their members. EJB rightly points out that union members, on average, make more than their non-unionized counterparts. I have countered your chart with TWO of my own! (stolen from the afl/cio website, via Dept. of Labor Statistics). Besides just a higher average income, union membership helps narrow the income gap between genders and races. Plus, unions help secure greater benefits for their members.

So, I recognize that EJB would not contest the fact that unions help their members. His point, really, was to show that this aid comes at the expense of certain sectors of society - namely, the unemployed and the non-unionized workforce. But I suppose my response to that would be, so what? Unions were not formed (and are not formed) to benefit society as a whole. They are explicitly and unabashedly fighters for their own members' causes. And while I do not support legislation that would force workers to join unions, I would suggest to anyone that works in a factory to join their local union and reap the benefits and protections they have established.



A couple of things. You state that my premise changed via my title and the post. When I titled this post suggesting unions do not help workers, I was referring to workers at large, so I don't think I was being misleading. This is because as a matter of public policy it is often argued that more unions are better for workers in general and that workers have been hurt by declining unionization rates over the years.

I completely agree that obviously in the static moment, unions do benefit their members relative to non-members. However, even union members are hurt in the long run. This is because over time, less and less union labor will be demanded via the substitution effect previously explained. This is why the car companies are not building new factories in Detroit.
As the chart to the left shows, the Detroit US manufactures annual car production declined over this period. But this was not the case in the larger US industry. The Asian companies who produce cars in the US (in largely right to work, low unionization states) greatly expanded their production. Now obviously there are other factors with the companies going on here, but this shows that even the unionized workers are hurt in the long run because the demand for their labor decreases, resulting in slower wage growth and more unionized workers now finding themselves unemployed. On the macro picture, this is why unionization has been on a steady decline for decades and unions are finding it increasingly important to use the power of government to enact laws that essentially force increases in their membership.