Labor Day Reflections, A Day Late and a Dollar Short

Labor unions are typically justified as a means of raising the wages of workers. According to this view, workers individually lack the bargaining power necessary to negotiate a decent wage, but by banding together they can increase their bargaining power and gain a higher wage at the expense of Capital.

The perspective of neoclassical economics on this issue is a little different. Neoclassical economists wouldn’t deny that the above story could be true for individual cases, at least in the short term. What they would deny, however, is that unions can raise the real wages of workers generally or over the long term. This is because unions ultimately benefit their members not at the expense of Capital but at the expense of other workers. It’s true that when a union shop wins a wage increase above the market rate this will initially be paid by employers. But according to the neoclassical picture this increase will ultimately be offset either by higher prices or by lower employment (as paying the increased wages leads marginal firms to either go out of business, cut back their workforce, etc.) Since each union benefits its own members at the expense of everyone else, unionizing all workers would result not in higher wages for workers generally, but would lead to the individual gains of each worker being more than offset by the higher prices and lower growth caused by the unionization of everyone else.

Which perspective is right? A few months ago the blogger/economist Tino from SuperEconomy compared the share of workers covered by collective bargaining agreements with Labor’s share of GDP. If the pro-union perspective is correct, and unions lead to higher wages at the expense of Capital, then labor ought to have a higher share of income in countries with more unionization. If the neoclassical picture is correct, by contrast, and unions benefit some workers at the expense of others, then the correlation between unionization and labor’s share of income ought to be small if not nonexistent.

As it turns out, the data supports the neoclassical picture.

Labor’s share of income remains about the same, regardless of the percentage of workers subject to collective bargaining. We get the same result if we look at data within a given country over time. In the United States, for example, labor’s share of income has remained fairly constant since WWII, despite massive declines in unionization.


On the other hand, countries where most workers are subject to collective bargaining agreements do tend to be slightly poorer than countries where workers are left to fend for themselves, which is consistent with the neoclassical position that unions impede economic growth, and inconsistent with the pro-union view that collective bargaining is necessary to prevent mass impoverishment of workers by employers.

3 Responses to Labor Day Reflections, A Day Late and a Dollar Short

  1. Jim B says:

    In the context of Catholic Social Teaching, the Popes defense of unions (I believe) is not the sort that we have here in the US, but rather more along the lines of Solidarity in Poland to overcome REAL oppression.

    IMHO the unions here in the US have, for the least 50 years severely let their members down by focusing too much on salary & benefits and not enough on equity. It’s a lot harder to outsource jobs overseas when the workers are the owners. They also get a real dose of reality when the salaries are THEIR bottom line as lived out in this real world case study:

    Manufacturer Goes Small in Era of ‘Too Big to Fail’

  2. Art Deco says:

    You neglect the possible utility of unions to induce amendments to working conditions and to enhance the flow of information up the hierarchy of large enterprises governed by psychologically insulated and contemptuous people. David Witwer’s history of the Teamsters’ union is instructive on the former point. One of the motors of collective action in the early years of that union was the extraordinary hours those employing teamsters expected them to work during the week. PBS recently ran a documentary on the construction of Hoover Dam instructive on the latter point, where complaints of the workforce about health and safety were met with mass firings.

  3. Doug says:

    What about all the many occupations that are never, or seldom unionized. I as an example, have spent a working lifetime in sales and marketing of one kind or another. No argument here, I just could not imagine how or what a union could offer a person who is contented with a commission income. Thank You, Doug Moore

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