The Economic Effects of
Labor Unions Revisited
RICHARD VEDDER and LOWELL GALLAWAY
Ohio University, Athens, OH 4570l
Using a variety of statistical techniques, we conclude that labor unions have reduced
U.S. output by significant amounts -- trillions of dollars over time. Additionally, the
employment-population ratio and the unemployment rate have been adversely affected
by the presence of unions. From the very beginning, unionization materially lowered
employment in the auto and steel industries, and union militancy in coal mining has
contributed importantly to largely eliminating employment in this once large indus-
try. While some individual workers have profited from unions, the aggregate economic
impact is strongly negative.
I. Labor Unions and Their Effects
Workers who join labor unions expect an improvement in their utility, typically mani-
fested in the form of higher wages and benefits. Indeed, there is a substantial literature
that suggests that, other things equal, unionized workers do receive higher rates of com-
pensation than their nonunion counterparts (Lewis, 1963, 1985). At the same time, how-
ever, it is possible that unions have longer-term detrimental effects on the economy as
a whole and, arguably, therefore, unionized workers. Labor unions may promote prac-
tices that reduce hours worked or productivity growth (from union rules, reduced cap-
ital formation, barriers to resource mobility, etc). A number of studies observe a negative
relationship between the incidence of union membership and economic performance
(Vedder and Gallaway, 1986; Pantuosco et al., 2001). On the other hand, proponents
of the concept of efficiency wages and others might argue that the positive effect of
unionization on worker moral e might raise productivity and possibly economic growth
(Krueger and Summers, 1988; Katz, 1986; Altenburg and Straub, 1998).
Of course, the impact of unions on the aggregate performance of the economy
would depend in part on their relative importance in labor markets and that has changed
dramatically over time. To roughly summarize the 20th century experience, during
the first one-third of the century, union membership tended to be small (usually 10 per-
cent or less of employment), in the middle third of the century it tended to be much
larger (reaching one-third or so of the labor force), and in the last third of the century
the "market share" of labor unions in the private sector was falling rather steadily, by
century's end approaching the levels of the earlier part of the century. Thus if unions
on balance had adverse effects on the rate of economic growth as some have suggested,
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Volume XXIII, Number 1 Winter 2002
106 JOURNAL OF LABOR RESEARCH
those impacts would have been growing in mid-century (when unions were at their
peak), but diminishing in the latter part of the century.
II. The Labor Market in Perspective
In the broadest sense, labor markets tend to conform to the economist's perception of
institutions that tend to move toward equilibrium outcomes. In an unconstrained labor
market, the price of labor (the wage rate) will move toward a level at which the num-
ber of workers interested in working at that wage will match the number of workers
that employers are interested in hiring. In the aggregate, this is not likely to occur in
all markets, but, when it is the typical case, what is often called a "full-employment"
This does not mean that there is an absence of statistically-measured unemploy-
ment. The measured unemployment under these circumstances can be explained
through a choice-theoretic, reservation-wage, job-search model. Job-seeking workers
approach the labor market with a reservation wage in mind. If an initial search reveals
no job opportunities that satisfy their reservation-wage aspirations, they continue to
search. As they do this, they will be regarded by the statistical authorities as involun-
tarily unemployed, that is, actively seeking work but without a job. As the search
process continues and time passes, two things will happen: Superior job alternatives
will be revealed, and workers will revise their reservation wage expectations down-
ward in response to the previous search disappointments. Eventually, a correspondence
between an actual job (and wage) opportunity and the job-seeker's reservation wage
will be attained and the market will clear, as shown graphically in Figure I.
When all job opportunities have been filled, historical experience tells us that there
will still be active job seekers in the market. Consequently, statistically measured unem-
ployment will still be observed. 1 Expressed as an unemployment rate, this is the "equi-
librium" or "natural" rate of unemployment. It differs from the "effective" rate of
unemployment, which reflects any mismatch between the quantity demanded of labor
and the quantity supplied. At full employment, the effective unemployment rate is zero. 2
In the truest sense of the word, any measured unemployment at this point should be
viewed as voluntary.
Various factors determine the magnitude of the measured rate of unemployment.
Things such as public policies and market imperfections may generate shifts in either
the reservation-wage or best-offer loci shown in Figure 1. For example, governmental
programs that subsidize job search, such as unemployment compensation and general
income-maintenance arrangements, move the reservation-wage locus upward and
rightward, increasing the natural rate of unemployment. On the other hand, of partic-
ular interest in this essay, is the effect on job search outcomes of the presence of labor
unions. At first glance, it might be thought that unions, by raising the wages of their
members, would shift the best-offer locus upward. However, in a world in which unions
are pervasive, this would not be the case. As unions increase wage rates through the
use of their monopoly power, job opportunities in the unionized industries and occu-
RICHARD VEDDER and LOWELL GALLAWAY 107
pations decrease, increasing the supply of labor in the nonunion sector. This drives
wages down in those areas and increases the relative number of lower-wage jobs avail-
able to workers engaged in the job-search process. The effect of this is to rotate the
best-offer locus to a less steeply sloped position (Figure 2), which, typically, increases
the search time necessary to clear the market, thereby increasing the natural rate of
unemployment and imposing a deadweight loss of economic output on the economy.
S o S o '
108 JOURNAL OF LABOR RESEARCH
The presence of deadweight losses arising out of labor union activity can be shown
in an alternative fashion. Here we borrow from Rees (1953, 1963), who has demon-
strated the consequences of union wage-raising initiatives on levels of employment in
both the union and nonunion sectors of the labor force. His formulation begins with a
negative-sloping aggregate demand curve for labor and a fixed supply of labor, 3 as
shown in Figure 3 in the respective loci D t and St (where the subscript t denotes total).
In an unhampered competitive labor market, the equilibrium wage rate would be W c.
Consider an initial state in which the labor market is divided into two sectors, both of
which are nonunion. In both of them, the competitive wage, Wc, will be the norm. Now,
let one of the sectors become unionized, say, the smaller one. Denote its demand for
labor by Du and the other's by D n. Presumably, the union presence in its sector will
lead to wages among union members rising above the competitive standard. This will
reduce employment in the union sector from L 2 to Lu.
Those workers who become unemployed in the union sector will tend to gravi-
tate to the nonunion sector, driving down wage rates for those jobs available. Assum-
ing the same slopes for the demand schedules in both the union and nonunion sectors
The Effects of Union Wage Differentials
on Resource Allocation
L u L 2 L..
RICHARD VEDDER and LOWELL GALLAWAY 109
of the labor market, the deadweight welfare loss to the overall economy is shown by
the shaded rectangle in Figure 3 and is equal to 1/2 (Wnu - Wu)(L2 - Lu).
The Rees formulation can be made operational if union density and wage premi-
ums are known, as well as the general elasticity of demand for labor. The union den-
sity establishes the value of Lu, while the wage premium information permits the
calculation of Wnu and Wu. The latter is done by setting the wage that would exist in a
competitive market equal to 1.0 and writing Wc = Lnu Wnu + Lu Wnu, where Lnu and Lu
are expressed as decimal fractions of total employment. Knowing the wage premium,
this expression can be expanded to We = Lnu Wn, + Lu (1 + a) Wn,, where a is a deci-
mal fraction representing the union wage premium. With Wc set to 1.0, we can solve
for W~, viz., W~ = 1/[(1 + a)]Wu.
This leaves only the calculation of L2 to make Rees's model operational. At this
point, an estimate of the aggregate elasticity of demand for labor is needed to esti-
mate the employment effects of the wage premium in the union sector using the expres-
sion L2 = Lu/[(W, - W~.) EoL], where EoL represents the aggregate elasticity of demand
The only remaining question is, "What value should be used for EoL?" Drawing
on a framework suggested in some of our other work, we have selected a value of-0.76
for this statistic. 4 Using it and other estimates of the necessary data, we have calcu-
lated the Rees effect deadweight losses associated with the presence of labor unions in
the American economy for selected years between 1947 and 2000. The results, expressed
as a percentage of workers' wages, are shown in the second column in Table 1. Con-
Estimated Deadweight Loss of U.S. National Income Resulting from
the Presence of Trade Unions, Various Years, 1947-2000
Effect Year Rees Effect Total Effect
110 JOURNAL OF LABOR RESEARCH
sistently, they show a deadweight loss of slightly more than a third of one percent of
workers' wage income. Adjusting to take into account the fact that wages are only a
fraction of Gross Domestic Product (GDP), albeit a large one, the net loss of GDP is
about a quarter of a percent a year. See column two of Table 1.
There is a shortcoming to the Rees methodology. He assumes a perfectly inelas-
tic aggregate supply of labor. Consequently, any labor supply effects associated with
the beating down of wage rates in the nonunion sector of the labor force are ignored.
If the aggregate quantity supplied of labor responds positively to changes in wages,
there will be an additional amount of output lost as the result of union activity equal
to Lnu(Wc - Wnu)EsL, where EsL denotes the aggregate supply of labor. 5 Estimates of
this loss are shown in column three of Table 1. The values shown there range between
one-half and three-quarters of one percent. Thus, the combination of Rees deadweight
losses and labor supply effects can impose as much as a one percent annual drag on
the American economy's output. The mean value of the three sets of estimates shown
in Table 1 is 0.823 percentage points. In a $10-trillion economy (roughly the current
level in the U.S.), that amounts to $82.3 billion or over $300 per person.
III. Is There Employment Shifting ?
At the heart of the Rees formulation is the proposition that the adverse employment
effects associated with labor unions are reflected by higher levels of employment and
lower levels of wage rates in the nonunion sector of the labor market. How valid is
this proposition? To answer that question, we explore the historical data concerning
employment and wage levels in different parts of the labor force. We begin with the
period 1919-1933, a time when labor unions were a relatively small factor in the Amer-
ican economy. This is an interval in which the average compensation per full-time-
equivalent employee in the industrial callings that would later become central to the
growth in unionism in America is only slightly greater than compensation in indus-
tries that would later be regarded as relatively nonunion. Details are shown in Table 2.
For fourteen years of data, the average union-nonunion differential amounts to a mere
3.2 percent. 6 And, in four years, it is actually negative. In fact, a simple t-test of the
null hypothesis that the true differential is equal to zero leads to its acceptance. 7 Thus,
there is a period which, in a statistical sense, possesses characteristics not unlike those
of a competitive labor market.
From an historical standpoint, the terminal year in this interval is an important
demarcation in the history of American labor unions. In 1933 the National Industrial
Recovery Act (NIRA) was passed, which contains a section 7(a) that is the precursor
of the National Labor Relations Act of 1935 (the Wagner Act). Between 1933 and 1935,
there was a transformation of American public policy towards positive federal gov-
ernment encouragement of and support for unions. At the beginning of this period (in
1933), the union-nonunion industry wage differential was negative and less than one
percent of the average level of compensation. Under the stimulus of the NIRA, by 1935,
this differential had turned positive and risen to 3-4 percent of the average compensa-
tion level. After 1935, the union-nonunion wage differential surges, exceeding twenty
RICHARD VEDDER and LOWELL GALLAWAY 111
Compensation Per Full-Time-Equivalent Employee* (Column A) and
Difference in Compensation Per Full-Time-Equivalent Employee
between Union and Nonunion Sectors (Column B), 1919-1960
( 1957-1959 Prices)
Year Column A Column B
Note: *In order to take account of changes in industrial mix through time, 1954 weights were used through-
out to standardize the estimates of compensation per full-time-equivalent employee. Thus, these esti-
mates abslract from shifts in industrial structure.
Source: U. S. Department of Commerce, Bureau of the Census. Historical Statistics of the United States,
Colonial Times to 1957, Series D-685-D-719; and U. S. Department of Commerce, Survey of Current Busi-
ness, July 1961.
112 JOURNAL OF LABOR RESEARCH
percent by 1941. The general pattern shown by these data is simple: From 1919 through
1933, there is little, if any, wage differential and no time trend in it. 8 After 1933, there
is a pronounced upward time trend in this differential through 1941. There is a brief
hiatus in the increase in the wage differential during World War II. However, subse-
quent to the war, the differential resumes its pre-war pattern of growth, reaching about
one-third of average compensation per full-time-equivalent employee in 1960. Clearly,
the behavior of wage differentials immediately subsequent to the adoption of a public
policy that encourages labor unions is quite consistent with the Rees framework.
What about employment patterns, though? Here, we pick up the story in the post-
World War II period. In a world where unions have the impacts already suggested, we
would expect a systematic shifting of the overall structure of employment away from
the union and toward the nonunion sectors of the labor force. Thus, over time, there
would be a relative decline in employment in the union sectors and a relative rise in
employment among nonunion workers.
As a first step in analyzing the nature of changes in the structure of employment,
we have estimated the following regression equation for each of nine broad private
nonagricultural industries of employment: EMPi = a + b TOTEMP + c TIME, where
EMPi denotes employment in the ith industrial sector; TOTEMP represents total
employment in the economy (included to control for intertemporal growth in employ-
ment); and TIME is a variable to capture the passage of time. Since our data set cov-
ers the fifty-year time period 1950-1999, the TIME variable takes the value one in 1950,
two in 1951, etc., through 50 in 1999. The results of these estimations are shown in
Table 3. In seven of the nine cases, the coefficient of the time-drift variable is statisti-
Regression Analysis of Time Drift in Employment, by Sector, 1950-1999
Coefficient Industry t-Statistic Probability
Mining -21.75 2.02 0.0496*
Construction -58.31 4.66 0.0000"
Durable Goods Manufacturing -908.93 4.33 0.0001"
Nondurable Goods Manufacturing -423.46 I. 10 0.2773
Transportation and Public Utilities -65.96 6,31 0.0000"
Finance, Insurance, and Real Estate 88.44 6.56 0.0000"
Wholesale Trade 5,83 0.47 0.6403
Retail Trade l 13.83 2.36 0.0000"
Service 590.51 3.66 0.0000"
Note: *Statistically significant at the five percent level or fiigher.
RICHARD VEDDER and LOWELL GALLAWAY 113
cally significant at the five percent level. Four of the significant coefficients are nega-
tive and three are positive. Most interesting, the four significant negative time-drift
industries (mining, construction, durable goods manufacturing, and transportation and
public utilities) have the highest union densities in 1973, 1980, and 1986. 9 On the other
hand, the three positive time-drift coefficients are in retail trade, finance, insurance and
real estate, and service employment, all very low union-density sectors. As to the two
nonsignificant coefficients, wholesale trade, a low union-density sector, has a positive
sign, and nondurable manufacturing, on the high side in terms of union density, has a
The pattern of statistical significance shown in the time-drift coefficients is
extremely consistent with the Rees model. High union-density areas experience a sig-
nificant negative time drift in their employment relative to overall employment. And,
low union-density industries show significant positive time drifts. What is suggested
is the shifting of displaced union workers to nonunion employments. If the time-drift
coefficients are expressed as percentages of average sectoral employment over the inter-
val 1950-1999, the respective rank-order correlation coefficients between the time-drift
measure and union density for 1973, 1980, and 1986 are -0.74, -0,62, and -0.61,
V. More Extended Estimates
Clearly, the stylized facts of the post National Industrial Recovery Act and National
Labor Relations Act of 1935 era are broadly consistent with the argument propounded
by Rees. Thus, it seems appropriate to extend the earlier estimation of the deadweight
economic losses associated with the existence of labor unions to encompass a more
extended time period. This requires the developing of deadweight loss estimates for
additional years. Subsequent to 1986, we have made the necessary calculations for
1993 and 2000, while, prior to 1973, we have added estimates for 1947, 1953, 1960,
and 1967. l0 The results of these calculations, in combination with our earlier estimates,
are displayed in Figure 4. The pattern shown by this graphic is intriguing. In the early
years following World War II, the deadweight losses associated with union activity
are relatively small, although not trivial, amounting to slightly more than one-third of
one percent of annual output. However, after 1953, as unions become more solidly
entrenched in the economy, the deadweight losses mount, peaking in the 1970s. This
is followed by a decline in union impact as both union membership (density) and the
union wage premium fall. By the end of the century, the deadweight loss estimates have
returned to their early post-World War II levels.
The variability in the economic cost of labor unions over the last half century or
so makes it more difficult to arrive at generalizations about their total cumulative cost.
To deal with this problem, we have calculated simulated (or counterfactual) levels of
GDP for 1947 through 2000 that assume a zero deadweight cost of unions. The year-
to-year values of the deadweight losses that are assumed in these calculations are esti-
mated by extrapolating in a linear fashion between the individual years for which actual
114 JOURNAL OF LABOR RESEARCH
estimates are provided. The results of this simulation are shown in Figure 5 and pro-
vided in Table 4. They are striking. By 2000, our simulations show a shortfall in cur-
rent real GDP (1992-1994 dollars) of about $3.5 trillion dollars -- about forty percent
of current GDP.
This may seem to be an astoundingly large number. However, it must be remem-
bered that the deadweight economic losses that are being measured are not mere one-
shot impacts on the economy. They recur, every year, relentlessly, cumulating in their
impact. What our simulations reveal is the powerful effect of the compounding over
more than a half-century of what appears at first glance to be small annual effects. An
even more dramatic statement of the economic cost of unions is provided by cumu-
lating the lost income and output over the entire 54-year period under consideration.
The result exceeds $50 trillion (1992-1994 prices), a breath-taking total.
An alternative way of expressing the economic impact of unions is to assess the
effect on the growth rate in real GDE We do this by comparing the mean actual growth
rate with the mean of the year-to-year percentage changes in our simulated GDP series.
The difference is appt'oximately three-quarters of a percentage point a year. Among
students of Edward Denison-style national income growth accounting, that is a huge
impact, quite consistent with the counterfactual output differences already reported.
RICHARD VEDDER and LOWELL GALLAWAY 115
One interesting implication of this finding is that it implies that even union mem-
bers are potentially worse off from the effects of unionization. If unionization has an
accumulated long-term impact of lowering GDP by, say, 30-40 percent, and union
members earn a 15-20 percent wage differential from unionization, the gains to union
members from the wage differential are more than offset by the losses associated with
lower wage levels in general arising from a smaller national output.
To summarize the findings of this section of our appraisal of the economic cost
of government-sponsored union activity in the U.S., it can be said that it is perhaps a
classic case of a doctrine laid down by Frederic Bastiat (1950) a century-and-a-half
ago, when he opined, "it almost always happens that when the immediate consequence
[of an economic policy] is favorable, the later consequences are disastrous." In this
instance, those "later consequences" amount to what can be thought of as a "$50-tril-
VI. A Cross-Sectional Approach
An alternative approach is to examine how labor unions affect economic performance
cross-sectionally (Vedder and Gallaway, 1986; Pantuosco et al., 2001). Unlike previ-
ous studies, we decided to examine variations in economic performance over a long
116 JOURNAL OF LABOR RESEARCH
Comparison of Actual Real U.S. Per-Capita Gross Domestic Product
with Simulated Gross Domestic Product Assuming an Absence of
Deadweight Losses Attributable to Labor Unions, 1959-1999
Gross Domestic Product
Domestic Product Year
RICHARD VEDDER and LOWELL GALLAWAY 117
time horizon, the 35-year period 1964 to 1999. Our sample is the 50 U.S. states plus
the District of Columbia.
Real per capita income growth (hereinafter, GROWTH) from 1964 to 1999 var-
ied substantially among the states, from lows of under 80 percent in California and
Alaska to over 150 percent in Georgia, Mississippi, North Carolina, South Carolina,
and Tennessee. The incidence of unionization (UNION) likewise varied widely. Since
union membership as a percent of the labor force declined over time, we took an aver-
age of membership as a percent of the labor force at the beginning and end of the period.
That average varied from 5.3 percent in North Carolina to 37.1 percent in Michigan.
We introduced five additional independent variables into our analysis: MANUF
(the percent of employment in manufacturing early in the period); INCOMETAX, the
number of times at four different dates in the period that a state levied an individual
income tax on employment-based income; INC64, real per capita income in 1964; POL-
ITICS, the percent of the population voting for Ronald Reagan in the 1984 presiden-
tial election; and COLLEGE, the percent of the population over 25 years with a college
education or the equivalent as of the 1980 Census. Finally, we introduced 641NCOME
as a variable, the level of personal income per capita in 1964, at the beginning of the
period examined. If neoclassical income convergence is happening, we would hypoth-
esize a negative relationship between 64INCOME and GROWTH.
Table 5 includes the results using OLS regression analysis. There is a statisti-
cally significant (at the one percent level) negative relationship between UNION and
GROWTH. For each increase of one percent of the labor force belonging to labor unions,
it is estimated that real income growth per capita is lowered by over 1.24 percentage
points. The elasticity of per capita income growth with respect to unionization is about
Explaining Interstate Economic Growth, 1964-1999."
OLS Regression Results
Variable or Statistic Estimated Value t-Statistic
Constant 217.86 8.885
- 1.24 3.349
MANUF 0.9 6.101
R 2 .716
118 JOURNAL OF LABOR RESEARCH
-0.16. ~ l Of secondary interest, there is a significant positive relationship between COL-
LEGE and GROWTH and between MANUF and GROWTH. GROWTH is related in a
statistically significant negative fashion with the other three independent variables.
From the results in Table 5, it is possible to estimate the impact that unionization
has had, not only on the U.S., but on individual states. Turning first to the nation as a
whole, the average state had union membership equal to 18.88 percent of its labor force.
This compares with 5.3 percent in the state with the least unionization, North Carolina.
If all states had the level of unionization of North Carolina, the model predicts that
the rate of growth of real per capita income would have been increased by 16.89 per-
centage points. The mean rate of growth was 112.43 percent, so with North Carolina
levels of unionization, growth would have been 129.32 percent. This suggests that the
real annual compounded rate of per capita income growth would have increased from
the actual 2.18 percent to 2.40 percent, or by 22 basis points. Using a counterfactual
assumption of no unions whatsoever, the mean growth rate over the 35 years is an
estimated 135.85 percent, or an annual growth rate of 2.48 percent a year, some 30
basis points more than the actual growth. The estimated 1999 personal income per
capita under the assumption of zero unionization is more than 10 percent higher than
actually recorded, implying a gross domestic product loss associated with unionization
in the year 1999 of about $1 trillion. The present value of the accumulated loss over
the 35 years is, of course, measured in many trillions, reasonably consistent with the
rather extraordinary estimates using a quite different methodology cited above.
In Table 6, we report the actual personal income per capita by state in the year
1999, as well as a counterfactual estimate of what that income would have been if all
states had the level of unionization of the state of North Carolina. High levels of union-
ization are estimated to have severe adverse effects in Northern industrial states such
as Michigan, New York, and lllinois, but the low relative levels of unionization in most
southern states suggest that unionization had little impact. In reality, income per capita
in Georgia in 1999 was less than four percent higher than in Michigan, but the model
estimates that if both states had North Carolina's low level of unionization, Michigan's
income per capita would have exceeded Georgia's by over 21 percent. Thus the differ-
ential patterns of unionization have had an important role in explaining interstate income
differentials and changes in those differentials over time.
There is evidence that the presence of significant unionization has been a major
factor in the convergence of incomes over time. In 1964, the coefficient of variation
on per capita income variations between the states (including the District of Colum-
bia) was. 1894. By 1999, that figure had declined to .1593, or about 16 percent. This
is a sign of greater geographic income equality, as the poor states gained noticeably
on the rich ones. Yet, if the regression coefficient in Table 5 is approximately correct,
much of the convergence occurred because of union-related sluggish economic growth
in relatively high-income Northern states. The flight of capital to the South to avoid
the high wages associated with unions, and of workers to the North to obtain those
higher wages, was no doubt critical to convergence.
RICHARD VEDDER and LOWELL GALLAWAY 119
Actual and Counterfactual Personal Income Per Capita by State, 1999
State Actual 1999 Income Counterfactual Income % Income Lost
District of Columbia
3 I, I 14
2 I, 152
16. l 8
120 JOURNAL OF LABOR RESEARCH
We calculated the coefficient of variation in 1999 on the counterfactual income
per capita numbers in Table 6 to be. 1799. Of the 301 basis point decline in the coef-
ficient of variation on per capita income between 1964 and 1999, some 206 points, or
over 68 percent, can be attributed to the presence of unionization beyond that found
in the state with the least unionization, North Carolina.
Some might read these results as favorable to unionization. After all, the pres-
ence of extensive unionization has hastened income convergence, meaning that the poor
states of the South are not as poor any more in some relative sense. Yet that ignores
the fact that unionization is estimated to have lowered incomes for all, albeit more in
the relatively higher income states that on average have higher levels of unionization.
If unionization has led to a more even distribution of the income pie, it also has led to
a significantly smaller pie, one in which everyone gets smaller slices. Any increase in
spatial income equality has come at a very high price.
The findings above are obviously sensitive to the statistical estimates generated.
We re-estimated the model represented in Table 5 using alternative variables for con-
trol purposes. In every case, we obtained a statistically significant negative relation-
ship between UNION and GROWTH. Moreover, the regression estimate for UNION
presented in Table 5 was below the mid-range of estimates generated by sensitivity
analysis, increasing our confidence in the proposition that unionization can and does
have significant adverse effects on the growth in aggregate economic activity.
VII. Unions and Employment Opportunities Revisited
As indicated above, if the goal of unions is to raise wages for their members, then, in
the absence of productivity gains, one would expect employment opportunities to fall
as a consequence of unionization, since, ceteris paribus, the quantity of labor demanded
would fall with higher wages. The job creation effects are the result not only of reduc-
tions in the quantity demanded of labor in the union sector of the labor market, but also
the labor supply impacts of lower wage rates in the nonunion sector.
A cursory glance at data on union density and involvement in the labor force shows
that over time the proportion of the working-age population that was employed has
steadily increased, while union density has decreased. For example, at mid-century, the
percent of nonagricultural workers belonging to unions exceeded 30, while only about
56 percent of civilians over the age of 16 were working. By the end of the century,
union density among nonagricultural workers had fallen by over one-half, but the civil-
ian employment-population ratio had risen to above 64 percent (U.S. Bureau of the
Census, 1975, p. 178; Economic Report, 2001, p. 316).
Compare the periods 1953-1973 with 1973-1999. The first period is one of rel-
atively high union density, whereas the second one is clearly an era of steady decline
in the incidence of unionization. Let us compare what one might call the "marginal
employment-population ratio" in both periods. Specifically, let us look at the growth
in total civilian employment as a percent of the total growth in the noninstitutional pop-
ulation aged 16 and over.
RICHARD VEDDER and LOWELL GALLAWAY 121
During the first of these two periods, employment rose by 23,885,000, and the rel-
evant population by 40,040,000, giving a marginal employment-population rate of 59.7
percent. Both 1953 and 1973 are business cycle peaks, so the results are not signifi-
cantly skewed by cyclical considerations. During the more recent period of lower and
declining union density (also involving data for two prosperous years, largely elimi-
nating cyclical factors), employment rose by 48,424,000, while the appropriate popu-
lation rose by 60,657,000. The marginal employment-population ratio rises by almost
precisely one-third, to 79.7 percent. This 20 percentage point increase in this ratio is
the equivalent of saying that for each 10 new potential workers, two more were
employed in the period of low unionization compared with the era of enhanced union
density. If the higher marginal-population ratio had prevailed during the era of high
labor union influence, some eight million more jobs would have been created.
This is a rather startling result, but might be criticized because it assumes that
the pronounced rise in employment relative to the potential labor force entirely reflected
change in unionization. Accordingly, using an alternative data source and method-
olgy, we did two more estimations, reported in Table 7. We first examined variations
in interstate rates of unemployment (UNEMP). Because unemployment rates vary over
Impact of Unions on Unemployment and the Employment-Population Ratio:
OLS Regression Results
Variable or Statistic Dependent Variable:
Constant I 1.494
64INCOME - 0.000
122 JOURNAL OF LABOR RESEARCH
time and business cycle effects often are uneven spatially, we used as our measure the
median of the unemployment rate for nine years dispersed widely over the period 1964
to 1999.12 As we have indicated elsewhere (Vedder and and Gallaway, 1996), interstate
variations in unemployment are quite substantial. We observe a range from 2.9 per-
cent in Nebraska to 9.2 percent in Alaska (the high for the contiguous U.S. was 6.8
percent in West Virginia).
In the second regression, we examined variations in the employment-population
ratio, EMPOP. As with unemployment rates, the employment-population ratio varies
substantially. In Table 7, we used a mid-range year, 1981, for our estimate of it.13 In
each of the OLS regressions, we incorporated a number of other variables into the
analysis for control purposes and to reduce the probability of significant omitted-vari-
able bias. Among those variables not used in the earlier regression analysis are FARM,
the percent of personal income in a state derived by farming at the beginning of the
period (1965), COLD, the number of heating degree days annually, SUNSHINE, the
average percentage of days annually the sun shines, and OVER65, the percent of the
state's population over the age of 65 in 1981.
The results show strong and statistically significant (at the one percent level) neg-
ative relationships between our UNION variable and each of the dependent variables.
The unemployment results suggest that a state with a 10 percent unionized work force
could expect, other things equal, a 0.7 percentage point increase in its unemployment
rate. The employment-population ratio results are even more robust. They suggest, other
things equal, that for each four additional workers who become unionized, one less
person works. Put differently, had union density at the end of the twentieth century
remained about what it was near the middle of the century, union membership today
would be well over 10 million higher, meaning that the loss of jobs would be meas-
ured in the millions. Unions have a profound effect on total employment.
Looking at the two regressions together, the adverse employment effects of union-
ization largely (about 80 percent) may come from an increase in the proportion of the
work age population not in the labor force, and about 20 percent from higher unem-
ployment. The higher wages associated with unionization may cause people to with-
draw from the labor force because they are discouraged or because they opt for greater
leisure (e.g., union workers may retire at younger ages).
These results do suggest that the rise in the employment-population ratio in mod-
ern times reflects more than changing attitudes of women towards work. The decline
in the proportion of workers in unions seems to be an important factor in explaining
the rising proportion of people working over time. It is true that the rise in the employ-
ment-population ratio is entirely the result of rising female employment participation.
But it is at least plausible, and perhaps even probable, that the decline in unionization
has enhanced the involvement of women in the world of work, just as the reverse may
also be some extent true.
The findings above are reinforced using other data and methodologies. We exam-
ined the growth in employment over time by occupation and industry. The approach
RICHARD VEDDER and LOWELL GALLAWAY 123
to the calculation of union density by the U.S. Bureau of Labor Statistics changed in
1983, so for consistency we examined occupational and industry employment for 1983
and 2000. Tables 8 and 9 show the raw data. Starting with occupations (Table 8), there
were six categories that were relatively union-intensive, in that the proportion of work-
ers belonging to labor unions exceeded the average for the entire economy in both 1983
and 2000: professional workers, protective service, precision production workers,
machine operators, transportation workers, and handlers. Employment in those six clas-
sifications grew by 33.3 percent from 1983 to 2000. By contrast, the relatively low
union density classifications (executives, technicians, sales, administrative support,
services other than protective service, and farming), witnessed employment growth of
39.8 percent, or nearly 20 percent higher. Job growth was meaningfully greater in the
relatively nonunion occupations.
That approach, however, probably understates the adverse effects of unioniza-
tion on employment growth. Two of the occupational classifications, professional and
protective service, include disproportionately large numbers of government workers
Growth of Employment by Occupation and Union Density, 1983-2000
Workers: 1983 a
Workers: 2000 a
% Growth in
8.1% 5.3% 8,546 16,434 92.3%
24.0 19.3 11, I 11 18,444 70.5
12. I I 0.1 3,001 4,279 42.6
6.7 3.5 9,234 13,677 48.1
15.0 12.1 15,789 18,167 15.1
39.0 39.4 1,674 2,384 42.4
11.8 8,1 11,202 14,569 30.1
36.9 19,4 7,537 7,043 -6.6
32.9 21,9 10,546 12,716 20.6
38.5 23,1 3,822 5,182 35.6
29.5 17.3 4,058 5,417 33.5
5.5 4.5 1,775 1,974 11.2
ALL JOBS 20. I ! 3.5 88,290 120,786 36.8
Note: aNumbers in Thousands.
Source: U.S. Bureau of Labor Statistics and authors' calculations.
124 JOURNAL OF LABOR RESEARCH
Employment Growth, 1983-2000, by Industrial Classification
Agriculture 3.4% 2.5% 1,446 1,821 25.9%
Mining 20.7 10.6 869 499 -42.6
Construction 27.5 19. I 4,109 6,666 62.2
Manufacturing 29.2 16.4 I 1,162 11,688 4.7
Goods Manuf. 25.9 14.4 7,904 7,480 -5.4
Transportation 42.5 25.5 2,7 ! 2 4,573 68.6
Public Utilities 42.4 25.4 2,430 2,935 20.8
Wholes. Trade 9.3 5.4 3.653 4.766 30.5
Retail Trade 8.5 5. I 14,427 20,366 41.2
Finance, etc. 2.9 2.1 5,559 7,488 34.7
Services 7.7 5.5 18,400 33,528 82.2
Government 36.7 37.3 15,618 18,976 24.5
TOTAL 20.1 13.5 88,290 120,786 36.8
Note: aNumbers in thousands.
Source: U.S. Bureau of Labor Slatistics and authors' calculations.
(e.g., teachers and police officers). Theory expects the wage-enhancing goals of unions
will reduce employment in the private market economy where firms try to maximize
profits by producing where marginal costs equal marginal revenues. That is riot nec-
essarily the case in the governmental sector. Excluding the two government-intensive
occupational sectors, employment grew only 16.8 percent in the remaining four union-
intensive categories, substantially less than one-half the growth rate for the relatively
nonunion sectors. If those four occupational categories had grown at the average of the
six relatively nonunion-intensive occupational classifications, job growth would have
been about six million greater.
The results are perhaps even starker when one turns to the industrial classifica-
tions of employment data (Table 9). There are six categories of employment where
union density exceeded the average for the entire labor force in both 1983 and 2000:
construction, durable goods manufacture, nondurable goods manufacture, transporta-
tion, communications and public utilities, and government. There were five categories
that had below-average union density in both years: agriculture, wholesale and retail
RICHARD VEDDER and LOWELL GALLAWAY 125
trade, finance, and services. The 12th category, mining, is ambiguous, with above aver-
age union density in 1983 and below average in 2000.
Employment growth in the six union-intensive categories was 24.4 percent from
1983-2000, compared with 55.2 percent in the five classifications with relatively low
union density. If the percentage employment growth in the relatively high density indus-
tries had equaled that in the relatively low density industries, about 10 million more
jobs would have been created. Had employment growth equaled that of the economy
as a whole (36.8 percent), there would have been four million more jobs created. Thus
the job deficiency associated with high union density may well be somewhere between
four and ten million jobs, consistent with earlier estimates. 14
The industry data stress the growing relative importance of public employment in
American unionization. Looking at the total labor force, union density declined from
20.1 percent in 1983 to 13.5 percent in 2000, a decline in the proportion of the labor
force in unions of slightly less than 33 percent. Looking at the private sector alone,
however, density fell from ! 6.5 to 9.0 percent, a decline of over 45 percent. The decline
in unionization in the market economy is in marked contrast to that in the public sector,
where membership has grown significantly in an absolute sense, and even slightly as a
percent of the work force. The discipline that the market imposes has made unioniza-
tion less attractive. Governmental activity largely lacks that market discipline and is char-
acterized by considerable rent-seeking -- an environment in which unions flourish.
VIII. Unions and the Death of Jobs: Two Case Studies
The Birth of Unions and Job Destruction: The Case of Steel. In 1935, the National
Labor Relations Act (Wagner Act) was enacted. By greatly expanding the move towards
a pro-union/high-wage political environment that had begun four years earlier with the
Davis-Bacon Act, the Wagner Act within a few years led to massive increases in union
density in the U.S. In 1934, the year before the passage of the Wagner Act, union den-
sity among nonagricultural workers was less than 12 percent, while a decade after the
legislation's enactment the density had tripled to over 35 percent (U.S. Bureau of the
Census, 1975, p. 178). In the two years 1936 to 1938, union membership doubled. It
was precisely in that period that recovery from the Great Depression stalled. Unem-
ployment rates fell from over 21 percent as late as October 1935 to under 13 percent
by May 1937 (Vedder and Gallaway, 1997, p. 77). The Wagner Act only began to be
effective in the Spring of 1937, in large part because employers largely ignored it,
believing, wrongly, that it would be found unconstitutional. In the spring of 1937 the
great union organizing drives successfully occurred in several major industries, lead-
ing to huge wage increases in late 1937 that reversed the promising 1935-1937 recov-
ery and led to rising unemployment: the unemployment rate surpassed 20 percent again
by the spring of 1938.
Nowhere was the fight to unionize more contentious yet ultimately successful than
the steel industry. While the U.S. Steel Corporation negotiated a collective bargaining
agreement at the end of March 1938, and the Jones and Laughlin Company after a short
126 JOURNAL OF LABOR RESEARCH
strike in May, a bitter and bloody battle erupted with the "Little Steel" companies.
When it all subsided by September, 18 had been killed and 168 injured (Taft, 1964,
The upshot of the unionization was a dramatic increase in the wages of workers
and an equally dramatic decline in employment. From the last quarter of 1936 (the
last quarter before U.S. Steel signed a collective bargain agreement) to the second quar-
ter of 1938 (about eight months after the end of the Little Steel strikes), money wages
per hour rose more than 2 ! percent (amidst double-digit national unemployment!), and
manhours worked in steel mills fell by more than 5 l percent, reversing employment
gains that had occurred during 1936 when money wages were relatively stable and real
unit labor costs were actually falling because of rising productivity (Vedder and Gall-
away, 1997, p. 136).
After the initial trauma of unionization, markets did adjust to the new environ-
ment, From the second quarter of 1938 to the fourth quarter of 1940, money wages
rose very little, but robust productivity gains, no doubt in part induced by labor-sav-
ing technological change resulting from the new high wages, led to a significant decline
in the real wage adjusted for productivity change. As a consequence, employment again
rose sharply. Nonetheless, even in the fourth quarter of 1940, when the nation was mov-
ing rapidly to war mobilization, employees in the steel industry worked fewer hours
than four years earlier, before unionization had begun.
Long-Term Unionization and Job Destruction: Coal Mining. The quintessential
militant labor union leader during the golden age of American labor unions was John
L. Lewis (1880-1969), head of the United Mine Workers. Not only was he an extremely
aggressive and powerful leader of his union, he was by most accounts the founder of
twentieth century industrial unionization as practiced by the CIO (Congress of Indus-
trial Organizations). Yet a strong union tradition in mining predates Lewis, who became
UMW president in 1920. From the late nineteenth-century on, America's miners had
showed a significant interest in unionization, and "in 1897, the United Mining Work-
ers of America became the largest union in the United States, a position it retained for
almost three decades" (Taft, 1964, p. 166). Nonetheless, many miners remained
nonunion until membership grew sharply after the improvement in the political-legal
environment for collective bargaining beginning in the early 1930s.
From 1909 through 1927, the number of production workers in bituminous coal
mining in the United States oscillated around 500,000 or 600,000 (U.S. Department
of Labor, 1968, pp. 19-20). While employment declined in the Great Depression, it
never recovered. During World War II, Lewis incurred the wrath of the War Labor Board
and the American public by repeatedly violating labor's no-strike pledge, followed by
long and bitter strikes in the immediate post-war era. This strategy did lead to higher
wages, with weekly wages well over tripling from 1933 to 1944 (U.S. Department of
Labor, 1968, p. 20). Employment, which had been 471,000 in depression year 1937,
had fallen to 351,000 by relatively prosperous 1950. When Lewis gave up the UMW
presidency in 1960, employment had fallen below 150,000, a decline of about 400,000
during the four decades of his leadership.
RICHARD VEDDER and LOWELL GALLAWAY 127
Output had fallen by more than one-fourth, as consumers switched to other fuels.
Railroads started using oil-consuming diesel locomotives; homes switched to gas, oil,
and even electric heat. At the retail level, coal prices more than doubled from 1935 to
1950, while natural gas retail prices rose at best 10 percent (U.S. Bureau of the Cen-
sus, 1975, p. 214). Aside from being dirty and relatively labor intensive, home heat-
ing with coal was losing its price advantage over alternative fuels, in part because of
the high cost of mining it.
While coal mining had a brief revival in the 1970s and 1980s propelled by the
explosion in oil prices, booming electricity demand, and other factors, by 1999, only
70,000 production workers were left in coal mining in the U.S., barely one-tenth the
number when Lewis assumed the UMW presidency 80 years earlier. Coal miners
remained among the best paid industrial workers, earning nearly 50 percent more than
the average for private sector workers (U.S. Bureau of the Census, 2000, p. 428). While
environmental, occupational safety, and other factors no doubt played a role, several
decades of union militancy exacted a heavy toll on employment in the coal mining
industry. Ironically, the United Mine Workers by 2000 were a shadow of their former
self, as high wages reduced industry employment and led also to a growth in nonunion
IX. Unions and the Quality of Life
Because utility is essentially unmeasurable with precision, we cannot state precisely
what the impact of unions is on happiness or, broadly speaking, "the quality of life."
There is one act of revealed preference, however, that is probably a reasonable proxy
measure for the general level of satisfaction with a geographic locale, namely the
amount of net spatial migration. If people, net, are moving into an area, that suggests
that the area is perceived as being relatively attractive, for a variety of economic and
noneconomic reasons. Likewise, net out-migration would be a sign that an area is rel-
atively unattractive, leading people to vote with their feet by moving elsewhere.
The U.S. Bureau of the Census (2000) has estimated net domestic migration for
the 50 states and the District of Columbia for 1990 to 1999. The sum of migration is
zero -- each interstate act of migration is recorded as a negative (out-migration) for
the state of origin, and as a positive (in-migration) for the state of destination. We
took the 10 states with the highest rates of in-migration in the 1990s and observed their
end-period union density.t5 We compared that figure with the union density in the 10
states with the greatest out-migration) 6 Note that in the states with the highest out-
migration (a total of 6,468,945), the median union density in 1999 was 17.7 percent,
well above the national average of 13.5 percent, and more than twice the median den-
sity in the 10 states with the greatest in-migration (that received a total of 5,200,608
While that evidence is rather strong, we decided to classify the data an alterna-
tive way, namely by union density. We took the 11 states with the highest density and
compared them with the 11 states with the lowest density. 17 The results show that the
128 JOURNAL OF LABOR RESEARCH
lowest density states had net in-migration of 3,530,108 which is more than one thou-
sand persons a day, every day, for nine years. Ten of the 11 states had net in-migra-
tion, the single exception, South Dakota, having a very small (less than 3,000)
out-migration. By contrast, the 11 states with the highest union densities had a net
out-migration of 2,984,007 persons, with eight of 11 reporting net out-movement of
people. While no doubt other factors are also relevant in explaining these population
movements, the evidence suggests unions are not perceived positively by individuals
making migration decisions.
While there are no doubt many individual members of labor unions who feel that they
have benefitted from collective bargaining, the overall evidence is overwhelming that
labor unions in contemporary America have had harmful aggregate effects on the econ-
omy. Unions are associated with lower rates of growth in income and jobs. On balance,
people move away from union-intensive areas to areas with relatively low rates of union
density. Occupations and industries with high rates of union density have had less
vibrant job growth in recent decades. Widespread unionization of an industry is often
associated with initial sharp declines in employment, as the steel industry demonstrates.
The more strident and intense union involvement in industry, the bigger that indus-
try's decline, as the experience of coal mining shows. Also, high levels of unioniza-
tion are associated with out-migration of native born Americans, while low levels are
associated with in-migration. The decline in union density in the private sector in the
past generation has been sharp, and that decline has added to the vitality of the econ-
omy at the beginning of the new century. The increasing weakness of unions in the
market economy has contributed to economic growth and a rising proportion of the
working age population that actually works.
RICHARD VEDDER and LOWELL GALLAWAY 129
IThe classic case of this occurred during World War II. In the face of an overwhelming demand for work-
ers, the lowest level reached by the official statistically-measured unemployment rate was 1.2 percent in
2See Hutt (1977) for a fuller discussion of this issue.
3We relax this assumption later in this essay.
4This is derived from regression coefficients in Vedder and Gallaway (1997), Appendix B.
51n an earlier paper (Gallaway et al., 1991), we estimate an aggregate labor supply elasticity of 0.14. This
is broadly consistent with the general literature on overall labor supply.
6See U.S. Bureau of the Census (1975), Series D-685- D-719. In order to take account of changes in indus-
trial mix through time, 1954 weights were use throughout to standardize the estimates of compensation per
7The t-statistic for the test is 0.61.
SThe time trend in the wage differential between 1919 and 1933 is actually weakly negative.
9See Linneman et al. (1990) for details.
I~ Lewis (1963) and Parsley (1980).
IrA Ioglinear version of the model provides very similar results.
iZThe years were 1966, 1970, 1974, 1979, 1983, 1988, 1991, 1994, and 1999.
13Data are not available for this measure on a strictly comparable basis for all years in the period.
14Of course, the differential employment growth may be at least partially explainable by nonunion factors.
t SThe states are Arizona, Connecticut. Florida, Georgia, Nevada, North Carolina, Oregon, Tennessee, Texas,
16The states are California, Illinois, Louisiana, Massachusetts, Michigan, New Jersey, New York, Ohio, Penn-
sylvania, and the District of Columbia.
17The reason 11 states were used instead of ten was because the 10th highest ranking was a tie between
two states. The eleven high-density states are: Connecticut, Illinois, Michigan, Minnesota, New Jersey,
New York, Ohio, Washington, Wisconsin, Alaska, and Hawaii. The l l lowest density states are: Arizona,
Arkansas, Georgia, Mississippi, North Carolina, South Carolina, South Dakota, Tennessee, Texas, Utah, and
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