The Economic Effects of Labor Unions Revisited
ABSTRACT 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 industry. While some individual workers have profited from unions, the aggregate economic impact is strongly negative.
- Journal of Law & Economics - J LAW ECON. 01/1963; 6(1).
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ABSTRACT: This paper integrates union bargaining into an efficiency model with imperfect monitoring of worker performance. The model is used to examine the effects of an increase in the benefit replacement ratio on wages, employment, and effort. It is shown that, in contrast to both standard shirking and trade union models, these effects are all ambiguous. In particular, if unions have some bargaining strength, a higher replacement ratio may reduce wages and increase employment. Whenever employment is increased the level of effort falls. Copyright 1998 by Royal Economic Society.Oxford Economic Papers 02/1998; 50(4):726-46. · 1.11 Impact Factor
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ABSTRACT: The results clearly indicate that much of the considerable variation in the pace and pattern of economic growth between the various American states is explainable by institutional arrangements amenable to revisions through public policy. The findings suggest that long run economic growth would be best served by constraining distributional coalitions, be it through constitutional restraints (e.g., balanced budget amendments, the item veto), statutory changes (e.g., subjecting coalitions like labor unions to the antitrust laws), or some other means (e.g., labor and capital fleeing distributional coalitions, such as in the movement of workers and plants to nonunion areas).Public Choice 12/1985; 51(1):93-100. · 0.91 Impact Factor
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,
JOURNAL OF LABOR RESEARCH
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