December 20, 2024
The following cost-benefit analysis of America's system of collective bargaining is split into two parts. This post addresses the benefit side of the ledger; the next post, part 2, deals with the cost side.
Introduction
If you do a Google search relating to organized labor, the top results are likely to include links to liberal think tanks like the Economic Policy Institute (EPI). The take-away from these websites is that labor unions are essential for economic equality and prosperity: they bestow munificent benefits not only on their members, but on all wage earners.
However, since these sites seem oblivious to the downsides of unionization, they imply that all the wonderful benefits come at virtually no cost.
So, to challenge this "free-lunch" fiction, we definitely need a thorough Cost-Benefit Analysis of unionization in the U.S. My analysis concludes that the system is a net loser, mostly due to significant costs that have gone unrecognized and unmeasured.
This verdict would have been different if America had adopted Sweden's cooperative system of industrywide collective bargaining.
Instead, the U.S. has institutionalized a fragmented worksite-by-worksite style of collective bargaining, which is distinctly adversarial. The bargaining power of private sector unions is based on the right to strike. This includes the legal right to inflict pain on employers by withholding the supply of labor, and the right to incidentally harm third parties.
This strike-threat model of collective bargaining, a relic of the violent labor disputes in the Gilded Age, was legally enshrined by the passage of the Wagner Act in 1935.
Part 1: The limited and declining benefits of unionization.
Limited ability to counteract income inequality.
The chart illustrates how the decline in union density since 1954 was accompanied by a rise in earnings inequality in the labor force. Progressives argue that by raising the wages of low skilled workers, unions compress the gap between the top and bottom of the wage distribution. So, restoring union density to its former level will reverse inequality, a major social benefit.
But in fact, a union resurgence will have a minor impact on income inequality. That's because labor unions' influence on wages is limited to the workers they represent, and America's tedious workplace-by-workplace system of unionization is incapable of enlisting more than a minority of workers.
Liberal labor legislation in the 1930s unleashed a torrent of union organizing. Yet, when it peaked in 1954, only 37% the workforce was unionized. This left 63% to the mercy of the "free market." Today, only 7% of private sector workers are union members.
Union Density: the percentage of private and
public sector workers that are union members.

Union density in the private sector stalled at 37% for four reasons:
1. In the U.S., unlike Sweden and Germany, collective bargaining is centered on the individual business. This means that unions must organize workers plant by plant, shop by shop. Starbucks has 9000 stores. So its not surprising that the baristas' union has succeeded in organizing only 3% of them.
2. American firms have a powerful incentive to resist unionization of their employees. If union organizing succeeds at a Weis Foods store, the non-union supermarket down the road may eventually gain a competitive advantage. (And even if a union gains a foothold at Weis, management can stall an initial contract settlement for years).
3. More important, union organizing is plagued by the law of increasing marginal cost. It's relatively easy to unionize 50,000 dockworkers when all of them are concentrated in a small number of ports along the east coast. It's a lot harder to organize thousands of Starbucks baristas who are dispersed over 9000 locations nationwide. In short, once the low hanging fruit is picked, it becomes progressively harder to organize workers. At some level of union density, say 37%, extra effort is not worth the cost.
4. From union density's peak in 1954 to the present day, the labor force almost tripled, and millions of new (non-union) businesses joined the private sector. In order to prevent union density from declining, at least 37% of the new start-ups would have to be successfully unionized. But in fact, union organizing failed to keep pace with the growth of firms, and as a result, union density steadily fell to its current level of 6%. The reason for this failure is explained in the next section.
In sum, the social problem of wage inequality cannot be solved by a fragmentary, piecemeal bargaining process that, even in the best of times, couldn't capture more than 37% of workers.
The Diminishing Marginal Benefit of Union Membership.
Legend has it that the primary reason for the decline in union density is the steady shift in employment away from industrial production and into services. This is an exaggeration.
In reality, the popularity of unions declined in virtually all sectors of the economy. Workers across the board became progressively harder to enlist for a compelling reason: the benefit they could gain from joining a union had steadily diminished.
The main reason: politicians stole the unions' thunder.
The value of union membership declined as the government proceeded to mandate benefits that would have been prime targets of collective bargaining. It began in the 1930s with New Deal legislation that set universal labor standards. As a result, the fundamental rights unions originally fought for - the 8-hour workday, retirement security, minimum wage, and overtime pay - were guaranteed to all workers, union and non-union alike.
Legislation that diminishes the role of unions continues to this day, e.g. workplace safety and family leave. The passage of each additional welfare mandate robs unions of an opportunity to negotiate that benefit for their members. . . which is why some unions have opposed versions of Bernie's Medicare-for-all plan.
The Diminishing Union Wage Premium and its Spillovers.
So, now that workers are entitled to all those basic protections without a union card, it's harder to enlist new members. Union organizers must sell them on the promise of other benefits, such as the the celebrated "union wage premium." This is the difference in pay between union members and similarly situated non-union workers.
Even this benefit has diminished, from about 18% in 1984 to 10% in 2021, and along with it, the spillover benefit to non-union workers.*
Despite a shrinking wage premium, a restoration of union density to 37% will not solve the inequality problem.
Conventional wisdom holds that workers at the bottom of the pay scale gain the most from the union wage premium. This suggests that the steady decline in union density is responsible for the ever widening income inequality, as depicted on the chart. Therefore, progressive pundits and politicians advocate a resurrection of unionization as a way to shrink income inequality.
Unfortunately, an analysis of wages from 1979 through 2017 casts doubt on the effectiveness of resurrection. It finds that, contrary to conventional wisdom, unionization mostly benefits median wage workers, not the folks near the bottom. Consequently, the decline in union density since 1979 accounted for only 23% of the growing gap between the top and bottom rungs of the the wage distribution. That leaves three quarters of the gap to be explained by other things.
One of those 'other things' is the precipitous decline in the purchasing power of the Federal minimum wage from 1979 to 1989. That alone explains 59% the increase in the bottom-to-top pay gap.
In short, a quick and effective way to shrink that gap is not a piecemeal resuscitation of unionization, but a thoughtfully calibrated increase in the Federal minimum wage, as proposed by Dube.
The Benefit of Executing the Strike-Threat
The final diminishing benefit is the payoff to workers who actually engage in a legal strike. Before 1980 strikers could expect to win a 5-10% boost in wages over and above the pre-strike offer left on the table. Since 1980, the average strike has delivered zero increases in wages, hours, or benefits.
But even if the sum of benefits were greater, they would not offset the enormous social costs of the strike-threat model. That is the subject of Part 2.
* Spillover effects refer to the fact that the wage increases won by union members tend to boost the pay of non-union workers. Successful union organizing can be contagious. The threat of unionization nudges non-union firms to mollify their workers with pay-raises. This is a way to forestall union organizing and to retain workers that might be attracted to a unionized firm.
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