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The Economic Costs of Labor Unions Democrats Never Mention

February 2023



The decade following WWII marked the heyday of the American labor movement. In 1954 it succeeded in unionizing 37% of private sector workers. But after 1960, union membership steadily declined, and today only 7% of those workers are unionized. Union coverage is much greater among government workers, but they represent only 12% of total employment.


union membership density



The Democrat Party and its liberal pundits are committed to reversing this trend. They want to re-energize organized labor with taxpayer subsidies and pro-union regulations. I am referring to pending legislation that allows striking workers to collect unemployment compensation, and the "buy-American" and "prevailing wage" provisions of the Inflation Reduction Act. Organized labor is thus rewarded for its generous contribution to the Party's coffers and vote totals.


My argument boils down to this: A grand resuscitation of old-school unionization is a patchy and inefficient way to redivide the pie more fairly. The "negative externalities" of union expansion will shrink the pie, leaving the average American worse off.


The Dems' justify their desire for union resurgence by citing the correlation between rising income inequality and the decline in union membership (see chart). Their explanation is that the demise of union power has enabled the owners of capital to nibble away at labor's share of national income. Simply put, when labor power is weak, capitalists enjoy higher profit margins at the expense of workers' wages. Therefore, union revitalization is needed to reduce income inequality.


However, this Labor vs Capital explanation appears to be a figment of left-wing imagination. Recent analysis shows that over the first 40 years of union decline the division of national income between labor and capital hardly changed at all. Only recently, around 2005, has labor's share dropped; but surprisingly, the increase in the capitalists' share did not go to labor's corporate employers, but to the owners of residential housing.


Another explanation for rising inequality is the widening wage gap within the ranks of labor, especially the chasm between workers with and without a college degree. In the past, unions have reduced inequality by raising the wage floor for low-skilled workers. But this is not sufficient to offset the structural causes of today's record-high inequality, such as freer trade, globalization, winner-take-all markets, and the increased premium on skill and college credentials.


A privatized remedy for a social problem.


During the first 35 years of the 20th century, the preferred remedy for inequality were laws that strengthened the bargaining power of unionized workers. The Clayton Act of 1914, for example, stipulated that antitrust laws prohibiting cartels could not be used against labor unions. The Wagner act 1935 further strengthened the rights of workers to organize, bargain collectively, and strike.


So in effect, Congress was engineering a privatized solution to a social problem: inequality can be reduced by churning out thousands of voluntarily negotiated contracts between private firms and labor unions.


But, by FDR's second term, it was apparent that the privatized solution was not up to the job. Despite a surge in unionization, collective bargaining covered only 12% of the workforce. And a 15% unemployment rate eroded negotiating leverage even for unionized workers.


So, it occurred to Democrats that social problems might require social solutions, ones that were mandatory and universal. In 1937 they passed the Fair Labor Standards Act (FLSA) which mandated a slew of minimum labor standards that protected all workers, regardless of union affiliation. This included a minimum wage standard and the 8-hour workday. Wisely, Congressional Democrats have continued to emphasize social solutions, issuing a stream of welfare mandates, from Social Security in 1935 to Obamacare in 2010.


Those social solutions are clearly superior to the privatized option for two reasons. First, social legislation covers all workers, not just the minority that are unionized. Second, the adversarial style of collective bargaining, so common in America, is a game of extortion and intentional economic punishment, which makes it a destructive and inefficient way to reduce inequality.


The Democrats' vision for a big expansion of unionization will harm economic welfare more than it helps. The reasons are twofold: diminishing returns to unionization and its extravagant social costs, a.k.a. "negative externalities."



The shrinking marginal benefit of unionization


Thanks to the string of welfare mandates enacted by Congress since the New Deal, most of the fundamental rights that unions originally fought for - overtime pay, 8-hour workday, minimum wage, retirement security, and the like - are now guarantied to all workers, union and non-union alike.


All of this progressive legislation has clearly diminished the value of union membership. The passage of each additional welfare mandate robs unions of the opportunity to negotiate that benefit for their members. And it reduces the appeal of membership to non-union workers. Imagine how the future passage of Bernie's "Medicare for All" reform would eviscerate the union's role in negotiating employer sponsored health insurance.

Nevertheless, today's unions still perform an important role: they bargain for things that supplement and enhance the basic labor guarantees in accordance with the specific needs of their members. (Nurses want more humane scheduling, pickers more shade, and UPS drivers more AC). Therefore, any expansion of unionization should occur organically, in response to workers' demand for those services. It should not be an artificial resurgence, fueled and subsidized by public policy.


The Costs of Unionization


Social Costs = Private Costs + Negative Externalities


The private costs of collective bargaining refer to costs borne by unionized workers and their employer, such as the wages and profits they lose during a strike, as well as membership dues that pay the salaries of union officials.


Private costs are NOT the problem, since both parties consent to them. Rather, the real problem is "negative externalities." These are the economic harms that union activity inflicts on outsiders, without their consent.


Devil's Bargain: Unions Thrive on Firms' Monopoly Power.


Ironically, the foremost private benefit gained by unionized workers, the vaunted wage premium, is financed by exploiting consumers, a serious social cost.


Companies whose profits are whittled to the bone by vigorous competition, such as most restaurants, cannot afford to pay above-normal wages. So, only from companies that make excess profits (which economists call rents) can unions extract big wage premiums. Indeed, Starbuck's exceptional 14% profit margin has attracted union organizers who have managed to unionize over 300 stores.


Various barriers to competition enable firms to exercise monopoly power. This means they are able to raise prices without losing too many customers.

A firm can have monopoly power without being a pure monopoly. Starbucks' power derives from the speciality of its product line; in other words, Dunkin Donuts is a poor substitute for the "Starbucks experience". On the other hand, highly unionized Anheuser-Busch enjoys monopoly power because it's a member of an oligopoly; that is, an industry dominated by a handful of firms who mutually avoid price-cutting.


So, when unionized workers extract a premium wage from monopolistic firms they are sharing in the spoils of consumer exploitation. It's called "union rent-sharing," and it is quite lucrative. In 2022, the annual wages and benefits of workers in the most monopolistic industries - railroads and utilities - averaged $145,000 and $157,000 respectively, which is about 60% higher than the average for all workers.


To protect the flow of rents unions align their political influence with their employers' power to raise prices. Consequently, organized labor has been a champion of public policies that restrain competition. To this day, organized labor continues to oppose "free trade" agreements, and to favor anti-competitive measures such as import restrictions and "buy America" mandates (which, by the way, are integral to Joe Biden's new "industrial policy" and the Trumpian nationalism it echoes). These policies erode Americans' economic welfare.


The takeaway: Wage premiums secured from monopolistic firms make consumers poorer, and most of those consumers are non-union workers.


It's a mistake to believe that union rent-sharing is the optimal antidote to monopoly power. To the contrary, market power undermines economic efficiency, so curbing that power, instead of sharing the loot with a union, would generate a bigger economic pie and lower prices for everyone.



Years of empirical research on the economic effects of "union density" (percentage of employees who are union members) has been subjected to meta-analysis. Here's the damage report from that research:


Higher Union density reduces the level of employment, especially for the young, the old, and women. It also depresses private investment in both physical and intangible capital. These two deficits portend a drag on economic growth.


However, unlike other developed countries, unionization in the U.S. actually enhances labor productivity, which might offset the drag on growth. On the other hand, less investment in R&D jeopardizes future productivity gains.



Parasitic Strike Costs


From 1948 to 1970, the highpoint of private sector unionization, the percentage of total labor hours idled by strikes was 25 times greater than in the last 20 years. This should serve as a warning that the Dems' vision of resurgent unionization is sure to multiply strike costs.


Furthermore, strike costs are grossly underestimated. That's because strikes spawn negative externalities that often go unmeasured, unrecorded or even unrecognized. According to American labor law, workers cannot be held liable for losses "incidental to a legal strike." The legal right to strike is, in effect, a license to inflict collateral damage on third parties with impunity. The message here is that the costs of work stoppages reaches far beyond the lost wages of the strikers and the lost profits of the targeted firms.


For example, according to standard economic metrics, the total cost of recent six-week UAW strike was $10.4 billion. The direct costs - wages and revenue lost by the two warring parties - came to $5.1. But the losses didn't stop there. They rippled outward to satellite firms that supplied parts and services to the Big-3. The drop in orders forced these firms to layoff workers who, in turn, cut back spending on discretionary items. This depressed the income of other businesses and employees... and so on. These indirect costs to third parties amounted to $5.3 billion.*


However, $5.3 billion is just the tip of the iceberg because it omits all the negative externalities that are not captured by standard economic indicators. Uncounted damages to third parties is why strike costs are woefully underestimated.


Uncounted Externalities


For example, the estimate of $5.3 billion doesn't include the public health effects of involuntary layoffs. Not only do idled workers suffer an increased risk of substance abuse and clinical depression, but they are also more prone to domestic violence. A 1% increase in the rate of major depression among workers laid off during the UAW strike would add $37 million to strike costs, not to mention the medical and legal costs associated with domestic violence.


Perhaps the the most egregious example of uncounted collateral damage (negative externalities) is strikes by health care workers. A comprehensive study of nurses' strikes against hospitals in New York from 1984 to 2004 found that "strikes increase in-hospital mortality by 18.3 percent"


Yes, strikes kill, in this case 138 patients. Since the CDC puts the value of a statistical life at $6 million, those excess deaths add almost a billion dollars to strike costs. Also adding to the cost is the higher rate of hospital readmissions attributed to the strikes.


Another leader in uncounted externalities is teachers' strikes. The Covid experience raised public awareness of the fact that interrupted schooling causes learning loss. And so it is with teachers' strikes. Studies in Europe, Canada, Argentina and the United States consistently find that strikes retard student achievement. This portends lower earnings after graduation. Raj Chetty's research finds that students whose achievement lags by 1 Standard Deviation will earn 1% less at age 28, the continuation of which would grow into a $25000 loss.


Also uncounted is the time and money parents expend on alternative childcare during a strike. An average expenditure of just $5 per pupil per day, would add $7.5 million to the cost of the recent three-day LA teachers strike.


Finally, transit strikes stand out because of the sheer numbers of people affected. Since WW-II nine big cities in the US have been struck at least once. A treasure trove of data on transit strikes in Germany allowed researchers to tease out their deleterious effects. The authors find a 13% increase in car traffic which resulted in 14% more car crashes, 20% more accident-injuries, 14% more particle pollution, and 11% more hospital admissions of children for respiratory problems. The only harm they attempt to monetize is the burden of increased travel time, which averaged about 3.2 million per strike. The bill for the extra injuries and hospital admissions is probably a lot larger.


One last example illustrates the significance of uncounted externalities. The 1994 strike at a Bridgestone/Firestone tire plant resulted in quality flaws that were responsible for (at least) 35 fatal accidents. According to the Department of Transportation, the value of those statistical lives is $350 million. Add to this the medical cost of accident related injuries and property damage, and the total collateral damage from this one single plant strike could approach $1 billion.


The message: Unions are extracting huge subsidies from the public. Covertly, the public is subsidizing private labor unions by involuntarily absorbing the spillover damages of strikes. On top of that are overt subsidies such as Biden's $36 billion bailout of union pension funds and "prevailing wage" laws.


Political Hypocrisy


Since most private sector strikes are modest in size and localized, their externalities are muted and escape public awareness. This is why politicians' support for the right to strike in the private sector is not unpopular.


But in the public sector, lawmakers severely limit the right to strike. The reason is simple: strikes by government workers could cause serious and conspicuous collateral damage. Imagine the blowback politicians would suffer at the polls if they made it legal for police and firefighters to walk off the job and leave civilians to fend for themselves.


Consequently, the vast majority of states deny teachers and first responders the right to strike. And, as underscored by Reagan's firing of air traffic controllers in 1981, all employees of the Federal government are prohibited from striking.


But even in the private sector, politicians are sensitive to the potential for significant blowback. For example, the likely damage to the economy from a railroad strike is so great that railway unions are governed by a special law - The Railway Labor Act. This law allowed Biden to forestall a crippling railroad strike in 2022.


So, as long as the full cost of strikes remains hidden and the threat of political blowback is minor, politicians will allow strikers to gain at the expense of third parties.


The Alternative to Parasitic Strikes: Mediation/Arbitration


Without the costly collateral damage from strikes, unionization would become a net positive for society. So assuming that the right to strike is replaced with a blend of mediation and arbitration, collective bargaining would provide two valuable services...


Curbing monopsony power in the labor market. Monopsony refers to a firm's power to pay a sub-par wage and still retain enough workers. A firm's ability to skimp on wages depends on how costly it is for workers to switch to a different employer.


For example, to seize an attractive job opportunity might require moving to a different location, or commuting an additional 30 minutes, or upgrading credentials. Since such costs are ubiquitous, most companies enjoy some degree of monopsony power.

Collective bargaining through mediation/arbitration has succeeded in offsetting monopsony power in the strike-limited public sector. It can do the same in the private sector.


Customizing benefits and working conditions. Although decades of progressive social legislation have diminished the role of unions, tailoring labor contracts to members' unique needs is still a job for collective bargaining. Nurses, for example, want humane schedules; and UPS drivers want air conditioning.


Public Policy Alternatives to Union Evangelism


The Democratic Party promotes the growth of organized labor because of its value as a political asset. If progressives really cared about the welfare of the working class, they would be waging war against monopsony and monopoly power. In other words, to squelch excess profits and foster competition they would be passing legislation that...

  • Eliminates non-compete clauses in employment contracts.

  • Criminalizes Big Pharma's schemes to forestall competition from generic drugs.

  • Ensures that drug companies get only one bite from the apple of patent protection.

  • Breaks the AMA's monopoly on medical services by allowing Nurse Practitioners and Physician Assistants to practice medicine autonomously.

  • Repeals restrictions on international trade that do not entail serious national security risks.

  • Establishes the Right to Repair.


Compared to other developed nations, America's level of inequality is disgraceful. But the main culprit is not a lag in union membership, but the Democrats' failure to pursue efficient redistributive policies. For example, instead of subsidizing a union comeback, inequality could be reduced more effectively by...

  • Expanding the Earned Income Tax Credit (EITC)

  • Mandating Federal Minimum Wages that are tailored to the median wage level in each state or region.

  • Reforming NIMBY inspired zoning and building restrictions to make housing more affordable.

  • Implementing "Medicare for All" which would not only elevate the bottom half of the income distribution, but it would lead to a healthier workforce and impose needed cost controls on the "billing machine" known as American Health Care.


 

*In this case, much of the $10.4B in direct and indirect losses will be recouped through accelerated production in subsequent months. However, recouping is difficult to impossible in non-manufacturing sectors, such as strikes by teachers, farm workers, and transit workers; and the cost of externalities are not recoverable.


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