January 15, 2025
The following cost-benefit analysis of America's system of collective bargaining is split into two parts. This post, part 2, addresses the cost side of the ledger; part 1, deals with the benefit 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 an unmitigated good for the working class. They are essential for economic equality and well-being.
However, these sites are oblivious to the downsides of unionization; they imply that all the wonderful benefits are bestowed 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 assessment concludes that the system is a net loser, mostly due to significant costs that have gone unrecognized and uncounted.
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 that is distinctly antagonistic. The bargaining power of private sector unions is based on the right to strike. This includes not only the right to deprive employers of productive labor, but also the right to incidentally harm innocent bystanders.

The 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 2: The Costs of Unionization
Social Costs = Private Costs + Collateral Damage
The private costs of collective bargaining refer to costs borne by unionized workers and their employers, such as the wages and profits lost 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 the collateral damage, also known as "spillover costs." This refers to the costs that union activity inflicts on third parties, without their consent.
Strike Costs – the 800-pound Gorilla.
These enormous costs stem from the fact that unions possess a license to inflict collateral damage. American labor law protects unions from liability for third-party losses that are "incidental to a legal strike."
In short, unions enjoy qualified immunity. If a strike is conducted in a lawful manner, innocent bystanders that are harmed by the walkout cannot sue the union for compensation.
The message here is that the private costs of strikes, to which workers and employers consent, often pale in comparison to the harms inflicted on third parties.
For example, according to standard economic metrics, the total cost of recent six-week UAW strike was $10.4 billion. The direct private 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-Three. 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 downstream burdens on non-consenting third parties amounted to $5.3 billion.*
However, $5.3 billion is just the tip of the iceberg because it omits the collateral damage that is not captured by standard economic indicators. Uncounted damages to third parties is why strike costs are woefully underestimated.
For example, that $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.
Four Compelling Examples of Uncounted Collateral Damage.
( 1 ) In some states nurses are prevented from striking by "patient abandonment" laws. New York is not one of them. 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 during the period studied. Also adding to the cost is the higher rate of hospital readmissions attributed to the strikes.
( 2 ) Another leader in uncounted spillover costs 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 that last more than 10 days. Studies in Europe, South Africa, Canada, Argentina, Belgium and the United States find that such strikes retard student achievement. Raj Chetty's research shows that lags in student achievement translate into lower earnings as adults.
In the U.S., teachers strikes rarely last long enough to impact learning. But even short-lived strikes force parents to spend time and money on alternative child care, which includes less time at work.
For example, I calculate that the four-week Portland teachers strike caused the parents of public school students to forego $6.3 million in earnings. This estimate is based on the finding that families affected by school closing during the Covid emergency cut their work-time by 2 hours/week, at an average wage-rate of $27/hour.
How does this $6.3M loss compare to the payoff for teachers? The main benefit they gained from the strike was an annual cost of living adjustment (COLA) that exceeded the District's pre-strike offer by 2.15%. This boosts the average teacher's annual raise by $1700. Therefore, over the course of the three-year contract, the District's 3600 teachers will collect an extra $18 million.
In other words, for deliberately abandoning the parents' children, teachers are rewarded with $18 million, while the parents are docked $6.3 million. And this cost omits other expenses related to childcare. It also excludes the detrimental effect of a four-week strike on student achievement. Because of these uncounted costs, total collateral damage is substantially greater than $6.3 million.
By the way, teachers strikes exemplify the caveat that collateral damage is not just incidental, but a deliberate bargaining lever: by hurting the customers, the union builds-up pressure on the employer to settle.
( 3 ) 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 larger.
( 4 ) Finally, here's an example of how a small isolated strike can cause catastrophic damage. 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 spillover damages are muted and escape public attention. Furthermore, the workers are seen as underdogs. This allows politicians, usually Democrats, to side with labor's right to strike in the private sector.
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 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 social cost of strikes remains underestimated and the threat of political blowback is minor, politicians will allow strikers to gain at the expense of the public.
Devil's Bargain: Unions Thrive on Firms' Monopoly Power.
Today, only 7% of the private sector labor force are union members, down from a high point of 37% in 1954. On average, union representation increases a worker’s hourly wage by 10-15%. This “union wage premium” is often financed at the expense of consumers – obviously, a social cost.
Companies whose profits are whittled to the bone by vigorous price competition cannot afford to pay above-normal wages. If a local McDonald’s raised its prices to cover a big wage increase, many of its customers would gravitate to other fast-food joints.
So, union organizers seek out firms that can afford to pay premium wages. This refers to high productivity firms that exhibit fat profits and some degree of pricing power.
Pricing power is the essence of monopoly power. To the degree that firms are
shielded from competition, they can raise prices without losing too many customers. Therefore, by bumping up prices, monopolistic firms can minimize the loss of profits by passing at least part of the wage increase onto their customers.
A company doesn't have to be a pure monopoly (e.g., local cable company) to exercise pricing power. Monopoly power can stem from any advantage over current or potential competitors: patent ownership, a distinctive product, scale, brand loyalty, and first-mover advantage (e.g., Amazon books).
Given that competitive markets provide poor prospects for unionizing, it’s no surprise that union density is higher in monopolistic industries.
At the low end of the scale is the highly competitive retail industry. Unions have managed to organize only 3.7% of retail workers. And for good reason: the industry’s paltry net profit margin of 3.3% leaves little room for a union wage premium. (In fact, the wage premium in the retail sector is negative).
By contrast, union membership and wage premiums are much higher in monopolistic markets, especially those dominated by small number of large firms.
A prime example is the railroad industry, where four firms serving separate regions of the nation haul 90% of all the freight. A whopping 41% of their workers are union members. With a net profit margin of 23%, those firms can easily afford to pay a premium wage.
And that premium wage is a whopper: the total compensation (wages plus benefits) of unionized railroad workers in 2023 was $65/hour. Compare that to the $40/hour paid to the 90% of the labor force that are non-union.
The scenario is similar in the monopolistic utilities and telecom industries. They also score high on union density, profitability, and hefty wage premiums.
Union Wage Premium = Loot Sharing
The profit advantage of monopolistic firms is parasitic. They can get away with charging excessive prices because competitive alternatives are not readily available to their customers. The resulting excess profits are called “rents” because the extra profit is unearned; it’s captured without returning anything of extra value.
So, when unionized workers extract a premium wage from monopolistic firms they are sharing in the spoils of consumer exploitation. The wage premium is their cut of the loot. The polite academic label is "union rent-sharing," and it is quite lucrative. In short, union workers benefit enormously from leeching off a parasitic host.
However, the wage premium understates the extent of workers’ loot sharing. In addition to wages, union workers enjoy better benefits. So, their total compensation (TC) outshines the wage premium. Let’s call it the TC-premium.
Because unions gravitate to employers that can afford to pay more, the average TC-premium for the labor force is impressive. For the unionized 10% of workers, TC is $56/hour; but for non-union employees it’s only $40/hour, a TC-premium of 40%.
Partners in Rent-Seeking
For rent-seeking businesses and unions, the economists’ ideal of competitive markets offers slim pickings. That's why unions actively help to sustain and protect their employers' monopoly power.
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. Back in the 1970s, unions fought against the deregulation of trucking and airline industries. To this day, they continue to oppose "free trade" agreements, and to favor anti-competitive measures such as "buy America" mandates. These policies erode Americans' economic welfare.
The Social Cost of the Devil's Bargain.
Immediately after the Miller-Coors merger, which reduced the dominant brewers in the US from three to two, the price of a 12-pack went up $0.40 (extra loot to share with the Teamsters union). The point: higher prices make consumers poorer, especially the 90% who don’t benefit from a union wage premium.
The loot-sharing alliance helps to perpetuate employers’ monopoly power rather than curb it. Monopoly power distorts the allocation of resources, undermines efficiency, and erodes Americans’ economic welfare. One estimate of the erosive effect is this: the steady increase in monopoly power from 1980 to 2016 reduced the income flowing into Americans' pockets by 10%. That’s a huge social cost.
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