David R. Henderson  

Do Labor Unions Promote the Middle Class?

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In today's WaPost, political scientists Jacob S. Hacker and Paul Pierson argue that not only are unions good for their members but also that unions promote a strong middle class. Their main argument is that unions are a strong political force that lobbies for pro-middle-class policies. Dealing with that argument, which I think has some correct points and some incorrect, would take me too far afield from their more-narrowly-economic argument about the direct impact of unions on wages, which is what concerns me here. Here is that argument:

The reason [that unions reduce income inequality] isn't just that unions defend their members. They also create changes in social norms, such as pressures for nonunion employers to match union gains.

What Hacker and Pierson have done here is point to one effect of unions--labor economists call it the "threat effect"--but left out another that is stronger. But to see why, we need to back up and think about what unions have been in the United States since the 1930s. Unions, as economists, even many who are pro-union, have pointed out are legal monopolies. As pro-union Harvard economists Richard Freeman and James Medoff, put it, "Most, if not all, unions have monopoly power, which they can use to raise wages above competitive levels." They have this monopoly power mainly because the federal government gives them the power, not the right, to be the sole bargaining agent for workers in a plant or company, even if many of the workers don't want to be represented. These workers tend to be "the unseen."

But because the unions drive wages above competitive levels, they cause some of the workers to be put out of work. Many of these workers would have rather driven their own bargain and worked for a lower wage, but they can't do so legally. Check out this comment by Rich on my previous post on this subject for one such case.

What do these workers do? Sit and eat bon-bons the rest of their lives? No, they go out and find other work. If they find work in the non-union sector, that drives down wages there. Indeed, one of the main findings of the late H. Gregg Lewis, the famous labor economist at the University of Chicago, is that unions in their heyday, the 1950s and early 1960s, caused union wages to be 10 to 15 percent higher and non-union wages to be 3 to 4 percent lower.

But what if unions did have the effect that Hacker and Pierson claim? This "threat effect" would undercut my claim above. But to see how, let's take an extreme. Let's say that every non-union employer, seeing the threat of unionization, raises pay and benefits a little. They, just like union employers when faced with a higher wage, will employ fewer people. Then those people put out of work by unions will have more trouble finding work. The wages of those who are working will be higher--and there will be fewer of them. The wages of those who are not working will be zero. Will you have a bigger middle class? Possibly. Will you have a larger lower class with people, especially younger people, having much more trouble finding work? Definitely.

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CATEGORIES: Labor Market

COMMENTS (13 to date)
Ryan writes:

I read Richard Freeman's interview which Mankiw posted today. He does not seem to mention the effects that you do, even though they seem to be empirically present. Why, do you think, does he not take these in to account.

Also, there is one thing he said that stood out to me. Freeman speaks of a potential trade-off where unions step in and bargain for more fringe benefits, that come at the expense of higher wages. Yet, it seems to me, that especially where public-unions are concerned, the employees experience both wage and benefit advantages. Is this correct? If so, then why does Freeman not address this apparent "free lunch" for the public employees?

Why assume that monopoly raises wages in other sectors? By its definition monopoly has no competitors. The real comparison has to be made with the same industry in the absence of monopoly (counter-factual) and then it's not clear anymore that there's a union premium. I can see an employer having to deal with good workers threatening to go on permanent strike (take another job), being subject to much more pressure.

David R. Henderson writes:

Thanks for the link. I hadn't check Greg's site today. I think the answer to both of your questions is "because the interviewer didn't ask him." Freeman is not only pro-union but also pro-union monopoly. It would be unlikely that he would point these things out unless asked. This was a softball interview.

Ryan writes:

I got ya. Thanks for the prompt response and keep up the honest work. Thanks again.

kiwi dave writes:

A slightly off-topic terminological issue, but coming from a British-influenced country, I find the use of the term “middle class” in the US quite strange. The article to which you link is a very good example of that. In the UK and the Commonwealth (and I think much of Europe), more or less by definition, if someone belongs to a trade union he/she is pretty much by definition working class and not middle class (there are certain exceptions, such as for university professors and perhaps school teachers – K-12 teachers would generally be seen as lower-middle class or possibly upper-working class rather than middle class proper).
It seems that in the US, “middle class” means roughly anyone in the middle, say, 3rd through 8th deciles of the income distribution. Whereas the British (and perhaps European) definition of “middle class” is different in two ways as far as I can tell:
(i) class, in the British sense, is to do with a lot more than strict economic factors – class is a complex thing that has a lot to do with origins, occupation, education, cultural and linguistic shibboleths etc. A building contractor or master plumber may make much more money than a country GP, but the former is still working class and the latter middle class.
(ii) even inasmuch as it can be reduced to economic factors, the middle class doesn’t literally mean the middle of the income distribution. This is consistent with the historical origin of the bourgeoisie – they were the “middle” between the aristocracy and the peasantry, but they were still way above the median in an economic sense. I would say that in Britain (and British-influenced societies such as New Zealand), the “middle class” would roughly correspond to income deciles 5 through 9 (decile 10 would include the upper-middle class and the fraction of 1 percent that is actually upper class).
I suspect, and I feel I have heard this elsewhere, that the term “middle class” in America used to be roughly the same as in the UK, but over time, and people such as labor union members were referred to as working class, but since the term “working class” had undesirable undertones of class warfare, labor unions and left-leaning Democrats began to prefer to call the working class the “middle class.” I think this is similar to how social-democrats and socialists in America called themselves “liberals,” even though a lot of their policies and positions have nothing to do with classical liberalism, or even social liberalism, as “liberalism” is understood in Europe.

David R. Henderson writes:

@kiwi dave,
Good point about usage. I tend to use the term in a statistical sense but it is true that Americans go back and forth between usages of the term "middle class."

Daublin writes:

It's worth noting the magnitude of the changes we're talking about. The best theoretical result that any rank-and-file union members sees is a 15% improvement in pay?

That seems pretty modest compared to the costs. Look at the pain and problems caused by even a single strike. Consider the worker-against-worker outcome of scab hazing. Ponder what it must be like to work in a field where your coworkers are chosen by seniority rather than merit, and thus where managers are unusually likely to be dunces. On top of all that, consider all the time spent by industry members hanging out in D.C. Then, when you've finished considering that, consider the poor clients of your industry. They have to overpay for crappy products.

A best-case 15% improvement doesn't sound worth it. You can get more than that by skilling up at a trade school.

Charley Hooper writes:

Pro-union people must really believe, in their heart of hearts, that the only reason workers don't earn more is that greedy employers have enough power to pay substandard wages. Except in limited circumstances, this isn't true and it completely ignores the power of the market.

Employment must be beneficial for both parties and the metric the employer uses is profitability. In other words, how does the employee's pay compare to his/her productivity?

Therefore, wages can never stray too far, on either the low or high end, from productivity before adjustments are made. Those who want wages to rise should focus on productivity first and foremost.

Gary Marshall writes:

Hello David,

There is also the problem of unions driving up costs for entire industries so much so that companies move operations overseas. The steel and textile industries are such an example. However, one could argue that people would then be forced to seek better education and employment in more enriching fields and industries. Still, it does cause a premature shift in production out of the country.

Secondly, a union may plausibly be a benefit in a thriving industry, but it can be perilous in a declining industry. I recall the Steel Workers Union refusing to give wage and benefit concessions to prospective Japanese buyers at a closed Pennsylvania steel mill in the 80's because it would lead to similar demands from owners at mills elsewhere. Better to let the one plant fall than have to compromise at other union mills.

Gary Marshall

Shankar writes:

Doesn't a bigger middel class create more demand for products and consequently create more jobs? I would really like to see some statistical analysis of all the claims both pro- and anti-union posts make. Without numbers, I will not be convinced of any arguments the either side is making.

Chris Gaun writes:

"[Unions] have this monopoly power mainly because the federal government gives them the power, not the right, to be the sole bargaining agent for workers in a plant or company, even if many of the workers don't want to be represented."

Does the above statement leave out "right-to-work" states(http://en.wikipedia.org/wiki/Right-to-work_law)? Because it seems like a sizeable part of the US, 22 states, work under laws with slightly different conditions. (Not sure if that changes the thesis. My guess would be no.)


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Dustin writes:

Why would an employer higher fewer employees if they made higher wages? Wouldn't an employer have to hire as many workers as was necessary to meet demand? Obviously you can get into a situation where labor costs can drive prices higher and reduce demand, but labor is relatively small percentage of total cost for a great many things.

Kevin L writes:

Labor is a large part of almost any product. If labor costs go up per unit worker, managers will attempt to make do with fewer workers. Otherwise, like you said, prices will go up, demand will decrease, supply will fall, and people will lose jobs. Either way, there are fewer people working for higher wages.

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