David R. Henderson  

Effect of Monopoly Unions on Income Distribution

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In a comment on my post, Minimum Wage: The Missing Explanation, Tom West writes:

I'm not certain it's necessarily a net loss for the USA to have actually had labor laws and unionization that led to a middle class large enough to encompass the majority of its citizens during the 1950-1990 period. While the unemployment of extremely marginal workers *is* a real cost, I don't think the transfer of the "excessive" wages garnered from the labor laws to the owner class would make the USA today a better place to live for the majority of its citizens.

Tom misunderstands the effect of unions. As I noted in my post, "Do Labor Unions Promote the Middle Class?", the main effect of unions is not to strengthen the middle class but to transfer wealth from non-union to union workers.

I focused in that post on the effect of unions on relative wages. Let's look here at the effect of unions on owners of businesses that are unionized. Say a union forms and uses its monopoly power to get a higher wage. What happens next? It's true that the profits of the firms that are unionized fall. If the whole industry is unionized, then firms leave the industry until the industry returns to normal profitability. Prices of the output are higher. That means that the long-run effect of the higher wages union receive is not a transfer from capital but a transfer from consumers.


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COMMENTS (7 to date)
mktlogic writes:

No, unionization does benefit some of the people in the middle class. The pro-union side has this right.

Their error is that they think the middle class benefits at the expense of the owners of capital. In reality it is at the expense of those who do not make it into the middle class.

Tom West writes:

You make a very good point, and you are probably correct today.

However (and you knew there'd be a however :-)), I find it interesting that the development of a sizable middle class basically occurs at the same time that unions start to gain influence and wages (even for non-unionized workers) start to rise, especially among the unskilled or semi-skilled.

There are a million variables and no hope of modeling the historical developments realistically, but I think unionization in that time period forced a *social* change that made it possible for a huge number of semi-skilled workers to get into the middle class, and that was a net benefit for American society.

Did it mean prices for cars and other goods were higher than they would have been in the absence of unionization? Absolutely. But I think a model where *all* increased wage costs are automatically passed on to the consumer is simplistic and, in the real world, often wrong.

Prices and wages are as often dictated by psychological and sociological concerns as they are by economic concerns. Thus, I think unions, especially in the early days, obtained much of their workers wealth from the owners. Certainly relatively speaking, inequality measures in that time period plunged.

Steve Roth writes:

How does this theoretical model explain the fairly strong correlation (.5) between states with higher union densities and higher gdp/capita?

http://www.asymptosis.com/do-unions-kill-prosperity.html

Shouldn't the pernicious effects of unions have killed prosperity in those states?

The obvious answer -- the reverse-causation "unions are a normal good" explanation -- is not terribly satisfying:

o As prosperity has increased over the decades, union density has declined. (If you tangent off to post hoc ergo propter hoc here, you're still left with the current correlation between union density and prosperity.)

o Polish prosperity pre-1989 hardly explains Solidarity.

mktlogic has it right, in a sense. This theoretical model suggests that the prosperous middle class in postwar America resulted from unions disenfranchising the poor. Does that make economic sense? Does it jive with the reality we see in the data?

How does it explain that widespread and fast-growing postwar prosperity, in face of all the economically destructive progressive policies that should have drowned it in the bathtub?

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John Hall writes:

To the extent that some (most?) union members are part of the middle class, David is arguing that some members of the middle class benefit.

John V writes:

Tom West,

", I find it interesting that the development of a sizable middle class basically occurs at the same time that unions start to gain influence and wages (even for non-unionized workers) start to rise, especially among the unskilled or semi-skilled."

That's not interesting. It's a red herring. What David said about unions above holds true regardless of any "appearance" of something that raises questions to the contrary. Obviously, the answer to the point you raise lies elsewhere. Robert Higgs' work on analyzing the economics of WW2 and the aftermath are a great step in that direction.

Maniel writes:

Suppose that I fail to take care of myself, that I get too little sleep, have poor eating habits, do not exercise, etc. Then, I am more likely to get sick than you are. Likewise, suppose that I run a business, but that I lack the wisdom to share responsibilities and profits, to emphasize employee morale (one prime directive of Six Sigma), to promote training and the acquisition of new capabilities, and to offer opportunities for upward mobility. Then, I am more likely to attract a union than is your company because you show more wisdom. The point is, companies with poor habits and attitudes can make themselves sick.
A unionized company is, by definition, a divided company. Management and workers are in an adversarial relationship which affects compensation, hours, and flexibility, and erects barriers between the classes (either you’re an officer or you’re enlisted). Such a company where not everyone pulls in the same direction cannot compete with a company within which cooperation provides an edge.
My poor health habits may have gotten me sick, but it was the pneumonia that finished me off. How that affects the health of the larger population, I have no idea. I would hope that others could learn from my mistakes.

David C writes:

Steve Roth, that's easily explained. The states with higher union densities make it more difficult for poor people to get a job, so the poor people leave for other states. Most of the states near the bottom have large immigrant populations. California has a large immigrant population and is doing much worse than their union density would suggest. TX and FL have fewer unions and are doing better than the data would suggest. AZ and NM are about on the line. The states in the top right are mostly from the Northeast. Also, the author isn't adjusting for cost of living.

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