Let unions erode at your peril

Last week the US Supreme Court ruled in the Janus v AFSCME case that it is unconstitutional to require non-union member workers in the public sector to pay (reduced) fees to unions that negotiate salaries and labour conditions on their behalf. Legally, this is a serious blow to the ability of unions to organise workers in the part of the economy where they are still a presence to be reckoned with. In his account of the decision, John Cassidy writes that a third of workers in the public sector are unionised, against just one in 12 workers in the private sector.

Economically, my colleague Rana Foroohar is right to worry that this could exacerbate US problems of wage stagnation by further eroding the already diminished bargaining power of workers. I want to draw attention to some of the economic evidence that this is so.

A recent study has gained well-deserved attention for its meticulous analysis of expansive data on US workers’ pay and union membership since 1936. Here are some of the authors’ conclusions:

“When [union coverage] density was at its peak in the 1950s and 1960s, union members were relatively less-skilled, whereas today and in the pre-World War II period, union members are equally skilled as non-members . . . we estimate union household income premiums over this same period, finding that despite large changes in union density and selection, the premium holds steady . . . over the past 80 years . . . unions have had a significant, equalizing effect on the income distribution over our long sample period.”

In other words, the decline of American unions has come disproportionately through their loss of lower-skilled members, who arguably need union membership most. For those still represented, unions clearly still effectively pursue their interests. It seems plain that the weakening of unions plays a central role in the drama of the eroding US social contract.

Other research confirm the same role of unions in other countries. IMF researchers have established a clear general pattern in rich countries that a decline in union coverage leads to higher incomes for the top 10 per cent of earners, as well as less redistributive policies. They attribute this to the most natural explanation: unions increase the bargaining power of workers.

At this point, sceptics of unions might double down and say that, while unions are indeed a force for equalisation, that is precisely the problem with them. By making incomes more equal than they otherwise would be, they reduce incentives for productivity increases and economic growth. In short, they would say, equality comes at the expense of efficiency.

But they would be wrong. I recently interviewed Norwegian economics professor Karl Ove Moene for an upcoming podcast in our Big Picture series (check out the previous ones while waiting for mine to be released, hopefully soon). Moene, an expert on the economic model of the Nordic countries, pointed out to me that over the very long term, these economies have performed as well as the US in terms of growth per capita, in the presence of strong labour market institutions with national reach, both on the union side and the employer side. In his own words:

“So this has been a system that many American economists would consider a recipe for a catastrophe, but it has worked quite well.

Why is that? I think if you are going to put it in a few words, it is that it helps modernisation, it helps make the most modern industries [and enterprises] more profitable . . .

Why? Because these organisations, they hold back on the highest wages . . . And since the bargaining unit in these countries has been more or less the whole nation, all sectors, all types of workers considered together at the same time, you compress these wages. 

And that means that wages in the most modern industries, in the most modern enterprises, are lower than they otherwise would have been . . . They are paid less here relative to the lowest wage than in other countries. But that means that you get more investment . . . When the IT revolution came, it was much more beneficial to Scandinavian economies than most economies elsewhere because it was very profitable to use because those people who were skilled, who can benefit from it, they had a low cost.

[The distance] between the most productive enterprises and the least productive enterprises within sectors is much more narrow in Scandinavia than, say, the US. And, why is that? Well, because you can’t have very low productivity with these high minimum wages, and since you have low maximum wages, you make investment in these modern enterprises much more profitable.”

If the conventional view of a trade-off between egalitarianism and productivity is erroneous, there is an opportunity to have more of both. Finding that opportunity, however, depends subtly on the culture and workings of social institutions, including but not limited to unions. We let them erode at our peril. 

For more, wait for the podcast.

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Let unions erode at your peril

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