Unions function as labor cartels. A labor cartel restricts the number of workers in a company or industry to drive up the remaining workers' wages, just as the Organization of Petroleum Exporting Countries (OPEC) attempts to cut the supply of oil to raise its price. Companies pass on those higher wages to consumers through higher prices, and often they also earn lower profits. Economic research finds that unions benefit their members but hurt consumers generally, and especially workers who are denied job opportunities.
The average union member earns more than the average non-union worker. However, that does not mean that expanding union membership will raise wages: Few workers who join a union today get a pay raise. What explains these apparently contradictory findings? The economy has become more competitive over the past generation. Companies have less power to pass price increases on to consumers without going out of business. Consequently, unions do not negotiate higher wages for many newly organized workers. These days, unions win higher wages for employees only at companies with competitive advantages that allow them to pay higher wages, such as successful research and development (R&D) projects or capital investments.
Unions effectively tax these investments by negotiating higher wages for their members, thus lowering profits. Unionized companies respond to this union tax by reducing investment. Less investment makes unionized companies less competitive.
This, along with the fact that unions function as labor cartels that seek to reduce job opportunities, causes unionized companies to lose jobs. Economists consistently find that unions decrease the number of jobs available in the economy. The vast majority of manufacturing jobs lost over the past three decades have been among union members--non-union manufacturing employment has risen. Research also shows that widespread unionization delays recovery from economic downturns.
Some unions win higher wages for their members, though many do not. But with these higher wages, unions bring less investment, fewer jobs, higher prices, and smaller 401(k) plans for everyone else. On balance, labor cartels harm the economy, and enacting policies designed to force workers into unions will only prolong the recession.
Unions argue that they can raise their members' wages, but few Americans understand the economic theory explaining how they do this. Unions are labor cartels. Cartels work by restricting the supply of what they produce so that consumers will have to pay higher prices for it. OPEC, the best-known cartel, attempts to raise the price of oil by cutting oil production. As labor cartels, unions attempt to monopolize the labor supplied to a company or an industry in order to force employers to pay higher wages. In this respect, they function like any other cartel and have the same effects on the economy.
Cartels benefit their members in the short run and harm the overall economy. Imagine that General Motors, Ford, and Chrysler jointly agreed to raise the price of the cars they sold by $2,000: Their profits would rise as every American who bought a car paid more. Some Americans would no longer be able to afford a car at the higher price, so the automakers would manufacture and sell fewer vehicles. Then they would need--and hire--fewer workers. The Detroit automakers' stock prices would rise, but the overall economy would suffer. That is why federal anti-trust laws prohibit cartels and the automakers cannot collude to raise prices.
Now consider how the United Auto Workers (UAW)--the union representing the autoworkers in Detroit--functions. Before the current downturn, the UAW routinely went on strike unless the Detroit automakers paid what they demanded--until recently, $70 an hour in wages and benefits. Gold-plated UAW health benefits for retirees and active workers added $1,200 to the cost of each vehicle that GM produced in 2007. Other benefits, such as full retirement after 30 years of employment and the recently eliminated JOBS bank (which paid workers for not working), added more.
Some of these costs come out of profits, and some get passed to consumers through higher prices. UAW members earn higher wages, but every American who buys a car pays more, stock owners' wealth falls, and some Americans can no longer afford to buy a new car. The automakers also hire fewer workers because they now make and sell fewer cars.
Unions raise the wages of their members both by forcing consumers to pay more for what they buy or do without and by costing some workers their jobs. They have the same harmful effect on the economy as other cartels, despite benefiting some workers instead of stock owners. That is why the federal anti-trust laws exempt labor unions; otherwise, anti-monopoly statutes would also prohibit union activity.
Unions' role as monopoly cartels explains their opposition to trade and competition. A cartel can charge higher prices only as long as it remains a monopoly. If consumers can buy elsewhere, a company must cut its prices or go out of business.
This has happened to the UAW. Non-union workers at Honda and Toyota plants now produce high-quality cars at lower prices than are possible in Detroit. As consumers have voted with their feet, the Detroit automakers have been brought to the brink of bankruptcy. The UAW has now agreed to significant concessions that will eliminate a sizeable portion of the gap between UAW and non-union wages. With competition, the union cartel breaks down, and unions cannot force consumers to pay higher prices or capture higher wages for their members.
Unionized employers must pay thousands of dollars in attorney's fees and spend months negotiating before making any changes in the workplace. Unionized companies often avoid making changes because the benefits are not worth the time and cost of negotiations. Both of these effects make unionized businesses less flexible and less competitive.
Final union contracts typically give workers group identities instead of treating them as individuals. Unions do not have the resources to monitor each worker's performance and tailor the contract accordingly. Even if they could, they would not want to do so. Unions want employees to view the union--not their individual achievements--as the source of their economic gains. As a result, union contracts typically base pay and promotions on seniority or detailed union job classifications. Unions rarely allow employers to base pay on individual performance or promote workers on the basis of individual ability.
Consequently, union contracts compress wages: They suppress the wages of more productive workers and raise the wages of the less competent. Unions redistribute wealth between workers. Everyone gets the same seniority-based raise regardless of how much or little he contributes, and this reduces wage inequality in unionized companies. But this increased equality comes at a cost to employers. Often, the best workers will not work under union contracts that put a cap on their wages, so union firms have difficulty attracting and retaining top employees.
Numerous economic studies compare the average earnings of union and non-union workers, holding other measurable factors--age, gender, education, and industry--constant. These studies typically find that the average union member earns roughly 15 percent more than comparable non-union workers. More recent research shows that errors in the data used to estimate wages caused these estimates to understate the true difference. Estimates that correct these errors show that the average union member earns between 20 percent and 25 percent more than similar non-union workers. 86 --Barry T. Hirsch, "Reconsidering Union Wage Effects: Surveying New Evidence on an Old Topic," Journal of Labor Research, Vol. 25, No. 2 (April 2004), pp. 233-266.
Union wage gains do not materialize out of thin air. They come out of business earnings. Other union policies, such as union work rules designed to increase the number of workers needed to do a job and stringent job classifications, also raise costs. Often, unionized companies must raise prices to cover these costs, losing customers in the process. Fewer customers and higher costs would be expected to cut businesses' earnings, and economists find that unions have exactly this effect. Unionized companies earn lower profits than are earned by non-union businesses.
In essence, unions "tax" investments that corporations make, redistributing part of the return from these investments to their members. This makes undertaking a new investment less worthwhile. Companies respond to the union tax in the same way they respond to government taxes on investment--by investing less. By cutting profits, unions also reduce the money that firms have available for new investments, so they also indirectly reduce investment.
Lower investment obviously hinders the competitiveness of unionized firms. The Detroit automakers have done so poorly in the recent economic downturn in part because they invested far less than their non-union competitors in researching and developing fuel-efficient vehicles. When the price of gas jumped to $4 a gallon, consumers shifted away from SUVs to hybrids, leaving the Detroit carmakers unable to compete and costing many UAW members their jobs.
Counterintuitively, research shows that unions do not make companies more likely to go bankrupt. Unionized firms do not go out of business at higher rates than non-union firms. Unionized firms do, however, shed jobs more frequently and expand less frequently than non-union firms. Most studies show that jobs contract or grow more slowly, by between 3 and 4 percentage points a year, in unionized businesses than they do in non-unionized businesses.
Consider General Motors. GM shed tens of thousands of jobs over the past decade, but the UAW steadfastly refused to any concessions that would have improved GM's competitive standing. Only in 2007--with the company on the brink of bankruptcy--did the UAW agree to lower wages, and then only for new hires. The UAW accepted steep job losses as the price of keeping wages high for senior members.
The balance of economic research shows that unions do not just happen to organize firms with more layoffs and less job growth: They cause job losses. Most studies find that jobs drop at newly organized companies, with employment falling between 5 percent and 10 percent. -- Freeman and Kleiner, "The Impact of New Unionization on Wages and Working Conditions"; Lalonde, Marschke, and Troske, "Using Longitudinal Data on Establishments to Analyze the Effects of Union Organizing Campaigns in the United States."
Labor cartels attempt to reduce the number of jobs in an industry in order to raise the wages of their members. Unions cut into corporate profitability, also reducing business investment and employment over the long term.
These effects do not help the job market during normal economic circumstances, and they cause particular harm during recessions. Economists have found that unions delay economic recoveries. States with more union members took considerably longer than those with fewer union members to recover from the 1982 and 1991 recessions. -- Robert Krol and Shirley Svorny, "Unions and Employment Growth: Evidence from State Economic Recoveries," Journal of Labor Research, Vol. 28, No. 3 (Summer 2007), pp. 525-535.
Unions simply do not provide the economic benefits that their supporters claim they provide. They are labor cartels, intentionally reducing the number of jobs to drive up wages for their members.
In competitive markets, unions cannot cartelize labor and raise wages. Companies with higher labor costs go out of business. Consequently, unions do not raise wages in many newly organized companies. Unions can raise wages only at companies that have competitive advantages that permit them to pay higher wages, such as successful R&D projects or long-lasting capital investments.
On balance, unionizing raises wages between 0 percent and 10 percent, but these wage increases come at a steep economic cost. They cut into profits and reduce the returns on investments. Businesses respond predictably by investing significantly less in capital and R&D projects. Unions have the same effect on business investment as does a 33 percentage point corporate income tax increase.
Less investment makes unionized companies less competitive, and they gradually shrink. Combined with the intentional efforts of a labor cartel to restrict labor, unions cut jobs. Unionized firms are no more likely than non-union firms to go out of business--unions make concessions to avoid bankruptcy--but jobs grow at a 4 percent slower rate at unionized businesses than at other companies. Over time, unions destroy jobs in the companies they organize. In manufacturing, three-quarters of all union jobs have disappeared over the past three decades, while the number of non-union jobs has increased.
No economic theory posits that cartels improve economic efficiency. Nor has reality ever shown them to do so. Union cartels retard economic growth and delay recovery from recession.