Union Impacts on Employment Conditions

Why should we be interested in assessing union impacts?

1. Public interest — what do unions do to efficiency, equity, rights?

2. Understanding impacts helps us understand industrial relations processes — how collective bargaining works

What are the 3 employment conditions of focus

compensation, turnover, productivity

In terms of compensation impacts, what are union absolute impacts?

How much higher (or lower) would wages be if unions did not exist at all?

How does union impact compare to if there were no unions at all

• union - NO union differentials

In terms of compensation impacts, what are union relative impacts?

Union wage vs. nonunion wage at the same time (union–nonunion differential)

Between union absolute impact and union relative impact, what do we know and what do we want to know?

We would like to know union absolute impacts but most data informs us of union relative effects.

What is the relative differential in terms of wage levels and how does it vary

Relative differential is about 15% — union workers earn more compared to nonunion workers

It varies:

• Over time

• Across demographic groups (race effects is more positive)

• Across industries (depends on bargaining power)

How do economists measure relative wage effects?

They compare union to nonunion workers using regression analysis: a statistical method used to figure out how much one factor (like being in a union) affects an outcome (like wages) while holding other factors constant

They control for factors such as:

• Education

• Experience

• Age

• Occupation

• Industry

• Region

Does the relative effect approximate the absolute union effect? What are the 2 effects that explain this?

Crowding Effect in nonunion sector:

• If unions raise wages and restrict entry into union jobs, workers who cannot get union jobs are “crowded” into the nonunion sector

• This increases supply of workers in nonunion jobs → lowers nonunion wages.

• Because of this, the relative wage effect is larger than the absolute wage effect

• EXAMPLE:

  • 100 workers want union jobs

  • Unionized firms only hire 50 (due to limited positions, seniority rules, or closed shops)

  The other 50 workers spill into nonunion jobs.

  So instead of 100 people competing for 100 nonunion jobs, now you have:

  👉 150 workers competing for 100 nonunion jobs

Threat Effect in nonunion sector:

• Nonunion employers may raise wages to avoid unionization, so nonunion wages may rise above the union wage

• Makes the relative wage effect smaller than the absolute wage effect

How might the absolute wage effect of unions be measured?

Country comparisons

• Comparisons between high v. low unionization countries

Longitudinal (over-time) data within a country

• Wages before v after changes in union density

In terms of turnover impacts, what are the 2 key components?

1. Layoffs

2. Quit rates

Is the layoff rate higher in the union sector? Why?

Yes

1. Wage rigidity leads to employment volatility

• Union contracts make wages rigid:

  • Wages are locked in for multiple years

  • Wages cannot easily be cut during downturns

  So when demand falls and the firm can’t cut wages, it adjusts by: laying off workers instead

2. Unions may not cause layoffs but they respond to it

• Union representation is greater as a result of layoffs

• Industries with frequent layoffs are more likely to unionize because workers want protection

3. Unionized industries happen to be relatively sensitive to the business cycle

• Unions are concentrated in industries like durable manufacturing, which are industries that rise sharply in booms and crash sharply in recessions, so they produce more layoffs independent of unionization

Are quit rates lower or higher in unionized jobs, even after controlling for wage rate? Why?

Lower

1. Freeman & Medoff: 

• Unions give workers a voice instead of forcing/pushing them to exit

• The voice effects of unionism: exit v. loyalty

2. Union jobs may simply be better jobs, so when workers “luck into” a union job, they may be less likely to leave. 

Why is productivity & efficiency important for public policy?

• Increase productivity → they help the economy grow

• Decrease productivity → they hurt efficiency and competitiveness

What was the conventional thinking vs modern evidence of unions impact on productivity vs. efficiency?

Conventional wisdom:

• Unions limit output by reducing work effort and limiting managerial discretion

Modern Evidence:

• producitvity may actually go up

What’s some recent evidence concerning productivity effects?

1. Freeman and Medoff find a positive union effect

2. Case study analysis find less flexible and more costly work rules and higher manning levels (lower productivity) in unionized settings

3. Management behavior suggest they believe unions lower productivity

   1. deinvestment in unionized plants

Potential Productivity (output/labor hours) effects: Describe what happens when wage rates rise

When wage rates rise, management should substitute capital for labor, and as capital/labor rises, so should productivity

However, efficiency falls for the economy as a whole because if unions forced firms into expensive capital investments before they were ready, firms might over-invest or use tech that isn’t optimal or reduce employment more than efficient. 

Potential Productivity (output/labor hours) effects: Describe Potential “shock effect”

When management is pushed (forced) to pay higher wages and improve employment conditions, they may look for ways to lower costs and the firm may then be shocked into higher efficiency (and productivity) — ex: reorganizing workflow, reducing waste, upgrading tech

Potential Productivity (output/labor hours) effects: Describe how unions may reduce productivity

Unions may reduce productivity through imposing rigidities, inefficiencies, and a work slowdown

This is the conventional wisdom story

Potential Productivity (output/labor hours) effects: Describe how unions may raise productivity

Unions may raise productivity (and efficiency) by improving worker “voice.” By giving workers more of a say in decision making workers may become more loyal and motivated, and may quit less frequently. 

Do unions and CB reduce workplace conflict?

Unions and CB may “manage” the work force and reduce industrial conflict → can be another positive mechanism

What is the bozo effect?

Firms with innately low productivity go out of business when they are unionized → known as bozo firms

This may explain why unions appear to be associated with higher productivity, not because unions make firms more productive, but because unions force low-productivity firms out of business