Economic Impacts of Unions

The Economist (September 21 Print Edition) runs an article “The Limits of Solidarity” which attacks US Democrats for favouring union-friendly legislation. It concludes as follows:

“After all, trade unions have obvious drawbacks as well as modest attractions. Whenever they win their members higher wage rises than in non-unionised firms, this money has to come from somewhere. If it comes from profits, investment—and future economic growth—may suffer. If firms pass on the higher costs to their customers, the result is not always the sort of redistribution that Democrats want to see. Progressives may cheer at raising cleaners’ pay and charging hotel customers extra. But what about a fast-food joint or big-box retailer, whose customers are no richer than its workers?”

This piece selectively quotes from some economists to argue that unions are largely irrelevant and ineffective in terms of raising the living standards of workers. Yet recent impeccably mainstream reviews of the literature by the World Bank (Aidt and Tsannatos) and as conducted for the most recent OECD Jobs Study find that high union density at the national level is strongly correlated to low levels of wage and income inequality, and not correlated at all to weak economic performance in term of economic growth or levels of employment.

The Economist is mystified as to how unions can raise wages for the lower paid without raising prices or reducing employment. Part of the answer lies in the fact that the profit share is very high in the US, as elsewhere. This does not, as the Economist assumes, necessarily translate into high rates of real investment. Most importantly, a huge body of evidence shows that unionized firms are more productive, enabling them to pay higher wages. Productivity is much higher when a decent wage floor can be set in otherwise low wage sectors like consumer services, as indicated by very high business sector productivity in the highly unionised Nordic countries.

The trick, of course, is to combine high producivity with high employment in an equal society. That’s not easy, but some countries with strong labour movements and strong social democratic traditions have been able to pull it off, despite all of those global forces which the Economist seems to believe foreclose a choice of social models.


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