Unionization and Unemployment: My Canadian Ears Are Burning
Three months ago, Anne Layne-Farrar intervened in the US debate about the Employee Free Choice Act (EFCA) with a widely-reported paper and Senate testimony. She used Canadian data to argue that the proposed legislation would eliminate 600,000 American jobs.
As many critics have noted, Layne-Farrar works for a corporate consultancy and business funded this piece of research. Readers can take my comments with a similar serving of salt because I work for a union that strongly supports EFCA south of the border.
The possible relationship between unionization and unemployment has been a hot topic in labour economics for decades. Obviously, it is possible to find many studies pointing in opposite directions. Keynesians would tend to emphasize the role of unions in upholding wages during a downturn, which helps prevent a deflationary spiral and the consequent unemployment.
The mainstream, neoclassical consensus is that unions do not have a statistically significant effect on unemployment one way or the other. Even the Organization for Economic Co-operation and Development, typically a proponent of â€œflexibleâ€ labour markets, takes this view. So, it is notable that Layne-Farrar claims to have demonstrated empirically that higher unionization leads to higher unemployment.
Specifically, her regression analysis suggests that, among Canadian provinces between 1976 and 1997, each 3% increase in the unionization rate caused a 1% increase in the following yearâ€™s unemployment rate. Dean Baker points out that, if Canada and the US are so similar (except for unionization) that this relationship is transferable across the border, Canadaâ€™s much higher unionization would mean much higher unemployment in Canada than in the US. In fact, the Bureau of Labor Statistics calculates a lower unemployment rateÂ for Canada thanÂ for the US (5.3% versus 5.8% in 2008; 7.1% versus 8.9% in April 2009).
But why use historical Canadian provincial data in the first place? Examining unionization and unemployment among American states would seem more immediately relevant to US policy, provide five times as many data points (50 states versus 10 provinces), and take account of wider variations in unionization.
In both her paper and Senate testimony, Layne-Farrar offers a song and dance about how Canada is an ideal â€œnatural experimentâ€. While US labour law is mostly set at the federal level, certain provincial governments have enacted and repealed card-check certification, a key feature of EFCA.
Despite this seemingly sound rationale for focussing on Canadian history, she does not actually explore the correlation between card-check certification and unemployment. She just looks at the correlation between unionization and unemployment. This comparison is defensible insofar as EFCAâ€™s stated purpose is to increase unionization.
However, since the regression does not consider whether or not card-check certification was in effect, there is no need for the time period to encompass these legislative changes. Indeed, one might as well use the most recent data available. Doing so would likely suggest that higher unionization corresponds to lower unemployment, the opposite of Layne-Farrarâ€™s argument.
Of the five most unionized provinces in 2008 â€“ Newfoundland and Labrador, Quebec, Manitoba, Saskatchewan, and British Columbia â€“ four had unemployment rates among the five lowest in Canada in May 2009. The exception was Newfoundland and Labrador, which has very high unemployment for historic and geographic reasons.
Of the five least unionized provinces, four had unemployment rates among the five highest in Canada. The exception was oil-rich Alberta, which still has a relatively low unemployment rate (albeit a higher one than its more unionized Prairie cousins).
Most Canadians know it would be ridiculous to argue that low unionization â€œcausedâ€ high unemployment in Ontario and the Maritimes, or that higher unionization â€œcausedâ€ lower unemployment in Quebec and western Canada. Similarly, American policymakers could easily think of relevant variables overlooked by a superficial correlation between state unionization and state unemployment.
Therefore, I cannot help but conclude that Layne-Farrarâ€™s main motive for using Canadian data was to formulate an analysis that would be difficult for her American audience to question. It reminds meÂ of the old saw that â€œtrade barriersâ€ between Canadian provinces exceed those between European countries, a claim that Canadians cannot refute without detailed knowledge of the European Unionâ€™s economic institutions.