Effect of Monopoly Unions on Income Distribution
In a comment on my post, Minimum Wage: The Missing Explanation, Tom West writes:
I’m not certain it’s necessarily a net loss for the USA to have actually had labor laws and unionization that led to a middle class large enough to encompass the majority of its citizens during the 1950-1990 period. While the unemployment of extremely marginal workers *is* a real cost, I don’t think the transfer of the “excessive” wages garnered from the labor laws to the owner class would make the USA today a better place to live for the majority of its citizens.
Tom misunderstands the effect of unions. As I noted in my post, “Do Labor Unions Promote the Middle Class?”, the main effect of unions is not to strengthen the middle class but to transfer wealth from non-union to union workers.
I focused in that post on the effect of unions on relative wages. Let’s look here at the effect of unions on owners of businesses that are unionized. Say a union forms and uses its monopoly power to get a higher wage. What happens next? It’s true that the profits of the firms that are unionized fall. If the whole industry is unionized, then firms leave the industry until the industry returns to normal profitability. Prices of the output are higher. That means that the long-run effect of the higher wages union receive is not a transfer from capital but a transfer from consumers.