The Concise Encyclopedia of Economics

Labor Unions

by Morgan O. Reynolds
About the Author
For more than a century now, labor unions have been celebrated in folk songs and popular myth as fearless champions of the downtrodden working man, while "the bosses" are depicted as coldhearted exploiters of employees. But from the standpoint of economists—including many who are avowedly pro-union—unions are simply cartels that raise wages above competitive levels by capturing monopolies over who companies can hire and what they must pay.

Many unions have won higher wages and better working conditions for their members. In doing so, however, they have reduced the number of jobs available. That second effect is because of the basic law of demand: if unions successfully raise the price of labor, employers will purchase less of it. Thus, unions are the major anticompetitive force in labor markets. Their gains come at the expense of consumers, nonunion workers, the jobless, and owners of corporations.

According to Harvard economists Richard Freeman and James Medoff, who look favorably on unions, "Most, if not all, unions have monopoly power, which they can use to raise wages above competitive levels." The power that unions have to fix high prices for their labor rests on legal privileges and immunities that they get from government, both by statute and by nonenforcement of other laws. The purpose is to restrict others from working for lower wages. As anti-union economist Ludwig von Mises wrote in 1922, "The long and short of trade union rights is in fact the right to proceed against the strikebreaker with primitive violence."

Those unfamiliar with labor law may be surprised by the privileges that U.S. unions enjoy. The list is long. Labor cartels are immune from taxation and from antitrust laws. Companies are legally compelled to bargain with unions in "good faith." This innocent-sounding term is interpreted by the National Labor Relations Board to suppress such practices as Boulwarism, named for a former General Electric personnel director. To shorten the collective bargaining process, Lemuel Boulware communicated the "reasonableness" of GE's wage offer directly to employees, shareholders, and the public. Unions also can force companies to make their property available for union use.

Once the government ratifies a union's position as representing a group of workers, it represents them exclusively, whether particular employees want collective representation or not. Also, union officials can force compulsory union dues from employees, members and nonmembers alike, as a condition of keeping their jobs. Unions often use these funds for political purposes—political campaigns and voter registration, for example—unrelated to collective bargaining or to employee grievances. Unions are relatively immune from payment of tort damages for injuries inflicted in labor disputes, from federal court injunctions, and from many state laws under the "federal preemption" doctrine. Sums up Nobel Laureate Friedrich A. Hayek: "We have now reached a state where [unions] have become uniquely privileged institutions to which the general rules of law do not apply."

Labor unions cannot prosper in a competitive environment. Like other successful cartels, they depend on government patronage and protection. Worker cartels grew in surges during the two world wars and the Great Depression of the thirties. Federal interventions—the Railway Act of 1926 (amended in 1934), the Davis-Bacon Act of 1931, the Norris-LaGuardia Act of 1932, the National Labor Relations Act of 1935, the Walsh-Healy Act of 1936, the Fair Labor Standards Act of 1938, various War Labor Boards, and the Kennedy administration's encouragement of public-sector unionism in 1962—all added to unions' monopoly power.

Most unions in the private sector are in crafts and industries that have few companies or that are concentrated in one region of the country. This makes sense. Both factors—few employers or regionally concentrated employers—make organizing easier. Conversely, the large number of employers and the regional dispersion of employers sharply limit unionization in trade, services, and agriculture. A 1989 unionization rate of 35 percent in the public sector versus 12 percent in the private sector further demonstrates that unions do best in heavily regulated, monopolistic environments.

After nearly sixty years of government encouragement and protection of unions, what have been the economic consequences? A 1985 survey by H. Gregg Lewis of two hundred economic studies concluded that unions caused their members' wages to be, on average, 14 to 15 percent higher than wages of similarly skilled nonunion workers. Other economists—Harvard's Freeman and Medoff, and Peter Linneman and Michael Wachter of the University of Pennsylvania—claim that the union premium was 20 to 30 percent or higher during the eighties.

The wage premium varies by industry. Unions representing garment workers, textile workers, white-collar government workers, and teachers seem to have little impact on wages. But wages of unionized mine workers, building trades people, airline pilots, merchant seamen, postal workers, teamsters, rail workers, and auto and steel workers exceed wages of similarly skilled nonunion employees by 25 percent or more.

The wage advantage enjoyed by union members results from two factors. First, monopoly unions raise wages above competitive levels. Second, nonunion wages fall because workers priced out of jobs by high union wages move into the nonunion sector and bid down wages there. Thus, some of the gains to union members come at the expense of those who must shift to lower-paying or less desirable jobs or go unemployed.

Despite considerable rhetoric to the contrary, unions have blocked the economic advance of blacks, women, and other minorities. That is because another of their functions, once they have raised wages above competitive levels, is to ration the jobs that remain. And since they are monopolies, unions can indulge the prejudices of their leaders or members without the economic penalties that people in the competitive sector must face. In indulging those prejudices, unions have established a sordid history of racist and sexist practices.

Economist Ray Marshall, although a prounion secretary of labor under President Jimmy Carter, made his academic reputation by documenting how unions excluded blacks from membership in the thirties and forties (see sidebar). Marshall also wrote of incidents in which union members assaulted black workers hired to replace them during strikes. During the 1911 strike against the Illinois Central, noted Marshall, whites killed two black strikebreakers and wounded three others at McComb, Mississippi. He also noted that white strikers killed ten black firemen in 1911 because the New Orleans and Texas Pacific Railroad had granted them equal seniority. Not surprisingly, therefore, black leader Booker T. Washington opposed unions all his life, and W. E. B. DuBois called unions the greatest enemy of the black working class. Another interesting fact: the "union label" was started in the 1880s to proclaim that a product was made by white rather than yellow (Chinese) hands. More generally, union wage rates, union-backed requirements for a license to practice various occupations, and union-backed labor regulations like the minimum wage law and the Davis-Bacon Act continue to reduce opportunities for black youths, females, and other minorities.

The monopoly success of private-sector unions, however, has brought their decline. The silent, steady forces of the marketplace continually undermine them. Linneman and Wachter, along with economist William Carter, found that the rising union wage premium was responsible for up to 64 percent of the decline in unions' share of employment in the last twenty years. The average union wage premium for railroad workers over similarly skilled nonrailroad workers, for example, increased from 32 percent to 50 percent between 1973 and 1987; at the same time, employment on railroads declined from 520,000 to 249,000. Increased wage premiums also caused declines in union employment in construction, manufacturing, and communications. As Rutgers economist Leo Troy concludes, "Over time, competitive markets repeal the legal protection bestowed by governments on unions and collective bargaining."

The degree of union representation of workers has declined in all private industries in the United States in recent decades. A major reason is that employees do not like unions. According to a Louis Harris poll commissioned by the AFL-CIO in 1984, only one in three U.S. employees would vote for union representation in a secret ballot election. The Harris poll found, as have other surveys, that nonunion employees, relative to union workers, are more satisfied with job security, recognition of job performance, and participation in decisions that affect their jobs. And the U.S. economy's evolution toward smaller companies, the South and West, higher-technology products, and more professional and technical personnel continues to erode union membership.

In the United States union membership in the private sector peaked at 17 million in 1970 and had fallen to 10.5 million by 1989. Moreover, the annual decline is accelerating. Barring new legislation, such as a recent congressional proposal to ban the hiring of nonunion replacement workers, private-sector membership will fall from 12 percent to about 7 percent by the year 2000, about the same percentage as a hundred years earlier. [Editor's note: this prediction was made in 1992.] While the unionization rate in government jobs may decline slightly from 35 percent, public-sector unions are on schedule to claim an absolute majority of union members a few years after the year 2000, thereby transforming an historically private-sector labor movement into a primarily government one. Asked in the twenties what organized labor wanted, union leader Samuel Gompers answered, "More." Today's union leader would probably answer, "More government." That answer further exposes the deep, permanent conflict between union members and workers in general that inevitably arises when the first group is paid monopoly wage rates.

Assuming that unions continue to decline, what organizations might replace them? "Worker associations" that lack legal privileges and immunities and that must produce services of value to get members may fill the need. Such voluntary worker associations could negotiate labor contracts, serve as clearinghouses for workers to learn what their best alternatives are, monitor administration of fringe benefit plans, and administer training and benefit plans. Worker associations could also institute legal proceedings against collusion by employers, as the Major League Baseball Players' Association does so successfully for players who are free agents. Such services could be especially valuable to immigrant, minority, and female workers now dominating entry into the nineties' labor force.

About the Author

Morgan O. Reynolds is chief economist at the U.S. Department of Labor and is on leave from Texas A&M University, where he is a professor of economics.

Further Reading

Epstein, Richard A. "A Common Law for Labor Relations: A Critique of the New Deal Labor Legislation." Yale Law Journal 92 (July 1983): 1357-1408.

Freeman, Richard B., and James L. Medoff. What Do Labor Unions Do? 1984.

Harvard Journal of Law and Public Policy 13 (Spring 1990). (Entire issue devoted to labor law.)

Hirsch, Barry T., and John T. Addison. Economic Analysis of Labor Unions—New Approaches and Evidence. 1986.

Hutt, William H. The Strike-Threat System: The Economic Consequences of Collective Bargaining. 1973.

Lewis, H. Gregg. Union Relative Wage Effects. 1985.

Linneman, Peter D., Michael L. Wachter, and William H. Carter. "Evaluating the Evidence on Union Employment and Wages." Industrial and Labor Relations Review 44 (October 1990): 34-53.

Lipset, Seymour Martin, ed. Unions in Transition. 1986.

Marshall, F. Ray. The Negro and Organized Labor. 1965.

Reynolds, Morgan O. Making America Poorer: The Cost of Labor Law. 1987.

Troy, Leo. "Is the U.S. Unique in the Decline of Private Sector Unionism?" Journal of Labor Research 11 (Spring 1990): 111-43.

Unions That Discriminated Against Blacks in 1930

American Federation of Express Workers (AFEW)
American Federation of Railway Workers (AFRW)
American Train Dispatchers Association (ATDA)
American Wire Weavers Protective Association (WWPA)
Boilermakers, Iron Shipbuilders and Helpers Union (BIS)
Brotherhood of Dining Car Conductors (BDCC)
Brotherhood of Locomotive Firemen and Enginemen (BLFE)
Brotherhood of Railroad Trainmen (BRT)
Brotherhood of Railway Carmen (BRC)
Brotherhood of Railway Conductors (ORC)
Brotherhood of Railway Station Employees and Clerks (BRSEC)
Brotherhood of Railway and Steamship Clerks (BRSC)
Commercial Telegraphers (CT)
International Association of Machinists (IAM)
National Organization of Masters, Mates and Pilots of North America (MMP)
Neptune Association (NA)
Order of Railway Expressmen (ORE)
Order of Railway Telegraphers (ORT)
Order of Sleeping Car Conductors (OSCC)
Railroad Yard Masters of America (RYA)
Railway Mail Association (RMA)
Switchmen's Union of North America (SNA)

SOURCE: F. Ray Marshall.

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