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Labor Unions’ Effects on Productivity

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Unions’ Effects on Labor Productivity Labor unions have long been a central issue of economic debate in the United States, and since their emergence in the mid-19th century, the role of unions in industry has changed very little given the changes to the make-up of our economy. Although employer abuses of power aren’t nearly so blatant or extreme as in the early days of unions, the need to protect workers’ rights and ensure fair wages and benefits still exists.

Employees should be able to take problems directly to management.

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They should be able to miss work without being fired and have a say in how much they are paid or the benefit packages they receive. Labor unions and other collective bargaining strategies make these things possible. Of concern is not whether unions are good for union workers, but whether they are good for the economy as a whole, namely the labor market. Economists often ask critical questions such as: How do labor unions affect non-union workers’ wages? Do higher wages for union workers lead to more unemployment? Are union workers more or less productive than non-union workers?

The focus of this paper will primarily be on the effect of unions on labor productivity and how productivity might suffer or in fact gain from unionized labor.

It’s important to investigate as to whether the gains of union workers both in compensation and opportunity are not at the cost of the firms’ productivity and profitability, or perhaps that of non-union workers. Union participation has been in steep decline since the 1970’s when 27% of U. S. workers were covered by union contracts. Now, only 12% of the labor force consists of union members.

Compare these figures to countries like France, Belgium and Sweden, and one can see how substantially small U. S. unionization is when these countries have over 90% union participation. Such comparisons are helpful when looking at U. S. productivity growth and how it compares to productivity in heavily unionized nations over time. Many believe that unions achieve their goals not only by taking away from the profits of firms but by also making those firms less productive. Those critics go to great efforts to explain away perceived productivity gains in unionized industries and companies.

One possibility is that because unionized workers receive higher pay than non-union workers, they work harder than if they were paid less. Others argue that unions will only keep productivity high so long as they are a relatively small portion of the workforce. If everyone has a high-paying union job, there is no incentive for workers to strive and work hard to keep their prime union positions. Unions have, in the past, been blamed for keeping wage rates above equilibrium levels, leading to unemployment or at least less employment in unionized sectors of the economy.

This would cause an excess supply of union members over available work, which gives the least competent room to fall out of the labor pool, as well as forcing them to compete with each other to hold the available jobs. Naturally the effect of this would be greater labor productivity attributable to unions. So perhaps, to the extent to which labor unions do increase productivity, they do so by forcing less competent workers out of the labor market, because they are not worth union pay.

Another reason for this effect may be the significant reduction in transaction costs when finding and retaining labor, such as in construction trades, where it is more efficient to call the union and have them send over 50 guys instead of hire them individually. To me, however, this is a strong argument for the legitimate ability of unions to increase productivity, not a phenomenon to be written off for the sake of arguing against unions. Draca, Machin, and Van Reenen explore the effects of higher wages demanded by labor unions on a firm’s productivity and how they might reduce the firm’s profitability.

They cite a significant negative relationship between higher wages and firm profitability (DM&R, 130). On a side not, they found the effects of higher wages from unions varies depending on how perfectly or imperfectly competitive the industry is. In imperfectly competitive firms with greater market power, profits would often fall as firms took on more of the burden of paying higher union wages, while in competitive markets, the costs of wage increases are passed on more directly to consumers (DM&R, 132). They concluded that wage rates increases lone did not directly reduce the productivity of firms, nor did it increase labor productivity. Any increases were generally followed by profit reductions. In analyzing labor productivity for unionized and non-unionized workers, some critics point out that firm unionization is “not a double-blind random experiment. ” Those firms that unionize are likely to be the firms that are more productive in the first place, because they are already more profitable and have more profit surplus to be captured by unions in the first place.

Failing firms do not unionize, and when comparing unionized firms’ productivity with other unionized firms, it’s just as likely that unions are causing significant productivity drag, not gain (DM&V, 130). The positive effects of unions on productivity may work only at the firm level, not at the macro, economy-wide level. For example, if you pay workers more, you may get better workers. But the not so good workers do not just disappear, they must find jobs elsewhere, and the better workers come from other firms, who now have fewer good workers.

Also, no empirical evidence shows a strong positive relationship between the psychological effects of job security and labor productivity, not to mention how unreceptive unions have traditionally been to increases in technology that threaten to reduce the work force in some industries. All the above arguments against unions and their potentially negative effects on labor productivity go up against a great deal of empirical data suggesting the exact opposite. One mostly undisputable positive effect of unions on firms is lower transaction and hiring costs when presented with a lower turnover rate.

In a non-union company, and employee’s primary means of dealing with job dissatisfaction is to simply leave. Being in a union, however, increases the probability that the resolution of a problem will be a change in working conditions (Hanlon, 45). When backed by a union, the employee will be less likely to quit and therefore unionized firms will have lower turnover rates. This of course would lead to lower hiring and training costs. Wal-Mart, which has one of the highest turnover rates among employers, could learn a lesson or two in this instance.

Hanlon cites Richard Freeman when he explains that unions increase the employee’s sense of ownership in the firm when he sees it as fair and responsive to his needs. In turn, the union members are motivated to become stakeholders and to view their own interests in terms of the well-being of their company (Hanlon, 45). While pro-union labor economists admit that union aspects like work rules, seniority, labor protections, and long grievance processes can hurt company productivity, the majority of what unions do boosts labor productivity.

The positive effects aren’t exactly counter-intuitive either; pay workers more and you’ll get better, more productive and efficient workers. That labor unions can and usually do reduce company profits is not a bad thing. It’s proof that they force firms to share more of their revenue with their lower level employees. Richard Freeman, in his own study, found that one fifth of the greater productivity of unionized firms was attributable to lower quit rates or turnover rates (Hircsh, 5).

He notes that “unionism per se is neither a plus nor a minus to productivity. What matters is how unions and management interact at the workplace” (Hircsh, 5). As we have studied before, the U. S. has very low levels of union participation, and yet shows no greater labor productivity levels or greater productivity growth rates than European countries with high unionization. In fact, compared to countries like Sweden, the U. S. has even lower productivity growth since the 1970s as union participation declined.

Returning to the issue of labor productivity and competition: it would seem that an industry often deteriorates in labor relations and fails to maintain productivity gains along with wage gains partially because there is little competition in that particular sector. Freeman declares in What Do Unions Do? that “higher productivity appears to run hand in hand with good industrial relations and to be spurred by competition in the product market, while lower productivity under unionism appears to exist under the opposite circumstances” (Hirch, 5).

It seems that the argument about unions and labor productivity is a complex and multi-layered one. Such is obviously the case when both sides must admit they’re wrong on some levels. While labor unions are not the only form of worker protection agreements, they are often the most powerful and preferred ones of workers. To say that unions hurt labor productivity as a whole goes against 40 years of comparative data with European economies. Without a doubt, labor unions take away from a company’s total profitability.

To some that is not an acceptable consequence of equity, but to others it is a perfect way of giving more back to the workers whose own income dwarfs that of management. The above research suggests that unions boost labor productivity in their own firms, and do so at little expense to the firm in comparison. While employment may suffer from higher wages, there is little empirical evidence suggesting massive unemployment or layoffs have taken place because of higher union wages, nor does it seem that non-unionized workers suffer the cost of such changes, but may in fact benefit from it.

Works Cited Hirsch, Barry T. “What Do Unions Do for Economic Performance?. ” IZA. 892 (2003): Print. Hirsch, Barry T. , Stephen Machin, and John Van Reenen. “Minimum Wages and Firm Profitability. ” American Economic Journal: Applied Economics. 3. (2011): 129-151. Print. Hanlon, Martin D. “Unions, Productivity, and the New Industrial Relations: Strategic Considerations. ” Interfaces. 15. 3 (1985): 41-53. Print

Cite this Labor Unions’ Effects on Productivity

Labor Unions’ Effects on Productivity. (2016, Sep 17). Retrieved from https://graduateway.com/labor-unions-effects-on-productivity/

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