New Report Highlights Costs of Mandatory Collective Bargaining

Collective bargainingUnions do more than raise labor costs of employers with whom they negotiate. They also reduce wages and job growth in states where they are most prevalent. That’s the conclusion of a new monograph published by the Washington, D.C.-based Competitive Enterprise Institute titled “The Unintended Consequences of Collective Bargaining” (see pdf). The authors, economist Lowell Gallaway (Ohio University) and law student Jonathan Robe, calculate union-associated “deadweight loss,” on a state-by-state basis, over several decades. They concluded that a relatively high proportion of unionization, or union density, correlates with high rates of job loss. This suggests that by forcing employers to the bargaining table, federal labor law depresses entry-level worker prospects. It also suggests that state Right to Work laws mitigate this outcome.

Unionism in this country, note the authors, goes back well over a century. The American Federation of Labor, the precursor to the AFL-CIO, for example, was formed in 1886. Union density eventually rose to nearly 7 percent during World War I, and to 12.1 percent following the war, before declining to 7.4 percent at the onset of the Great Depression. Much of this growth was driven by legislation favorable to organized labor, such as the Lloyd-LaFollette Act, the Clayton Act and the Railway Labor Act. These laws were products of the “high-wage doctrine,” which assumes higher wages, regardless of the reason for the rise, lead to greater productivity, purchasing power and prosperity. This doctrine also lay behind Depression-era laws such as the Davis-Bacon Act, the Norris-LaGuardia Act and, most importantly, the National Labor Relations Act of 1935, which established the legal foundation for labor relations in the U.S. NLRA granted private-sector unions the right to exclusively represent all workers at a given worksite (regardless of how they voted) and, related, the right to force employers to fire non-joining (or fee-paying) employees. This monopoly authority, unions and certain employers have argued since, have been necessary to keep disposable income high.

Gallaway and Robe counter that by forcing wages higher, though attractive from the standpoint of promoting labor peace, has hidden inefficiencies which over the long run actually lower wages. The authors explain this paradox: “Because unions increase wage rates through their monopoly power, the number of job opportunities in unionized industries and occupations will decrease, thus increasing the supply of labor in the nonunion sector. This change drives down wages in those areas and increases the relative number of lower-wage jobs available to workers engaged in the job-search process.” The authors, building on the work of the late labor economist Albert Rees, term this effect “deadweight loss.” Unionization, by increasing the price of labor above that which would be established in a competitive marketplace, undermines economic output by imposing a sizable deadweight loss. The authors caution that this shouldn’t be taken to mean that paying workers less is a good thing. They simply point out that economic growth results from advancements in productivity, not artificially-imposed increases in labor prices.

The authors calculate deadweight loss, using state-by-state income and union density data for the years 1964 and 2011. They concluded that the loss of Real Per Capita Income (RPCI) resulting from the presence of labor unions over that 47-year period was greatest in states with highly unionized work forces. The authors also calculated national data, selecting six years over that time span – 1967, 1973, 1980, 1986, 1993 and 2000. They concluded that annual deadweight loss averaged slightly less than a third of one percentage point. Over a hypothetical 50-year period, that translates into a 15 percent reduction in wages and a 10 to 12 percent reduction in cumulative GDP. Gallaway and Robe add, if anything, these numbers are on the low side because Rees had assumed a perfectly inelastic supply curve for labor – that is, an increase or decrease in wages of whatever magnitude will not alter the supply of labor. “Estimates presented elsewhere,” conclude the authors, “suggest that this phenomenon could easily double the size of the estimated deadweight losses produced by unionization in America.”

States have lessened this effect, however, by enacting Right to Work legislation. These laws, authorized by the Taft-Hartley Act of 1947, prohibit unions from inserting clauses into labor contracts requiring private-sector employers to terminate employees who don’t join a union or (in lieu of joining) or pay so-called “agency fees” for core representation purposes. Thus far, 24 states have enacted Right to Work laws to protect an individual worker’s right to decide whether to join a union. Organized labor officials long have vehemently opposed such enactments as a threat to their collective bargaining power. But unionism is not an end unto itself, but rather a means to an end. And as the authors argue, it’s not a very effective one. The goal is prosperity and freedom of contract. This monograph makes a strong case for each.


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