Role of Labor Unions in Labor Markets Research Paper

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Labor unions are organizations formed by employees for the purpose of using their collective ‘strength to improve compensation, benefits, and working conditions through bargaining; to bring fairness to the workplace through the provision of due process mechanisms; and to represent the interests of workers in the political process. Economists have traditionally viewed unions as functioning as labor market monopolies. Because they raise wages above the competitive levels set by the market, economists argue that labor unions create inefficiencies resulting in the loss of jobs and in greater income inequality in the workforce. For this reason, economists view unions as an undesirable interference in the operation of the market (Booth, 1995; Friedman & Friedman, 1980; Simons, 1948). However, some economists argue that in addition to their negative monopoly face, unions have a second, positive collective voice face. They further argue that, on balance, the positive impact of unions outweighs the negative (Bok & Dunlop, 1970; Freeman & Medoff, 1984; Reynolds & Taft, 1956).

This discussion focuses on the role unions play—and the impact they have—in contemporary society and in the labor market. The research paper first examines the historical development of American unions. Next, it discusses the structure and government of modern unions and membership trends. The industrial relations process through which unions advocate for their members is outlined. Finally, the research paper examines the impact of unions and evaluates the two faces of unionism.

Why Do Unions Exist?

Unions are formed by employees who desire to improve their compensation, benefits, and working conditions and to bring greater fairness and due process to their workplace. Employees recognize that unless they have unusual or unique skills or talents, individuals have very little influence with their employers and very little power to improve the conditions under which they work. However, by banding together, workers are able to exert collective pressure that is more likely to force an employer to make specific improvements in the workplace. This collective power can also be used to obtain improvements through the political and legislative processes.

What Do Unions Do?

Economists generally assert that when employees are dissatisfied with their jobs, the only rational option available to them is to exit or quit their job and reenter the labor market to seek a better situation. However, some economists recognize that employees have a second alternative. Rather than exit their workplace, they can engage in voice. Engaging in voice involves trying to convince an employer to make changes in the workplace that will address employee dissatisfaction.

Employees readily understand that if they engage in voice behavior as individuals, they will probably have little success in convincing their employers to make significant changes. Even if an employee threatens to quit, an employer can, in most cases, easily replace one worker. Employees also recognize that if they combine their individual voices with those of the other employees in their workplace, they will be significantly more likely to persuade an employer to make changes. Unions are the mechanisms employees form in order to use their collective power.

Over time, employees have come to use the collective power of unions in three different ways. First, they engage in collective bargaining with employers in an effort to establish a legally binding contract that details the compensation, benefits, and working conditions in their workplaces. The goal of such a process is to negotiate terms that are better than those set by the labor market. Unions use the threat of a strike (a work stoppage that puts economic pressure on an employer by halting the production of a product or the provision of a service) to push employers to make improvements in these areas.

Second, unions establish processes and mechanisms through which employees can have a greater say in decisions that affect them. These processes can take many forms, including the establishment of grievance procedures that give employees due process when disciplined and employee involvement programs, such as labor management committees and quality-improvement plans. All of these processes are established through negotiations between the employer and the union and ultimately give employees an opportunity to voice concerns and participate in decisions about how work will be organized.

Third, the collective power of unions can be used to shape the legal and political environment in which they operate. Unions have long understood that forces beyond the employer and union relationship affect the union’s ability to represent its members’ interests. To varying degrees, unions have actively worked within the legal and political realms to mold this environment, as well as to obtain workplace improvements through the political and legislative processes. The local, statewide, and national membership of a union represents a significant voting bloc. Unions are able to provide campaign support for local, state, and federal politicians. In addition, unions help register people to vote, provide information to members and the public regarding politicians’ stance and record on employment-related issues, raise funds for candidates, and engage in get-out-the-vote initiatives. Using these financial and organizational resources, unions work “to reward labor’s [political] friends, and punish its [political] enemies” (Gould, 2004, p. 2). They also actively lobby for legislation that will benefit their members and against legislation they believe will be detrimental to their interests.

Historical Development of Unions

Most labor historians generally agree that the first real union in the United States was formed by shoemakers (then called cordwainers) in Philadelphia in 1792. By 1806, the courts banned the cordwainers, and all other unions, as conspiracies in restraint of trade. When this decision was overturned in 1842, the government found other ways to discourage the formation of unions, including issuing injunctions and the use of police and militia to put down strikes, demonstrations, and other forms of collective action. Meanwhile, most employers used a variety of strategies to fight the unionization of their workforce, including firing union activists and blacklisting them so they could not find other employment, evicting pro-union employees and their families from company-owned housing, and engaging in violence against workers who tried to organize.

These efforts on the part of employers did not entirely prevent workers from forming local, and even national, unions, but they did succeed in keeping unions relatively weak and on the defensive. However, legislation passed in the midst of the Great Depression as part of the New Deal changed the legal status of unions and ensured their existence as a central part of the U.S. economy. The National Labor Relations Act (NLRA), passed in 1935 as part of President Franklin Roosevelt’s New Deal, changed public policy toward unions in a dramatic, even radical, way. After more than a century in which government often assisted employers in the suppression of unions, the NLRA now granted most American workers in the private sector a legal right to organize, bargain collectively, and engage in strikes, if they choose to do so. Employers vehemently opposed the legislation, but it was declared constitutional by a 5-4 vote of the Supreme Court. The passage, and confirmation of the constitutionality of the NLRA by the Supreme Court in 1937, meant that the federal government would no longer side with employers against unions; rather, it would actively protect workers’ rights to organize, bargain, and strike. The NLRA included a set of rules that would dictate how employers and unions would deal with one another in the future. The violence and chaos that characterized union-employer relations for more than a century was replaced by a systematic process of industrial relations that is still in use today. And while the relationship between unions and management is still adversarial, the inherent conflict between the two parties is worked out under the rule of law, with strikes by unions and lockouts by employers used minimally and as a last resort.

One other major historical development that played a significant role in the formation of the contemporary American labor movement was the rise of public sector unions in the 1960s and 1970s. While the NLRA granted the right to organize, bargain, and strike to millions of American workers, it did not extend those rights to employees working for federal, state, or local government. These public employees did not begin to gain such rights until more than 25 years after the act’s passage.

Federal workers were the first government employees to gain the right to organize and bargain collectively. However, the bargaining rights extended to them under Executive Order 10988 in 1962 were (and are) limited. For example, federal employees were not granted the legal right to strike.

The rights of state and local government employees to form unions and bargain are granted on a state-by-state basis. A majority of states grant public employees the right to organize a union. Most also extend some rights to bargain collectively to those who organize a union (although some states, mostly in the South, do not). But only 11 states allow even some of their state and local government employees the right to strike. And while many states grant public safety employees (i.e., police, firefighters, and prison guards) some bargaining rights, none grant these workers the right to strike.

Contemporary American Unions

Unions are part of the economic framework of most developed, and many developing, nations. This is particularly the case in Western industrialized countries. However, the unions that have developed and operate in the United States over the last two centuries are somewhat unique compared to their counterparts in other nations. One of the most significant ways that U.S. unions have differed historically from unions in other countries is their acceptance of capitalism and rejection of socialism. Socialism has long been an integral part of the labor movements that developed in the United Kingdom and Ireland, western Europe, and Australia and New Zealand over the past 200 years. Even Canadian unions have had a tradition of supporting socialist principles. This uniqueness is sometimes referred to by historians as American exceptionalism and is a function of the American labor movement’s acceptance of capitalism (Lipset, 1997).

At various points in America’s history, there have been labor organizations that have promoted a socialist ideology. In the late 1800s, the leaders of the Knights of Labor led a quasi-socialist movement that attempted to organize workers on a massive scale. Initially, American workers flocked to the organization, and by 1886, the Knights had grown to 700,000 members. However, the membership quickly became disillusioned by the organization’s lack of tangible gains, and by the late 1890s, the Knights of Labor had largely disappeared.

In the early 1900s, another socialist union, the Industrial Workers of the World (IWW, also known as the Wobblies) was founded. The Wobblies were even more committed to socialism than the Knights of Labor and much more militant. Their union was based on the principle that “the working class and the employing class have nothing in common” and their stated goals were the “overthrow of capitalism” and the “seizure of the means of production” (Dubofsky, 2000).

While the IWW did attract over 100,000 members by 1917, American workers were fundamentally uncomfortable with their brand of revolutionary, socialist unionism. This, combined with heavy-handed attacks on the organization from federal, state, and local governments, led to the demise of the Wobblies as a labor union of significance (Dubofsky, 2000).

Historians suggest that the collectivism promoted by these two particular groups did not win the hearts and minds of the vast majority of American workers because of the uniquely American culture and worldview that were emerging in the late 1800s and the early 1900s. This culture emphasized individualism, egalitarianism, and a general suspicion of government, all of which were consistent with capitalism and at odds with socialism. If American workers had not embraced these capitalistic principles, the American labor movement could have taken a very different shape (Lipset, 1997).

Union Membership and Density

As U.S. unions developed during the twentieth century, both the number of union members and union density (the percentage of the labor force that belongs to a union) in the United States fluctuated over time. Figure 16.1 depicts the changes in union density.

From a high of 35.5% in 1945, union density fell over the next six decades to a low of 12.1% in 2007. Among the factors cited for this decline are structural changes in the economy (particularly the shift from an industrial-based to a service-based economy that occurred in the last 20 years), increasingly aggressive efforts by employers to fight unionization, weakening labor laws, and changes in the public’s attitudes toward unions. The overall union density rate includes employees in both the private and the public or government sectors. However, the trends in these two sectors have been very different over the last 40 years. Although private and public sector union density rates were both around 25% of the labor force in the mid-1970s, in the decades that followed, public sector union density rose to nearly 40%, while private sector union density rates fell below 10% (see Figure 16.2). The higher union density rate in the government sector is partly explained by differences in labor law that make it easier for public sector employees to organize unions. A second commonly cited reason for the difference is the relative mobility of jobs in the private sector versus the immobility of public or go eminent jobs (i.e., private sector jobs are far more likely to move within the United States or overseas to avoid unionization than are public sector jobs).

In addition to varying over time and across the public and private sectors, union density rates also vary geographically and by industry. States with relatively high union density are located in the Northeast, the Midwest, and the West Coast. In 2008, New York had the highest union density of any state at 24.9%, followed by Hawaii (24.3%) and Alaska (23.5%). Low rates are the norm across the South and in the southwestern states. North Carolina (3.5%), South Carolina (3.7%), and Georgia (3.9%) had the lowest rate of union density in 2008 (Bureau of National Affairs [BNA], 2009). Among industries with high rates of union density in 2008 were utilities (electric power, natural gas, water supply, etc.) at 26.9%, transportation and warehousing (transportation of passengers and cargo, warehousing and storage of goods, etc.) at 21.3%, and telecommunications (telephone service, cable and satellite television, Internet access, etc.) at 19.3%. Industries with low union density included insurance at 1.0%, finance (banks, savings and loans, brokerages, etc.) at 1.3%, agriculture at 2.8%, food service (restaurants, fast food, caterers, etc.) at 3.1%, and retail trade (stores, catalog sales, etc.) at 5.2% (BNA, 2009a).

role-of-labor-unions-in-labor-markets-research-paper1Figure 16.1 Percentage of Employees That Are Members of a Labor Union in the United States From 1930 to 2008

SOURCES: Data from 1930 to1970 are from Census Bureau Report (2001). Data from 1973 to 1981 are based on results by Hirsch and Macpherson (2009), which uses information from a May CPS data report. Data from 1983 to 2008 were provided directly to the authors from the Bureau of Labor Statistics (BLS, 2009a, 2009b) with the following explanations: (a) Beginning in 2000, data refer to private sector wage and salary workers; data for earlier years refer to private nonagricultural wage and salary workers, (b) Data for 1990 to 1993 have been revised to reflect population controls from the 1990 census, and (c) Beginning in 2000, data reflect population controls from census 2000 and new industry and occupational classification systems. BLS has an online source for the CPS 2000 to 2008 data at Employees refers to those who receive a wage or salary working in nonagricultural industries in the private and public sectors. No data were available from 1971 to 1972 or for 1982.

While union membership has historically been drawn from the ranks of blue-collar workers in the manufacturing, coal, utilities, transportation, and construction industries, the proportion of the contemporary labor movement’s membership made up of white-collar and professional employees has been increasing (although union density for these workers still remains relatively low). Actors, writers, athletes, nurses, teachers, sales representatives, school principals, musicians, and software engineers have joined unions in greater and greater numbers in recent years. The potential for growth in this area presents a great opportunity for American unions.

The degree to which they can take advantage of this opportunity may determine how relevant the American labor movement will be in the years ahead.

Labor unions are not by any means solely an American phenomenon. In fact, unions are a significantly more important part of the economies of most industrialized nations than in the United States. In 2006, the United States ranked 22nd of 24 nations, with only France (8.3%) and the Republic of Korea (11.2%) having labor movements that represented a lower percentage of the labor force. Countries with the highest union density rates were Sweden (78%), Finland (74%), and Denmark (70%). It is important to note that union density rates have been declining in most developed countries, although the decline appears to be slower for most other nations than for the United States (Chang & Sorrentino, 1991; Visser, 2006).

Union Structure and Government

To understand how unions function as organizations, it is necessary to understand how they are structured and governed. The structure and government of most unions is similar to the structure of American government in that it has three levels—local, state or regional, and national. The basic structural unit of a labor organization is the local union (in some unions the local might be referred to as a lodge or a branch). A local union often consists of the employees in a single workplace (a factory, an office, a warehouse, etc.), although sometimes a local can represent more than one workplace, and in very large workplaces, there can be more than one local union (e.g., one local might represent production and maintenance employees, while a second local represents the office workers). One of the most significant things about a local union is that it is the main point at which members interact with, or experience, the union. The local union is governed based on a local constitution or bylaws that establish how the local will operate. Typically, the local union constitution outlines how officers are elected, what their terms of office will be, what their duties are, as well as how decisions regarding the administration of the local, the bargaining of contracts, and the calling of strikes will be made. The exact structure of a local union will depend in part on its size and on the industry within which it operates. Because most local unions are affiliated with a national or an international union, the local union structure will also be influenced by the practices of the parent organization.

role-of-labor-unions-in-labor-markets-research-paper2Figure 16.2   Union Density in the Public and Private Sectors

SOURCES: Data for 1973 to 1981 are from Hirsch and Macpherson (2009). No actual data exist for 1982. Data from 1983 to 2008 were provided directly to the authors by the BLS (2009a, 2009b) with the following explanations: (a) Beginning in 2000, data refer to private sector wage and salary workers; data for earlier years refer to private nonagricultural wage and salary workers, (b) Data for 1990 to 1993 have been revised to reflect population controls from the 1990 Census, and (c) Beginning in 2000, data reflect population controls from Census 2000 and new industry and occupational classification systems.

The second level of union structure is the regional or state level. This is an intermediate level of the union that serves as a link between the national and local levels. The regional or state level brings locals belonging to the same national or international union in a given geographic region together for their mutual benefit. This level also often provides professional union representatives to assist the local unions. These individuals usually have significant experience and expertise in organizing, contract negotiations, and grievance handling/arbitration and provide advice and assistance to the local unions.

The national or international union represents the third level of union structure. A national union brings together its local unions within the United States. An international union is similar to a national union except that it has local unions and members in Canada (and sometimes in U.S. territories such as Puerto Rico and Guam). National and international unions perform numerous functions. They bring locals together to use their collective power in negotiations with larger national and multinational employers. National and international unions also provide the formal structure and mechanisms for their members’ interests to be voiced and heard in national politics and in addressing other important issues. Additionally, national and international unions support regional/state and local union initiatives and needs by providing services (e.g., legal, research, education) to these levels of the union.

It is important to note that unions—at the local, regional or state, and national/international levels— are mandated by federal law to operate democratically. The Taft-Hartley Act of 1947 (a series of amendments to the NLRA) and the Labor-Management Reporting and Disclosure Act (LMRDA) of 1959, also known as the Landrum-Griffin Act, established basic or minimum requirements for how elections are to be held, who can hold an elected position, and what the terms of office will be. These laws also mandate that all levels of all unions must file detailed reports accounting for every cent that is collected and spent and listing the salaries and expenses of all employees.

There is a fourth level of union structure and government called the federation. Unlike the other three levels discussed previously, a labor federation is not a union, nor is it a part of a union. It is a body that brings together many different unions into a loose alliance. This alliance helps the individual unions pursue their common interests by sharing information and bringing the collective authority and resources of the individual unions together. In some ways, a labor federation is analogous to the U.S. Chamber of Commerce in the business community. In the same way that a labor federation is not a union, the Chamber is not a business. Rather, it is a federation of businesses.

There are currently two labor federations in the United States. The first, the American Federation of Labor and Congress of Industrial Organizations (AFL-CIO), was founded in 1955. The second, Change to Win (CTW), was formed in 2005 by unions that disaffiliated from the AFL-CIO. The CTW unions split with the AFL-CIO over a number of policy differences, including CTW’s perception that the AFL-CIO was not placing sufficient emphasis on organizing new union members.

In 2009, the AFL-CIO consisted of 56 national and international unions with a total membership of 11 million, while CTW had 7 affiliates totaling 6 million members. While most U.S.-based national and international unions belong to one of these two federations, not all national or international unions are affiliated with a labor federation. In fact, the largest American union, the National Education Association (NEA), does not belong to either the AFL-CIO or CTW. However, other than the NEA, the unions that not affiliated have relatively small memberships and little influence nationally (Sloane & Whitney, 2010).

The Industrial Relations Process

The Three Steps

To understand the role that unions play in labor markets, it is helpful to understand the process by which employees form unions and, once formed, how unions negotiate contracts and resolve day-to-day differences with employers.

The industrial relations, or union-management relations, process consists of three steps. For most private sector workers, these steps are spelled out in the NLRA. For railroad and airline workers, they are spelled out in the Railway Labor Act. For public sector employees who have been granted the rights to organize and bargain and in a few cases to strike, these steps are addressed in various federal and state laws. The processes differ from law to law but generally have much in common.

The first step in the process involves the organization of a union. Under the NLRA, this occurs in one of two ways. If a majority of employees in a workplace sign representation cards, the employees can request that their employer voluntarily recognize the union. If the employer refuses, the employees can then present these cards to the National Labor Relations Board (NLRB) and ask for a certification election (note, while it is necessary to have a majority of employees sign cards to ask for voluntary recognition, only 30% are required to request an election). Once the cards are verified, the NLRB will order that an election be held within 45 to 60 days.

In the time between the filing of cards and the election, the union and the employer will both conduct campaigns to convince the employees to vote for or against unionization. At the end of the campaign, a secret ballot election is typically held. Most employers do not opt to voluntarily recognize a labor union, despite having evidence from a third party that a majority of those workers want to form a union. For the union to be certified, a majority of employees voting in the election must vote for the union. Once a union is certified or voted in, the employer is obliged to engage in bargaining with that union.

The second step in the industrial relations process is collective bargaining. Collective bargaining involves the employer and representatives of the union meeting to negotiate over compensation, benefits, hours, and working conditions for unionized employees. In the bargaining process, the union usually presents proposals for improved wages and benefits, and the employer responds with counterproposals for less generous improvements (or during downturns, reductions in compensation and benefits).

In the small percentage of cases where the parties cannot reach an agreement on the terms of the new collective bargaining contract, one side or the other might engage in strategies to force the other side to change its position. For unions, this would normally take the form of a strike, a tactic in which the union’s members refuse to work in an effort to put economic pressure on the employer by disrupting its ability to operate. As a counterbalance to a strike, private sector employers, under certain conditions, can lockout, or voluntarily close, their businesses in an effort to deprive employees of their income.

It is important to note that a very, very small proportion of negotiations involve either a strike or a lockout. The vast majority of collective bargaining negotiations conclude with the two sides agreeing to a contract without any disruption of work. The end result of collective bargaining is a contract (also known as a labor agreement). Contracts are for fixed periods of time, normally 3 to 4 years, although they can be of shorter or longer duration.

Once the parties agree to a contract of a fixed duration, they enter the third step of the industrial relations process. This step is sometimes called the contract administration step. It involves the implementation of a mechanism called a grievance procedure for systematically resolving disputes that arise during the term of the contract. While both parties to the contract may intend to abide by the agreement, there may be incidences when the employer or the union may misinterpret or misunderstand the intent of a specific section in the contract. Disputes might also arise over union concerns that the employer is not following the contract (e.g., an employer does not follow the provisions relating to promotion in choosing a person for a vacated position).

Prior to the passage of the NLRA, unions would sometimes strike over such issues, but today they are settled peacefully through the grievance procedure. This is a quasi-judicial process in which disputes are worked out during a series of meetings involving employer and union representatives. If the issue is not resolved at the first-step meeting, the union can appeal to a second and third step. Each meeting involves different union and management representatives with increasing authority and expertise in addressing the dispute resolution. Most disputes are successfully resolved within the first three steps of the grievance process. However, if no resolution is reached between the parties, the case goes to arbitration, a quasi-judicial process that involves a hearing before an arbitrator (a sort of judge). The arbitrator is usually empowered by both parties to issue a final and binding decision.

A relatively high percentage of cases taken to arbitration involve disciplinary charges against employees (demotions, discharges, etc.). The grievance procedure provides disciplined workers with due process, including an opportunity to present their sides of the story and have their day in court. From the union members’ point of view, this is one of the most important benefits a union provides its members—a voice in resolving disputes between an employee and a manager.

 Distinctive Features of the U.S. Industrial Relations System

Just as American unions are somewhat different from their counterparts in other parts of the world, so is the system of industrial relations in the United States. The system is distinctive in four major ways.


The focal point for collective bargaining in the United States is the individual workplace or bargaining unit (a factory, an office, etc.). This is the unit in which employees organize to form a union. While these bargaining units can be combined into multi-unit structures for the purpose of negotiating a uniform contract across multiple workplaces operated by one employer (as in large corporations like General Motors, U.S. Steel, etc.), the vast majority of collective bargaining in the United States involves a single local union and a single employer negotiating a labor agreement for a single workplace.

While industry-wide collective bargaining is rare in the United States, national labor agreements covering entire industries are much more common in the United Kingdom, western Europe, and Australia. In some U.S. industries, large employers do negotiate company-wide contracts that can cover hundreds of workplaces (this is the case in the auto industry and its three majors employers, General Motors, Ford, and Chrysler), but again, this is the exception and not the rule.

Exclusive Representation

A second practice that differentiates the U.S. collective bargaining system from others in the world is exclusive representation. The NLRA provides that only one union can represent the employees in a bargaining unit. If workers in a unit decide to organize and are successful in convincing a majority of those employees who vote in the election to support the union, that union becomes the exclusive representative for those employees. No other union can represent any of the workers in that unit. In addition, the union that wins the election acquires the responsibility to represent all employees in that unit, not just the employees who voted for the union.

In many other countries, unions represent only that part of a bargaining unit that chooses to be represented by a particular union. This proportional representation can result in multiple unions representing different percentages of the employees in a given unit (i.e., Union A might represent 40% of the unit; Union B, 30%; Union C, 20%; etc.). Employers are forced to deal simultaneously with multiple unions in that unit, a situation that can be chaotic, confusing, and disruptive.

The Role of Labor Contracts

In the U.S. system, the heart of any union-management relationship is the contract. These contracts are the end product of bargaining and spell out, with precise language and great detail, what the compensation, benefits, hours, working conditions, local practices, disciplinary processes, and grievance procedures will be. These contracts are often long and complex (the General Motors-United Auto Workers’ contract is an almost 1-inch-thick booklet of very small print). This contrasts with the United Kingdom’s and western Europe’s approach in which negotiations focus on only a handful of issues (wages, some benefits, etc.). The resulting contract is much more limited in scope. Issues not addressed are resolved as they arise, in a more informal process by the parties.

The Role of Government

A fourth difference between the U.S. system of collective bargaining and the system in most countries is the larger role that the U.S. government plays in determining, regulating, and enforcing the bargaining process. Legislation like the NLRA, the Railway Labor Act, and federal and state public sector labor laws detail how a union is formed, who can be included in that union, the obligations the parties have to bargain with each other, when bargaining occurs, and more.

U.S. labor laws also specify in great detail what the parties must bargain over (mandatory issues); what they cannot bargain over (prohibited issues); and what they may, but are not required to, bargain over (voluntary issues). Again, in the United Kingdom and western Europe, the government does not get involved to as great a degree in either the process or the substance of negotiations. These issues are largely left to the parties.

The Impact of Unions on Labor Markets

As suggested earlier, economists have traditionally viewed unions as monopolies that interfere with the efficient operation of labor markets. They do so in three main ways.

First, unions raise wages above the competitive levels set by the market. In doing so, they cause employers to hire fewer workers than they would otherwise. The evidence does, in fact, indicate that unions increase wages. In 2008, the BLS (2009c) reported that the median weekly earnings of union members employed full time was $886, while full-time nonunion workers earned $691, a difference of 28% (see Figure 16.3).

A comparison of earnings by occupation indicates that this earnings premium is present in most occupations (see Table 16.1).

The impact of unions on wages is even greater than indicated by the union-nonunion wage differential. This is because nonunion employers often raise the wages of their employees above what they would otherwise pay to reduce the likelihood that their employees will organize a union. The phenomenon of unions indirectly causing an increase in the wages of nonunion employees is called the union threat effect (Filer, Hamermesh, & Rees, 1996).

role-of-labor-unions-in-labor-markets-research-paper3Figure 16.3 Comparison of Union and Nonunion Median Weekly Earnings 2008 SOURCE: BLS (2009c).

Economic theory suggests that artificially raising wages results in a reduction in the number of jobs because employers buy less labor as the price increases. And as those employees who have lost their jobs search for work in the nonunion sector, they bid down wages there. In essence then, some of the wage increases won by unions come at the expense of lower-paid or unemployed workers. For this reason, many economists argue that the interference of unions in the operation of the market causes inefficiencies. This leads to the conclusion that, on balance, unions play a harmful role in the market.

Many economists believe that unions contribute to inefficiency in a second way by engaging in strikes. When unions call strikes in an effort to increase their bargaining power, productivity falls. At the firm level, this ultimately lowers profitability; at the national level, it reduces gross national product (GNP) (Freeman & Medoff, 1984).

Third, economists believe that unions reduce efficiency through the imposition of work rules and work restrictions with which nonunion employers are not saddled. One often-cited example is work jurisdiction rules in which employees have strictly observed job descriptions that prevent them from doing even the simplest of tasks that are not a part of their jobs. Where work jurisdiction rules exist, some economists argue that these provisions have a negative impact on individual and firm-level productivity (Filer et al., 1996).

However, other economists question this view of unions. They believe that “markets are competitive enough to give unions little or no power to extract monopoly wages” (Freeman & Medoff, 1984, p. 7). They reason that unions really acquire monopoly power only when they organize an entire market or are present in a noncompetitive market (Filer et al., 1996). They also point out that strikes involving 1,000 workers or more have fallen steadily in this country from a modern high of 470 in 1952 to 44 in 1990 to 15 in 2008 and that the percentage of estimated working time lost for those same years fell from 0.14 to 0.02 to 0.01 (BNA, 2009). They also note that strikes occur in other industrialized countries and usually at higher rates that more than offset the cost of strikes in the United States. Last, they argue that restrictive work rules may have been a problem in the past but that many unions have worked closely with employers to eliminate these practices and to find ways to more efficiently produce goods or provide services.

Over the last 25 years, another perspective on unions, based on the writings of Hirschman (2007), but most effectively articulated by Freeman and Medoff (1984), has gotten significant attention and has influenced economists’ views of unions in important ways. This collective voice/institutional response perspective suggests an alternative to the classic market mechanism of exit and entry. Economic theory posits that exit occurs in a perfectly competitive market in which “no individual can be made better off without making someone worse off ” (Freeman & Medoff, p. 8). The freedom that dissatisfied employees have to leave bad employers and go to work for good ones contributes to the efficiency of the market. If this system works as assumed, unions can interfere only with the free operation of the market and create inefficiencies (Bennett & Kaufman, 2007).

Freeman and Medoff (1984) contend that employees can deal with workplace problems in two ways. They can exit (quit—the only option available to workers according to classical economic theory) or they can engage in voice by speaking up and trying to change the conditions with which they are dissatisfied. Regarding the exit option for dissatisfied workers, Freeman and Medoff argue that these self-regulating mechanisms of markets are not perfect because actors do not have complete information and there are significant mobility costs for employees who choose to exit. And should employees consistently exit the firm when dissatisfied, the result is high turnover in the workforce, which is costly to employers. Voice can, in fact, reduce costs to both employers and employees by drawing attention to bad employment practices and resolving them. Freeman and Medoff point out that voice expressed by an individual is much less likely to be effective in resolving problems, particularly in a large workforce, than is voice expressed by a group. And because the most effective way to express collective voice is through a union, they conclude that unions can have a positive impact on efficiency in a workplace.

role-of-labor-unions-in-labor-markets-research-paper-t1Table 16.1   Earnings by Occupation, 2008 Full-Time Wage and Salary Workers’ Median Weekly Earnings in Dollars

The view that unions interfere with the efficient operation of the market continues to be the prevailing opinion in the field of economics. But the case made by Freeman and Medoff (1984) that, in addition to their negative monopoly face, unions also have a positive voice face has forced the economics profession to reconsider the conventional wisdom about unions.


By any account, labor unions have played a significant role in American society for most of the nation’s history. And while their influence has declined over the last 25 years, the modern American labor movement represents millions of employees in thousands of large and small workplaces across the country.

Most economists have viewed unions through the lens of neoclassical economic theory, concluding that they act as monopolies that create inefficiencies in the labor market, resulting in the loss of jobs and greater income inequality in the workforce. In their view, unions have also had a negative impact on efficiency through the conduct of strikes and by the institution of cumbersome work rules and work restrictions.

This assessment of unions has been challenged in recent years by a minority of economists who downplay the monopoly face of unions. These scholars argue that strikes no longer cause significant disruption to the economy and that unions have greatly loosened restrictions on work rules. And they argue that unions have a second voice face that plays a positive role in the workplace by allowing employees to address problems that would otherwise cause them to exit or quit. This side of unions benefits both employees and employers by reducing turnover, improving productivity, and bringing fair treatment and due process, two of the core values of American democracy, to the workplace.

It remains to be seen whether this minority view of unions can make inroads into the traditional view that has prevailed in the field of economics for a very long time.

See also:


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