Labor Economics and Unions By Bob Delaney

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The topic of unionism is always hotly debated. There doesn’t appear to be much in middle of the road when discussing unions. The emotions that are conjured up on both sides of the fence are often based on irrational arguments that cloud the debate and entrench the discussant in their long held beliefs.

The purpose of this article is to put forth a rational discussion on some of the issues.

When we think of unions we often think in terms of the image portrayed in the movies: labor thugs that prevent firms form implementing change that may benefit the all constituents.

What we need to appreciate is the fundamental human right of freedom of association. Since America values individualism, we must respect the fact that individualism allows independent choice.

There may appear to be a contradiction between individual choice and a person’s decision to join a union, thereby abdicating their right to negotiate independently with their employer. The perception is that there is a balance of power between the employer and their organization and an individual. Perhaps this perception stems from the legal status of corporations as entities that have certain rights and obligations, similar to the status of individuals.

The above perception of power is to me obviously distorted. When offered the choice between having all decisions made for you unilaterally by a more powerful entity, or having some form of codetermination through collective representation, I think anyone would choose the latter.

If we value freedom of association, what is the difference between seeking union representation and joining a community service club?

Union Objectives
Unions are political organizations whose objective is to represent its members in collective bargaining activities. Collective bargaining activities can be separated into several areas of interest including wages, employment (number of employees) and conditions of work. Usually the importance of these activities is decided democratically by the union membership.

There is a classic trade-off between wages and levels of employment. What this implies is that if unions attempt to maximize wages they may limit the number of members (firm employees). If the union attempts to maximize employment (members) they may limit wages. An alternative objective may be to maximize the wage bill by placing somewhat equal weight to both objectives.

Union objectives are influenced by:

  • Degree of homogeneity of the membership
  • Differing cohorts may have different objectives (e.g. older workers and younger workers)
  • Political structure of the union
  • Availability of information
  • Desire of union leaders to remain in office
  • Labor market conditions
  • Skill levels
  • Availability of labor
  • Availability of substitutes for labor
  • Product market conditions
  • Declining/ accelerating industry
  • Ability to pass on price increases to consumers
  • Individual employer
  • Ability to pay
  • Ratio of labor costs to total costs

Union Wage/ Benefit Differential Unions have been successful in negotiating higher then market wages and benefits for their members. The wage differential (premium) lies between 10% – 20% in the United States. There are naturally some variances across firms, industries, and between the public and private sector. Differentials also exist between union and non-union workers when it comes to the following:

  • Fringe benefits
  • o Better at unionized workplaces
  • Working conditions
  • More structured at unionized workplaces
  • Job control is union’s response to management’s rights
  • Turnover
  • Lower at unionized workplaces

Union Spillover Effect
Unions can have a spillover effect on the wages and benefits of non-union workers, whether they are at the same work location, or in the same industry. For example, blue-collar union wages may have a positive influence on the white-collar wages at the same employer. There are also inter-industry, intra-industry, and public-private sector spillover effects. Negative (lower wage) spillover effects may result from former union workers (who become unemployed due to the rational response of employers) looking for work in the non-union sector, thus increasing the supply of non-union workers at all wage levels.

Rational Employer Response

Inputs To Production
Given the higher cost of labor in the presence of a union, employers may respond in a rational way. If we treat labor simply as an input to production (remember we are thinking rationally not altruistically), we should respond in the same way that we would if any other input’s price increased.

Depending on the ability to use, and the availability of substitutes for labor, a rational employer response may be to replace expensive labor with a relatively cheaper substitute such as machinery (otherwise known as capital). This results in the use of less labor (unemployment in the unionized sector).

An analogy is the current price of gasoline. If gasoline was an input to producing your good or service, given the recent price increases, you may be looking to convert to a cheaper source of energy such as natural gas.

Since most firms operate on a given budget, it is necessary to balance the costs of inputs, through trade offs, in order to meet budgetary objectives


Recruitment and Selection
Since unionized wages are generally higher, a rational response would be to recruit and select higher quality labor. For example you may look for individuals who have several years of experience in an attempt to reduce your training cost and other fixed costs of hiring.

Due to higher union wages, there is an inherent cost to union members if they lose their job. This cost is measured in regards to their ability to find comparable wages and benefits in a non-union setting.

Another rational response would be to try to amortise your fixed costs of labor over a shorter time period through the use of overtime. Also, by working your existing unionized employees longer hours, you reduce the need to hire additional workers thereby avoiding additional fixed cost of hiring.

Your more expensive labor may require more talented supervision. Through the use of higher quality supervisors, who have industrial relations training, you may be able to reduce the inherent conflict in the union-management relationship.

Labor Economics and UnionsThrough the use of higher quality labor and supervision, it is rational to seek out and develop processes that improve the productivity of your workforce. Since you may be paying a premium for the input, you should attempt to make it more productive in an effort to remain competitive.

Management’s Rights
Management retains the right of unilateral control over most aspects of the workplace that are not contained in a collective bargaining agreement.

Unionization has long been viewed as a negative reflection on management. I have said in the past that any management that has a union deserves a union. One of the reason’s why people choose to unionize is the perceived arbitrary nature of management decision-making. Unions attempt to formalize process and remove the arbitrary-ness of decision-making.

It is rarely a single incident that stimulates interest in unionization. Often it is management behavior over time, which highlights the negative aspects of arbitrary decision-making. As I mentioned above, I think any one given the (free) choice would opt for some form of “voice” in determining (bargaining) wages, employment, and conditions.

Though mismanagement and abuse of power may be a stimulus for the demand for unionization, I have matured in my outlook in regards to laying blame on management. It is a common human frailty, which has been exposed in numerous psychological and sociological studies that “power corrupts and absolute power, corrupts absolutely.” How then can we blame anyone for simply being human?

The rational response to a power imbalance is to restore some form of equilibrium. Workers rational response is to seek (demand) union representation.

Given budgetary constraints and the need to remain competitive, management will respond rationally to the rising cost of inputs to production.

When viewed from an economic point of view, unionization can lead to positive benefits to all constituents. Higher wages, better working conditions, high quality labor and management, lower turnover, increased productivity, increased employment due to higher demand for equipment (capital), ect.

One of the problems is: unionism that is achieved in an adversarial atmosphere fosters bad feelings between the parties. If unionism was viewed in a positive light, and codetermination was the norm in the workplace, then much of the fear and loathing between the parties would not exist or develop.

Bob Delaney is a Knowledge manager at Concurrent with his responsibilities at, Bob is an Academic Instructor in a Post-graduate Diploma Program in Human Resources Management. His academic credentials are separately in Economics and Industrial Relations, Human Resources Management, Business Administration and Alternative Dispute Resolution

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