Collective Bargaining: Short Term Wage Increase Equals Long Term Wage Decrease

Unions 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.” 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 conclude 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.

Much of the historical growth of unionization rates was driven by legislation favorable to organized labor. 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 assumption was wrong – you know what happens when you assume….

Gallaway and Robe counter that by forcing wages higher inefficiencies are hidden that 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 sizeable deadweight loss.

The authors calculate deadweight loss, using state-by-state income and union density data for the years 1964 and 2011. They conclude that the loss of Real Per Captia Income (RPCI) resulting from the presence of labor unions over that 47-year period was greatest in states with highly unionized work forces (like Ohio and Illinois). Not surprising, states that have enacted Right to Work legislation have lessened this effect.

h/t National Legal and Policy Center (