On Unions

Busy day so here are a few union related tidbits.  The first, and most interesting, is the NY Times/CBS poll results on American's attitudes toward public sector unions.

The second is a study of public employee compensation that shows that public employees are not compensated more than their private sector peers even when controlling for benefits.

The third is an opinion piece by Robert Barro in the Wall Street Journal that argues against union rights. Note that I tried to find the paper cited in the article by Thomas Holmes, but according to his CV, he published nothing in 2000, and I don't see a paper that matches the description, perhaps someone can help me out.

Update: here it is, thanks to a reader, in a working paper version.

Of Wisconsin and Public Sector Unions

I had the great fortune to go to both middle school and high school (go Regents!) in Madison, Wisconsin. I say great fortune because at that time Wisconsin has one of the best public school systems in the country, and because Wisconsin is a wonderful state, full of honest, hard-working and unassuming people, and Madison is a great city - it was a great place to grow up.  Now, of course, the state, like many, has to do some belt tightening and the Republican governor is taking the opportunity to knee-cap state public worker unions by attempting to deny them their ability to bargain collectively.

So, the obvious question is, are public sector unions necessary?  How I think about unions starts with labor markets in general.  If labor markets were complete. they would be efficient and unions would not only cause distortions that reduced welfare.  Some believe this to be true, or that at least unions cause more harm through distortions than the good they provide.  It is also true that the efficiency of markets is completely unrelated to distribution and unions are a way in which we, as a society, provide some distributive pressure on the natural outcomes of markets.  We can either do it through unions or through tax and transfer policies - but the latter is generally unpopular.  

To me the fact that labor markets are not efficient is incontrovertible.  Employees face considerable search costs and switching costs.  That is, it is hard and expensive to find jobs and once in a job switching is costly, often involves giving up retirement benefits, etc.  It is also expensive for firms to search, but not nearly as costly, and turnover may cost firms in terms of productivity but allows them to shed higher salaries for lower ones.  I think the social welfare calculus is pretty simple: the imbalance in labor markets creates efficiency losses and unions help to restore the balance.

In the public sector, employees and bureaucracies are often subject to the political cycle and are often targets of budget cutting politicians.  What unions to to benefit all of us is create stability in our public sector that preserves services, promotes productivity enhancing tenure and morale, and helps to ensure that government bureaucracies can compete for the best talent.  The proof that they are not creating more distortions lies is studies that find that, once you control for education and experience, public sector workers earn less than their private sector counterparts.

Unions are not without fault, for sure, no organization is - the internal political economy of teacher unions, for example, causes them to protect underperforming teachers and limit the ability of school systems to distribute teachers most efficiently.  Unions have to be able to change and help find solutions to thinks like underperforming schools. But this does not mean they unions don't play a vital role in the US economy and, most importantly, does not negate the fact that the US is probably better off with unions than without.  

And we should not forget the history of unions, which, during the industrialization of the nation, were able to bargain for a share of the economic rents that the largely oligopolistic firms enjoyed. This created a more just and equitable income distribution and created a consumer class that helped fuel the economic growth of the 20th century.

Unions and Wage Effects

I am trying to occasionally come back to some unfinished business, today's being another look at the economic effects of unionization. A while back when the Employee Free Choice Act was in the news I promised a series of posts on the effects of unionization. I started the endeavor but quickly lost the plot. So here is another look at some research (here and here) I recently came across that generally confirms the positive effect unions have on wage formation (meaning unions are successful in negotiating higher wages). What does this due to firms, well this paper suggests that it cuts into firm profitability but only the amount of the wage premium. In other words unions are able to negotiate a bigger slice of the pie.

So, again, the evidence seems to square with a overall general characterization of some real wage premiums from unionization and some small hit to overall firm performance. The overall welfare implications of this are therefore unclear.

I think a provocative question for the 21st century is: are unions as necessary in a world in which information is so readily available and switching costs relatively low? And if health care reforms happen that make employees less tied to their firms, will this erode the influence of unions even further and it this a good thing?

Do Unions Hurt Business Performance?

One of the recurring themes of the 'problems with Detroit' narrative is that labor became too powerful, won too many costly concessions (e.g. the jobs bank) and these concessions are now crippling and are responsible for a big part of the troubles of America's auto companies.

A rather compelling case can be made that in this specific instance the rigidity that more and more complex union labor contracts begat hurt a company in crisis (in my view, a less compelling case can be made that it was labor that caused the crisis). But it begs the question, is this true in general?

Here is an abstract from a new NBER working paper by David Lee and Alexandre Mas:

We estimate the effect of new unionization on firms' equity value over the 1961-1999 period using a newly assembled sample of National Labor Relations Board (NLRB) representation elections matched to stock market data. Event-study estimates show an average union effect on the equity value of the firm equivalent to a cost of at least $40,500 per unionized worker. At the same time, point estimates from a regression-discontinuity design -- comparing the stock market impact of close union election wins to close losses -- are considerably smaller and close to zero. We find a negative relationship between the cumulative abnormal returns and the vote share in support of the union, allowing us to reconcile these seemingly contradictory findings. Using the magnitudes from the analysis, we calibrate a structural "median voter" model of endogenous union determination in order to conduct counterfactual policy simulations of policies that would marginally increase the ease of unionization.

We all know that stock market performance is based on many things, however a unionized work force appears to hurt it on average, but have little effect on the margin. This is probably explained by the fact that when you are using close elections, there is little difference in the performance of firms because there is not a huge discrepancy in what the union wants and what the firm is offering. On average though, these differences might be large - and especially so through time. A very small difference in growth rates of unionized versus non unionized firms can lead to large differences over time.

A caution: this says nothing about whether such differences are welfare improving. It may be that even with slower firm growth, such a trade off is welfare improving if unionization is beneficial to workers.

Unions - A Mea Culpa and an Anecdote

I have been trying to get back to my unions posts but it has proved more difficult than I anticipated.  I have tried to find some general overview article of the JEL type or some relatively recent paper that presents some convincing and wide ranging evidence, to no avail (but have not had much time to look).  Instead there are a multitude of (mostly older) papers that are hard to generalize but about which I think I can make a few statements.  Call them what, stylized facts?  Unions tend to raise wages and this effect is more pronounced for lower skilled workers.  Unions can also lead to rigidity that cause more unemployment (though this is buy no means a general result at least in my investigation).  Unions have no clear implications for the profitability and success of firms - I have found research that have found both positive and negative effects.  I hope soon to be able to find some time to discuss this in more detail.   

In the meantime, thank you for your comments.  Many have shared personal anecdotes, so I'll share mine:

When I was a UPS delivery person and was still relatively new, around Christmas (Dec 23), I was given a rental truck with hastily lashed 'shelves' that was literally stuffed to the roof with packages in only a minor semblance of order.  I was out until 10pm delivering these packages and at about 6:30pm I finally unearthed a series of packages for a medical office that was now closed given the hour of the day.  This is a cardinal sin at UPS - you make an attempt on every package in your truck and never, ever miss a business delivery.  But I had no control over this.  Anyway, I finally return to the UPS facility exhausted, not having eaten anything for ten hours. I was the last one in and the supervisor (whom I had never met as he was the overnight super) gave me a dressing down for the unattempted packages in my truck.  I gently suggested that if he had seen my truck in the morning, he would understand that it was overloaded and that I had done a pretty good job delivering as many packages as I had.  

So that was bad enough, but when I got to the locker room the union rep came in to tear into me for staying out too late.  All I could do was laugh.  

Now, he was trying to do me a favor, as a new guy, he wanted me to know that I had the right to return earlier and not to let UPS take advantage of me. "No one stays out past 9, said he."  But at that moment I was not interested.

Anyway, are the Teamsters good for UPS and its workers?  Well, I knew that (then, at least) I got paid much more than drivers at FedEx and had fantastic benefits.  Though I also noticed that FedEx workers were always pretty casual and unsweaty - in stark contrast to my haste. UPS was a very successful company and was always on the list of great companies to work for.  They aggressively promoted from within and they tried to stop me from quitting by promising that I would not be in a truck for long with my degree in economics - so clearly they thought of their employees as a long-term investment and wanted to keep them, which is a good thing.  There is also a 3 month probation period during which UPS aggressively weeds out those who cannot cut it which is a part of the union contract.  So in general, I think it is a pretty good model for a successful union shop.  But that is from a pretty small observation period.  As an economist I am trained to be suspicious of such rigidities, but the information asymmetries and job-specific investments present in the UPS example seem to provide a pretty good justification for unionization.  

Just a thought...hopefully more data to follow.

Unions: Do They Help or Hurt Business?

Rather than try and do a comprehensive treatment of the economics of labor unions, like I have done before, I want to highlight some particularly robust evidence from the economics literature in bits and pieces to try and provide a platform for informed debate. Today, I want to highlight DiNardo and Lee's 2004 paper "Economic Impacts of New Unionization on Private Sector Employers: 1984–2001"

Like almost all empirical economics studies, we don't have the counter-factual and so we are forced to try and do the best we can with the data we have. In this case they use the newly fashionable regression discontinuity design. In essence, they look at businesses where unionization just barely passed, versus businesses where it just barely failed. Why, well unionization is not likely to be random and unions could form at more profitable businesses that are more likely to pay higher wages. So if you see higher wages at union shops it is impossible to know how much is due to unionization and how much is due to the general profitability of the firm.

What do they find?

The analysis finds small impacts on all outcomes that we examine [business survival, employment, output, productivity, and wages]; estimates for
wages are close to zero. The evidence suggests that—at least in recent
decades—the legal mandate that requires the employer to bargain with a certified
union has had little economic impact on employers, because unions have been
somewhat unsuccessful at securing significant wage gains.

Thus the answer is not much. Unions in this period didn't seem to be effective at bargaining up wages and thus don't have much of an impact on firm performance.

But there remains an open question: in cases where unions did seem to win wage concessions was this at the expense of firm performance? I'll try and find evidence next time...

Discussion: Unions?

The debate about the Employee Free Choice Act presents a good opportunity to have a discussion about unions (particularly because OSU does not currently offer a labor economics class - gasp! - something I am actively trying to change). Unions are one of these issues that really divide economists. I am going to try (as I have before) summarize some of the recent economics literature on unions in the coming weeks, but for now a quick synopsis of the pro and con arguments made by economists.

[Full disclosure: I was once a Teamster when I was a UPS delivery person, but OSU faculty are not now represented by a union - though there is a discussion about changing that]

Con: They represent monopsony power that distort labor markets and lead to inefficient outcomes. This leads to higher unemployment and lower mobility.

Pro: Labor markets are asymmetric and employers have undue power over employees who find changing jobs costly - thus they do not necessarily yield efficient outcomes. Unions are an effective way to correct these imbalances.

Now I understand that there are lots of other things that I have not mentioned - but I invite you all to discuss unions and give me your reasons for and against in anticipation of my discussion of the economics literature.