A Primer on What Unions Do to the Economy

January 12, 2012

Unions create a substantial distortion within a market-driven economy.  To raise their members' pay unions must control the supply of jobs in a company or an industry.  Unions must prevent employers from hiring anyone without their permission.  If they can do this, they can expect the laws of supply and demand to work in their favor.  Holding down employment drives up union members' wages.  In other words, successful unions are job cartels, says James Sherk, a senior policy analyst at the Heritage Foundation.

  • Unions restrict competition for labor by limiting employers' hiring options.
  • Because unions often incorporate political efforts by forming interest groups and lobbying, they often employ government regulations and red tape to restrict market access to union-friendly businesses.
  • The union wage premium amounts to between 8 and 12 percent -- this pay differential over market rates reduces the total number of workers a business can hire (average businesses hire 5 to 10 percent fewer after unionization) and passes on higher costs to consumers.
  • Unions act as an anchor on corporate investment: because they tend to demand higher wages when businesses do well, businesses are less likely to allocate resources to investments that would lead to that end. This results in a 15-percent loss in physical capital, and research and development.

Fortunately, the market inefficiencies that are introduced by unions are under constant attack from an increasingly communicative and competitive global economy.

  • Within the United States, competition between states to attract employers, specifically between largely unionized states in the north and right-to-work states in the south, has caused a gradual migration of jobs towards the south.
  • Just as foreign imports damaged the United Auto Workers' stranglehold on American car manufacturing, increased international trade creates competition that undermines unions.

This growing competition offers only marginal comfort, however, because government-employed unions are largely unaffected by competition.  Government services do not face the same competition pressures that the private sector does and have significantly deeper pockets provided by tax revenues.  Until public-sector unions disappear, taxpayers and consumers will continue to pay the price.

Source: James Sherk, "The Union Difference: A Primer On What Unions Do To The Economy," Capital Research Center, January 3, 2012.

 

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