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September 03, 2003

Unions Strengthen the Economy

Before I hear the usual rightwing ramble about unions sinking the economy and driving jobs overseas, note two basic realities. First, look at Sweden, a country where almost all workers are unionized yet it has lower unemployment than the United States, better health care and more leisure for its workers. More dramatically, look at southern states in the US where unions are almost non-existent, yet jobs are hemmoraging overseas.

The myth that unions cost jobs comes from the fact that manufacturing was heavily unionized when the first bout of global competition hit in the 1970s. Today, with large chunks of manufacturing in the right-to-work South, there are still massive job loss despite lack of unions. We are seeing that if the game is who can drive wages down the most, the US can't go low enough to compete with China.

So the only answer is increasing productivity and innovation. And unions drive growth by improving both. Now, it's not as simple as that in all situations, since different employer strategies and industrial environments create varying outcomes, but when structured correctly, unions not only benefit individual workers, they strengthen the overall economy. I'll sketch out the dynamics researchers have noted driving this result, but for more empirical and theoretical detail, check out the classic book on the subject, Richard Freeman and James Medoff's What Do Unions Do. As well, you can work through these studies on the web (pdfs so they sometimes load slowly):

  • Trade Unionism and Growth: A Panel Data Study
  • The Decline or Expansion of Unions: A Bargaining Model With Heterogeneous Labor
  • Unions, Training and Wages: Evidence for British Men
  • Opportunities and Dilemmas: Labour and Regional Innovation
  • Training and Unions
  • Sectoral Strategies of Labour Market Reform

    The commonest metaphor for how unions strengthen the economy is that they force employers on to the "high road" of production-- concentrating on innovation rather than sweating workers, promoting skilled work versus unskilled low-wage labor, and encouraging investment in long-term productivity rather than short-term profits. Especially in a world of global competition, "low road" companies will inevitably lose to firms in developing nations which can always undercut them on price, so forcing companies into long-term investments in "high road" production is the only way US economic growth will sustain itself in the longer term.

    This operates in a few different ways

    Taking wages out of competition : Because unions often operate across multiple firms, they deter employers from seeking to gain advantages purely by who can slash wages and instead forces companies to compete on innovation. In the absence of unions, the availability of low-wage exploitation will encourage misdirection of to less productive firms that just are willing to abuse their workers.

    A Voice in Production: With a union, workers can gain a voice to improve production without worrying that they are merely contributing to their own loss of a job. Without union, workers fear that innovation will lead to speedups and layoffs, so itís often more in their interest to privately exploit knowledge to ease the workload than share it with the employer. But in the union context of a labor contract, unions can be guaranteed a share in productivity gains so unions encourage more commitment to increasing productivity.

    Lowering turnover and improving skills: A standard conservative argument is that anyone who doesn't like the work conditions is always free to leave. While this is technically true, it's a pretty narrow choice to give someone. Far better is the democratic alternative that unions provide of workers being able to change work conditions through contract negotiations. This option of "voice" versus "exit" options -- as it's often referred to in labor analysis -- encourages less worker turnover and improves skills within a firm.

    Increasing capital investment: While employers don't have to like the higher wages paid to union workers, it forces them to invest in better technology and more capital to make the high wages pay for themselves. Firms can afford to use outdated technology when sweatshop workers make up for low productivity, but when you are paying union wages you rationally have to improve productivity in order to compete. Such higher productivity is key to growth across the economy and encourages new employment in the technology fueling capital investment in the unionized firms.

    Multi-firm cooperation: Partly because wages are taken out of competition, multi-firm unions have pioneered coopration between firms, especially within regions, in cooperation on investments in "public goods" such as worker training and other services improving productivity at all firms. Check out this list of such partnerships across the country. All of them encourage greater productivity and innovation in industries needing to compete in the global marketplace.

    Finally, unions encourage Keynesian growth strategies by raising incomes of workers and thereby raising aggregate demand for goods, fueling a virtuous cycle of growth. This effect is lessened within any single country due to global trade (i.e. higher wages may just lead to higher imports) but it is salient on a global level. As we see wage pressures downward not just in the United States but even some developing nations like Mexico and Turkey, it's easy to see the culprit being low-wage China where labor unions are banned and wages are forced down to the minimum.

    Conservatives spend a lot of propaganda effort trying to convince workers that a union contract raising their wages will somehow make them poorer. It's a nice rhetorical trick but if you read through the labor market literature or just apply common sense, the right's arguments don't make sense.

    Forcing companies to compete based on innovation rather than worker exploitation is the best way to force them to invest in long-term growth. Sweatshops will inevitably go off shore in any case, so the rhetorical lure that we can slash wages as a route to prosperity is just ridiculous. Stronger unions, smarter public investments and more industry cooperation to improve skils is a far better alternative to build economic growth.

    Posted by Nathan at September 3, 2003 02:48 PM