Labor Unions

by Morgan O. Reynolds
About the Author
Although labor unions have been celebrated in folk songs and stories as fearless champions of the downtrodden working man, this is not how economists see them. Economists who study unions—including some who are avowedly prounion—analyze them as cartels that raise wages above competitive levels by restricting the supply of labor to various firms and industries.

Many unions have won higher wages and better working conditions for their members. In doing so, however, they have reduced the number of jobs available in unionized companies. That second effect occurs because of the basic law of demand: if unions successfully raise the price of labor, employers will purchase less of it. Thus, unions are a major anticompetitive force in labor markets. Their gains come at the expense of consumers, nonunion workers, the jobless, taxpayers, and owners of corporations.

According to Harvard economists Richard Freeman and James Medoff, who look favorably on unions, “Most, if not all, unions have monopoly power, which they can use to raise wages above competitive levels” (1984, p. 6). Unions’ power to fix high prices for their members’ labor rests on legal privileges and immunities that they get from government, both by statute and by nonenforcement of other laws. The purpose of these legal privileges is to restrict others from working for lower wages. As antiunion economist Ludwig von Mises wrote in 1922, “The long and short of trade union rights is in fact the right to proceed against the strikebreaker with primitive violence.” Interestingly, those who are expected to enforce the laws evenhandedly, the police, are themselves heavily unionized.

U.S. unions enjoy many legal privileges. Unions are immune from taxation and from antitrust laws. Companies are legally compelled to bargain with unions in “good faith.” This innocent-sounding term is interpreted by the National Labor Relations Board to suppress such practices as Boulwarism, named for a former General Electric personnel director. To shorten the collective bargaining process, Lemuel Boulware communicated the “reasonableness” of GE’s wage offer directly to employees, shareholders, and the public. Unions also can force companies to make their property available for union use.

Once the government ratifies a union’s position as representing a group of workers, it represents them exclusively, whether or not particular employees want collective representation. In 2002, unions represented about 1.7 million waged and salaried employees who were not union members. Also, union officials can force compulsory union dues from employees—members and nonmembers alike—as a condition for keeping their jobs. Unions often use these funds for political purposes—political campaigns and voter registration, for example—unrelated to collective bargaining or to employee grievances, despite the illegality of this under federal law. Unions are relatively immune from payment of tort damages for injuries inflicted in labor disputes, from federal court injunctions, and from many state laws under the “federal preemption” doctrine. Nobel laureate Friedrich A. Hayek summed it up as follows: “We have now reached a state where [unions] have become uniquely privileged institutions to which the general rules of law do not apply” (1960, p. 267).

Labor unions cannot prosper in a competitive environment. Like other successful cartels, they depend on government patronage and protection. Worker cartels grew in surges during the two world wars and the Great Depression of the 1930s. Federal laws—the Railway Act of 1926 (amended in 1934), the Davis-Bacon Act of 1931, the Norris-LaGuardia Act of 1932, the National Labor Relations Act of 1935, the Walsh-Healy Act of 1936, the Fair Labor Standards Act of 1938, various war labor boards, and the Kennedy administration’s encouragement of public-sector unionism in 1962—all added to unions’ monopoly power.

Most unions in the private sector are in crafts and industries that have few companies or that are concentrated in one region of the country. This makes sense. Both factors—few employers and regionally concentrated employers—make organizing easier. Conversely, the large number of employers and the regional dispersion of employers sharply limit unionization in trade, services, and agriculture. A 2002 unionization rate of 37.5 percent in the government sector, more than four times the 8.5 percent rate in the private sector, further demonstrates that unions do best in heavily regulated, monopolistic environments. Even within the private sector, the highest unionization rates (23.8 percent) are in transportation (airlines, railroads, trucking, urban transit, etc.) and public utilities (21.8 percent), two heavily regulated industries.

What have been the economic consequences of unions? In 2002, full-time nonunion workers had usual weekly earnings of $587, 21 percent lower than the $740 earned by union members. H. Gregg Lewis’s 1985 survey of two hundred economic studies concluded that unions caused their members’ wages to be, on average, 14–15 percent higher than wages of similarly skilled nonunion workers. Other economists—Harvard’s Freeman and Medoff, and Peter Linneman and Michael Wachter of the University of Pennsylvania—claimed that the union premium was 20–30 percent or higher during the 1980s. In a recent National Bureau of Economic Analysis study, David Blanchflower and Alex Bryson found a union wage differential of 18 percent, a relatively stable premium from 1973 through 1995.

The wage premium varies by industry and stage of the business cycle. Unions representing garment workers, textile workers, white-collar government workers, and teachers seem to have little impact on wages. But wages of unionized mine workers, building trades people, airline pilots, merchant seamen, postal workers, teamsters, rail workers, and auto and steel workers exceed wages of similarly skilled nonunion employees by 25 percent or more. During the job boom of the late 1990s, the union premium eroded, following a historical pattern. Union wage agreements tend to be relatively rigid for three years, so gains lag behind the more responsive and flexible nonunion sector during a boom. The reverse happens during an employment slump like that of the early 2000s because nonunion wage growth slumps as hiring weakens, while union wage gains march on.

The wage advantage enjoyed by union members results from two factors. First, monopoly unions raise wages above competitive levels. Second, nonunion wages fall because workers priced out of jobs by high union wages move into the nonunion sector and bid down wages there. Thus, some of the gains to union members come at the expense of those who must shift to lower-paying or less desirable jobs or go unemployed.

Despite considerable rhetoric to the contrary, unions have blocked the economic advance of blacks, women, and other minorities. That is because another of their functions, once they have raised wages above competitive levels, is to ration the jobs that remain. The union can discriminate on the basis of blood relationships or skin color rather than auctioning off (openly selling) the valuable jobs to the highest-bidding applicants. Because craft unions such as the carpenters’ and railway unions have had more monopoly control over wage rates and hiring practices than industrial unions such as the auto and steel workers have had, craft unions have had more opportunities to exclude minority workers. Industrial unions have had to organize whoever was hired, and industrial companies have hired large numbers of black workers. The degree of racial discrimination exercised by union officials depends on their ability and willingness to exclude. For example, leaders at the local shop level facing contested elections and turnover in office cannot stray far from median membership preferences, while insulated top union leaders have more discretion.

Economist Ray Marshall, although a prounion secretary of labor under President Jimmy Carter, made his academic reputation by documenting how unions excluded blacks from membership in the 1930s and 1940s. Marshall also wrote of incidents in which union members assaulted black workers hired to replace them during strikes. During the 1911 strike against the Illinois Central, noted Marshall, whites killed two black strikebreakers and wounded three others at McComb, Mississippi. He also noted that white strikers killed ten black firemen in 1911 because the New Orleans and Texas Pacific Railroad had granted them equal seniority. Not surprisingly, therefore, black leader Booker T. Washington opposed unions all his life, and W. E. B. DuBois called unions the greatest enemy of the black working class. Another interesting fact: the “union label” was started in the 1880s to proclaim that a product was made by white rather than yellow (Chinese) hands. More generally, union wage rates, union-backed requirements for a license to practice various occupations, and union-backed labor regulations such as the minimum wage law and the Davis-Bacon Act continue to reduce opportunities for black youths, females, and other minorities.

The monopoly success of private-sector unions, however, has brought their decline. The silent, steady forces of the marketplace continually undermine them. Linneman and Wachter, along with economist William Carter, found that the rising union wage premium was responsible for up to 64 percent of the decline in unions’ share of employment in the last twenty years. The average union wage premium for railroad workers over similarly skilled nonrailroad workers, for example, increased from 32 percent to 50 percent between 1973 and 1987; at the same time, employment on railroads declined from 520,000 to 249,000. By 2002, railroad employment had slipped to 216,000, down 13 percent since 1987, while total nonfarm employment grew 26 percent during the same period. Increased wage premiums also caused declines in union employment in construction, manufacturing, and communications. The silent, steady forces of the marketplace continually undermine labor cartels.

In recent decades, union representation of workers has declined in all private industries in the United States. A major reason is that employees do not like unions. According to a Louis Harris poll commissioned by the AFLCIO in 1984, only one in three U.S. employees would vote for union representation in a secret ballot election. The Harris poll found, as have other surveys, that nonunion employees are more satisfied than union workers with job security, recognition of job performance, and participation in decisions that affect their jobs. And the U.S. economy’s evolution toward smaller companies, the South and West, higher-technology products, and more professional and technical personnel continues to erode union membership.

In the United States, union membership in the private sector peaked at 17 million in 1970 and had fallen by nearly half—to 8.8 million—by 2002. Barring new legislation, such as a congressional proposal to ban the hiring of nonunion replacement workers, private-sector membership will likely fall from 8.5 percent to 5–6 percent by 2010, no higher than the percentage a hundred years ago. While the unionization rate in government jobs may decline slightly from 37.5 percent, public-sector unions are on schedule to claim an absolute majority of union members within the next few years, thereby transforming a historically private-sector labor movement into a primarily government one. Asked in the 1920s what organized labor wanted, union leader Samuel Gompers allegedly answered, “More.” Today’s union leader would probably answer, “More government.” That answer further exposes the deep, permanent conflict between union members and workers in general that inevitably arises when union-represented employees are paid monopoly prices for their services.

Assuming that unions continue to decline, what organizations might replace them? “Worker associations” that lack legal privileges and immunities and that must produce services of value to get members may fill the need. Such voluntary worker associations could negotiate labor contracts, serve as clearinghouses for workers to learn what their best alternatives are, monitor administration of fringe benefit plans, and administer training and benefit plans. Worker associations could also institute legal proceedings against collusion by employers, as the Major League Baseball Players’ Association does so successfully for free agents. Such services could be especially valuable to the immigrant, minority, and female workers now dominating entry into today’s labor force.

Unions and Exploitation of Labor, Capital, and Taxpayers

Morgan O. Reynolds

Conventional wisdom about labor exploitation can be summed up in two propositions:

Workers and employers are natural opponents; employers have a powerful advantage and they pay employees less than they are worth.

Public policy must tilt toward unions to help employees who are otherwise at the mercy of employers in wage bargaining.

The public has considerable sympathy for the “underpayment” thesis and even for unions as a corrective force. Consider this survey question: “Do you think that the interests of employers and employees are, by their very nature, opposed; or are they basically the same?”


Opposed Same

1939 Roper/Fortune 25 percent 56 percent
1994 Roper ASW 45 percent 40 percent


Yet economists point out that the U.S. labor market is highly competitive, with more than five million employers competing for labor, entrepreneurs establishing new businesses daily, and private industry hiring four million persons per month. A “powerful” employer cannot depress labor prices below the value of workers’ marginal (incremental) productivity for long because other firms are attracted by the cheaper labor. The new firms hire these workers and thereby put upward pressure on the prices paid to labor until further profit from the initial exploitation of isolated labor disappears. Also, if employer clout depresses wage rates in one location, labor supply will decrease as mobile workers leave, again putting corrective, upward pressure on wage rates.

Even if monopoly demand over labor were common in the U.S. economy, policy in favor of unions would not logically follow. Promoting union monopolies on labor to counter employer monopoly on labor demand establishes “bilateral monopolies.” Alternative policies that would directly address any lack of competition among employers would include removing government barriers that block new employers from entering an industry or applying antitrust law against employer cartels to fix wage rates.

Even the historical image of corporate power dominating isolated “company mining towns” is mostly fiction. Nineteenth-century Appalachian coal miners, for example, were highly mobile, and literally hundreds of companies competed in the same coal and labor markets in both company-owned and independent towns. In fact, extensive mineral deposits mined by a single company are rare.

More generally, what is at issue is the potential for owners of cooperating, complementary inputs to exploit and underpay each other. These situations are highly limited. It is much easier for a labor organization to exploit vulnerable owners of ports, mines, plants, utilities, and other massive fixed facilities than the reverse. Because labor is the most versatile and flexible input, it is much harder for owners of large fixed-capital investments to exploit labor than for labor unions to exploit business investors.

Sports teams at both the collegiate and professional levels offer rare examples of durable underpayment. Today, colleges still maintain a successful cartel to suppress the pay of college athletes below competitive levels. While there are tremendous advantages to cheating, thereby spawning “under-the-table” benefits to recruit superior athletes, the NCAA system suppresses member violations by sanctions and ultimately threatening termination of academic accreditation, thereby cutting off the elaborate network of subsidies each college depends on. By contrast, rival leagues, court rulings, and collective bargaining have broken the old system of noncompetitive salaries for professional athletes in team sports such as football, basketball, and baseball in favor of approximately competitive labor markets.


About the Author

Morgan O. Reynolds is a former chief economist at the U.S. Department of Labor and a professor emeritus of economics at Texas A&M University.


Further Reading

Blanchflower, David, and Alex Bryson. “Changes over Time in Union Relative Wage Effects in the UK and the US Revisited.” NBER Working Paper no. 9395. National Bureau of Economic Research, Cambridge, Mass., 2002.
Epstein, Richard A. “A Common Law for Labor Relations: A Critique of the New Deal Labor Legislation.” Yale Law Journal 92 (July 1983): 1357–1408.
Freeman, Richard B., and James L. Medoff. What Do Labor Unions Do? 1984. Available online at: http://papers.nber.org/papers/w11410.
Harvard Journal of Law and Public Policy 13 (Spring 1990). Entire issue devoted to labor law.
Hayek, Friedrich A. von. The Constitution of Liberty. Chicago: University of Chicago Press, 1960.
Hutt, William H. The Strike-Threat System: The Economic Consequences of Collective Bargaining. New Rochelle, N.Y.: Arlington House, 1973.
Lewis, H. Gregg. Union Relative Wage Effects. Chicago: University of Chicago Press, 1986.
Linneman, Peter D., Michael L. Wachter, and William H. Carter. “Evaluating the Evidence on Union Employment and Wages.” Industrial and Labor Relations Review 44 (October 1990): 34–53.
Marshall, F. Ray. The Negro and Organized Labor. New York: Wiley, 1965.
Reynolds, Morgan O. Making America Poorer: The Cost of Labor Law. Washington, D.C.: Cato Institute, 1987.
Troy, Leo. “Is the U.S. Unique in the Decline of Private Sector Unionism?” Journal of Labor Research 11 (Spring 1990): 111–143.

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