This is the second part of a series of posts responding to Matt Steinglass at the Economist, who put forward some common progressive arguments in favor of more unionization recently. To understand the big picture problem with the argument for more unions, it’s useful to look at the reasons why unions have died out in the first place. One common explanation is that the most highly unionized industries, like manufacturing, have shrunk, and that unionization was simply taken along for the ride. This is not the case however. As Barry Hirsch details, while overall manufacturing employment fell from 20.1 million from 1973 to 15.6 million in 2006, nonunion manufacturing employment rose by 1.5 million. A similar patter persisted in the other main union industries of construction, and transportation/communication/utilities: union employment fell while nonunion employment rose. The graphs below, from Hirsch, tell the story pretty clearly:
If declining industries is not the cause then what? Hirsh identifies 3 main explanations for the decline of unionism: competitive, structural, and institutional. Ultimately, he provides a convincing argument that the fall of unionism is due to a more competitive and dynamic economy. Part of the problem, he argues, is that collective bargaining slows firms down:
“Were changes in the economic environment very gradual and competitive pressures weak, a formal and highly deliberate union governance structure might pose few problems. The costs of deliberate or sluggish union governance, however, increase with the speed of change and the degree of competition. New information is constantly coming to a firm and its workers and it is prohibitively costly. to have explicit contract terms for every possible contingency. Revising formal contractual terms is costly. Although many collective bargaining agreements have broad management rights clauses, formalized contractual governance limits flexibility and managerial discretion in union companies. “
A related problem is that by cartelizing labor, unions raise wages above the competitive level. The more competitive a firm’s market, the less they will be able to raise price in response to higher wages, and the more costly unionization is in terms of lost employment. For both reasons it is difficult more difficult for unionization to exist in a competitive and dynamic economy.
A common counterargument to this, which Matt makes, is to point to the high employment and unionization of the 50s and 60s as evidence that they can co-exist. But the economy was much less dynamic and competitive than it was today. As detailed by Brink Lindsay in Nostalgianomics, labor market competition in that time period was limited by discrimination against minorities and women, and strict immigration restrictions. Goods market competition was limited by government policy like tariffs and price controls, and a much lower level of global competition than you have today. Despite this, strong economic growth was possible due to lots of long-hanging productivity fruit and innovation.
Today low unemployment can’t co-exist with high unionization of the kind we have in the U.S. because the world, and especially the U.S., is more competitive and dynamic. I think an implicit argument made by some, although not necessarily Matt, is that we should be willing to give up the dynamic and competitive economy in exchange for more unionization. But aside from being good for all the reasons detailed in Nostalgianomics (free trade, less discrimination, and more immigration are good things), a competitive and dynamic economy is extremely important. As Tyler Cowen argues in The Great Stagnation, we’re out of low-hanging fruit like we used to have, and so we can’t afford to give up the economic growth we do have by attempting to decrease labor market and goods market competition enough that unions can thrive again.