The Effect of Unions on Employment and Wages

We are seeing a lot of heated rhetoric here in Wisconsin about the governor and unions. The clearest treatment I have read of the effect of unions is Chapter 20 in Henry Hazlitt\’s book Economics In One Lesson. Jeffrey Miron, a Senior Lecturer at Harvard University and Senior Fellow at the Cato Institute, provides a nice, compact blog post that is along the same lines as Hazlitt.

In brief, both Hazlitt and Miron argue that unions have two effects, they transfer money from the general public to union members and they increase unemployment. These effects are a natural and unavoidable outcome of any union that negotiates to increase wages and/or benefits above those that an unfettered market would provide. When unions achieve higher wages or benefits for their members, they raise the cost of labor to the employer. The employer has a few choices.

1.    Increase the price of their product to cover the added costs.
2.    Hold prices stable and absorb the added costs as reduced profit.
3.    Invest relatively more in capital in order to reduce the need for labor.
4.    Shift production to a location with lower labor costs.

Option #1 will pass the extra labor costs on to the market – everyone purchasing the product will pay more. This shifts money from customers to union members. The money that the customers would have spent elsewhere is now in the union members\’ pockets. This reduces employment in other areas in the economy because consumers have less money to spend there.

Option #2 shifts money from investors and owners to union members. The money that the investors would have spent elsewhere or that the owners would have re-invested in their business is now in the union members\’ pockets. This reduces employment in other areas in the economy because less money is being to spend there.

Options 3 and 4 directly reduce employment for union members.

Thus we see that if unions succeed in raising labor costs above their natural level the country as a whole will have higher unemployment one way or the other. I fail to see how that is a morally acceptable position. I believe high unemployment creates far worse social problems than lower wages for union members. The damage it does to individual lives is far higher than the damage caused by lower than desired income. If I had to choose between a policy that increases employment or one that transfers money into a relatively small number of pockets at the cost of higher unemployment, I would have little difficulty choosing.


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