Do Unions Raise Wages?

In this lecture, we're going to be looking at the question, "Do unions raise wages?"

For workers as a whole, the answer appears to be, "No." Just to give a bit of evidence -- for example, the United States and Switzerland are two major economies with low unionization rates: 11% and 18%, respectively. In many European countries other than Switzerland, unionization rates vary between 30% and 80%, much higher. Yet despite these wide variations, the United States and Switzerland have equally higher -- higher wages than these other unionized countries. Even if unions can't raise wages for workers as a whole, we might be interested to know whether unions can raise the wages of some workers. And here the answer appears to be "Yes." Unionized electricians for example, typically have wages that are 10% to 15% higher than similar non-unionized electricians.

But how do unions raise wages? Let's look at our model of the labor market to understand this. Here's our model of the labor market with demand and supply as usual. Unions can raise wages in some jobs by reducing the supply of labor to that job. In other words, a union can act like a cartel. Just as OPEC raises the price of oil by reducing the supply of oil, a union can raise the wages of electricians by restricting or reducing the supply of electricians. Unions, however, can also lower wages.

Let's take a look at that. Unions can lower wages in two ways. First, unions raise the wages of electricians by reducing the number of workers who can get jobs as electricians. Those workers don't disappear, however. They seek work in other sectors of the economy, pushing wages in those other sectors down. Second, some national unions can become so powerful that they can shut down entire industries and severely reduce the efficiency of an economy.

In Great Britain in the 1970s, for example, the British train and trucking unions shut down large parts of the economy leading to mass shortages. When the garbage collectors went on strike, garbage piled up in central London. Tourists were not impressed with the rats. Even the gravediggers went on strike with unpleasant consequences. Voters, upset with the chaos, elected Margaret Thatcher in 1979 and Thatcher greatly restricted the power of these national unions. So unions can increase or decrease wages. The increase is immediately evident in union contracts. The decrease is longer term and harder to see.

First, unionized sectors have fewer workers pushing workers into other sectors. There are higher real prices to consumers, makes industries less competitive, and work stoppages and strikes can slow an entire economy down.The bottom line is that unions can raise the wages of certain classes of workers, but unions are not the fundamental reason why wages are high in wealthy countries. Keep in mind by the way, that unions are not just about wages. Unions can be useful in protecting workers from arbitrary abuses and they can help in maintaining good employer relationships.

One final point: when thinking about unions, we often think about someone like this, a blue-collared construction worker. Well, what about this guy, a physician? Do these two people look similar to you? They should. Both are represented by unions. Professional associations, like the American Medical Association, are really unions that represent white-collar workers, and as with the electricians union, they try to raise the wages of their members by restricting supply.

The AMA, for example, keeps a tight lid on the number of new medical schools. It lobbies to make it difficult for foreign doctors to work in the United States, and it tries to prevent competition from substitutes for physicians, like nurse practitioners. The AMA argues that these restrictions increase safety and benefit consumers. Maybe. But you should always be a little bit skeptical when someone claims that their high wages are in your benefit.

Okay that's it for unions. Next, we'll turn to the issue of discrimination in the workplace.