Unionization and Inequality

by Henry Farrell on June 28, 2011 · 3 comments

in Policy,Political Economy

Ramesh Ponnuru argues that the relevant social science suggests that US policy makers should not try to reverse the decline of unions.

Underlying this dispute … is a fundamental difference in perspective about the decline of unions. Liberals fear it will lead to the immiseration of the middle class. Conservatives tend to see it as inevitable and beneficial, because unions undermine the competitiveness that modern economies require.

In support of this claim, he refers to work by Henry Farber and Bruce Western.

[The liberal] storyline gets one thing right: Government policy did have a lot to do with the decline of unions. But it wasn’t labor law that mattered. In a study of the decline of unions between 1973 and 1988, economist Henry Farber and sociologist Bruce Western found that the chief reason was that nonunionized companies grew faster than unionized ones. Employment at unionized companies dropped by 2.9 percent per year while employment at nonunionized companies rose by 2.8 percent a year. Another paper by the same authors confirms that the union elections overseen by the NLRB were a sideshow: If the NLRB had held no unionization elections since 1972, the percentage of Americans in unions would have dropped by only an additional 1.7 percent. … Government abetted the decline by encouraging competition among companies:

This is a reasonable summation of their findings, although Bruce Western, in a recent paper with Jake Rosenfeld appears to have changed his mind in the intervening years, noting that “an influx of corporate donations influenced policymakers to oppose pro-union reform of labor law in the 1970s” and that “[p]olitical defeats in the 1970s and 1980s yielded an ‘enervated’ labor law that enabled employers to block organizing campaigns and weaken existing unions.” Perhaps more to the point, Western and Rosenfeld provide substantial supporting evidence for the ‘immiseration of the middle class’ thesis that Ponnuru is seeking to disprove. Ponnuru’s claim is that:

The shift toward a more competitive economy has not hurt workers in general: Total employee compensation as a share of the economy held fairly steady during the second half of the last century even as unions were shrinking. (It’s true that wages as a share of the economy fell, but that was a result of the increased cost of benefits.) The shift has, however, increased inequality among workers, with more rewards going to those with higher skills.

However, ‘workers in general’ seems a rather unusual proxy for ‘immiseration of the middle class’ given the high degree of variation in employee compensation (those in the highest income segments, where inequality has increased most dramatically since the late 1980s, cannot plausibly be described as ‘middle class’). Nor is inequality, as Ponnuru seems to suggest, the product of more money going to those with higher skills. Western and Rosenfeld’s figures suggest that the decline of unions has been just as important a factor as education in explaining the rise of inequality among men.

Counting the union and nonunion wage effects, deunionization explains about a third of the rise in men’s earnings inequality. Increasing returns to education and increasing wage inequality among highly educated workers explains a similar share of the rise in wage inequality. Among women, union decline explains about a fifth of the rise in wage inequality. Rising educational inequality in pay explains nearly twice as much. In short, the effects of deunionization on inequality are only half as large as the effects of education for women, but union and education effects are equally large for men.

While some of the association between union decline and inequality may be caused by the confounding factor of “technological, organizational, and institutional changes that eliminated rents and fueled deunionization,” Western and Rosenfeld find that:

The analysis suggests that unions helped shape the allocation of wages not just for their members, but across the labor market. The decline of American labor and the associated increase in wage inequality signaled the deterioration of the labor market as a political institution. Workers became less connected to each other in their organizational lives, and less connected in their economic fortunes. The de-politicization of the American labor market appears self-reinforcing: as the political power of organized labor dissipates, economic interests in the labor market are dispersed and policymakers have fewer incentives to strengthen unions or otherwise equalize economic rewards.

In short, there is good prima facie support for the claim that deunionization has hurt the middle class by contributing to a particularly top-heavy form of increased income inequality, from an author whom Ponnuru cites and presumably takes seriously. Very likely he wasn’t aware of this recent work. Still, it would be good to see him respond to this, perhaps also explaining why he seems to think that ‘workers in general’ and ‘the middle class’ are interchangeable terms. It’s nice to see academic work being cited in policy arguments – but it’s nicer again by far to see advocates citing work that goes against their preferred policy position (and dealing with it as best they can) as well as work that seems to support it.

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