Tuesday, February 03, 2009

UNIONS AND UNEMPLOYMENT

After an intensive debate about fiscal stimulus that would be utilized to cure the recessionary downturn of the current year, there is a wide debate whether President Obama would extend the role of unions in the U.S. While President Obama agreeably supports the extension of the role of labor unions (link), there are several doubts that need to be discussed.

First, there is a significant panel of empirical evidence showing that high level of unionzation tarnishes the growth of potential productivity which is essential to the long-term increase in the standard of living. In countries of the Continental Europe such as Austria, Germany and France, there is an obvious and firm evidence showing strongly negative correlation between the level of unionization and the rate of unemployment. The cost of unionzation is usually beared by grimmy prospects of future youth employment. Data provided by Eurostat (link) fosters the hypothesis that a somewhat negative correlation between unionization and employment rate exists. On the other hand, in Anglo-Saxon countries, where labor markets are more flexible and elastic, the rate of unionization is lower than in Norway, Sweden and Netherlands and the rate of unemployment is lower in all age groups. The difference can be explained by the fact that in Continental and Nordic countries, government fosters the bargaining network between government, employer associations and trade unions while there is significantly less government engineering of labor market in Anglo-Saxon countries such as the U.S., Canada and the UK. The OECD data (link) on hourly earnings are a strong evidence respectively.

Second, the bargaining framework of union negotiation depends on the elasticity of labor supply. If the labor supply curve is more inelastic, it is also more likely that unions will gain an advantage in seeking an anticipated rent and regulate the market for particular professions by restricting the entry and raising the wage ceiling. If unions bargain the rent, lower rate of employment will be an inevitable result of this act.

And third, president Obama says that "you cannot have a strong middle class without a strong labor movement." Unionization is indeed the long-term consequence of higher unemployment because higher union wages exceed competitive market wage rates which causes job losses and unemployment which is higher than hypothetical one. Larry Summers nicely outlined the consequences of unionization regarding welfare, employment and wages (link). It is also important to know the union membership has been declining. The union power of United Auto Workers in the U.S auto manufacturing industry is significant and it also contributes to the bailout problem given high labor cost. Since 1970s, the membership of UAW declined by more than one third. Consequently, foreign investors rather located the production activity in non-union plants in Southern U.S. Recently, professor Becker discussed the issue and perspectives of union membership (link). However, it should be noted that globalization and the rising mobility of labor has been slashing the bargaining power of unions significantly. Interestingly, union membership peaked in 1954 when it reached 28 percent of total employment and has had declined ever since with no reversal after president Reagan won the battle with PATCO (link).

Even though, president Obama's pro-union efforts may reverse the union membership trend, globalization and competitive regional and global labor markets will nonetheless diminish the power of domestic unions. While, in fact, there is no doubt that the long-term cost of unionization is higher rate of unemployment and employment rigidity that gives more economic power to the unions and derails productivity growth and freedom to choose.

1 comment:

Kenzie June said...

this was a good read, thanks.