There's an interesting discussion in the comment section of Matthew Yglesais' blog on the economic impact of unions. One comment that caught my eye claims that:
The literature shows this about union vs. non-union shops: unions shops increase productivity (happier, more motivated workers, with a formalized way to participate in their workplace), but, not surprisingly, a decrease in a company's EARNINGS--which, of course, is a big deal to a company. That's what the tug of war between capital and labor is all about--yeah, the more the union takes for its workers, the less the company has--that's a very real thing.
The analysis is about half right. First, as I documented in my article, Privately Ordered Participatory Management: An Organizational Failures Analysis, there is very little persuasive evidence that happiness is significantly correlated with productivity. To the contrary, the bulk of the evidence is that there is no such correlation. Second, the most recent evidence is that unionization does not have an economy-wide effect on productivity, although it may have a positive effect in some cases. Barry Hirsch reports that:
Twenty years have passed since Freeman and Medoff's What Do Unions Do? This essay assesses their analysis of how unions in the U.S. private sector affect economic performance - productivity, profitability, investment, and growth. Freeman and Medoff are clearly correct that union productivity effects vary substantially across workplaces. Their conclusion that union effects are on average positive and substantial cannot be sustained, subsequent evidence suggests an average union productivity effect near zero. Their speculation that productivity effects are larger in more competitive environments appears to hold up, although more evidence is needed. Subsequent literature continues to find unions associated with lower profitability, as noted by Freeman and Medoff. Unions are found to tax returns stemming from market power, but industry concentration is not the source of such returns. Rather, unions capture firm quasi-rents arising from long-lived tangible and intangible capital and from firm-specific advantages. Lower profits and the union tax on asset returns leads to reduced investment and, subsequently, lower employment and productivity growth. There is little evidence that unionization leads to higher rates of business failure. Given the decline in U.S. private sector unionism, I explore avenues through which individual and collective voice might be enhanced, focusing on labor law and workplace governance defaults. Substantial enhancement of voice requires change in the nonunion sector and employer as well as worker initiatives. It is unclear whether labor unions would be revitalized or further marginalized by such an evolution.
Having said all that, however, I note that there is a fairly strong theoretical case to be made using neo-institutional economics that private sector unions can have a transaction cost-minimizing effect. See my post The LA Strikes and the Economic Analysis of Unions. The gist of the argument follows:
Labor contracts are subject to moral hazard problems on both sides. Workers shirk—providing less effort than that to which they have agreed. Owners behave opportunistically—providing fewer rewards than promised. Preventing such shirking is one of the principal functions, in economic terms, of any labor relations system. Hence, at least among lawyer-economists in the transaction costs branch of law and economics, the once widely-held view that unions exist to capture monopoly rents for workers in the form of higher wages and superior benefits has given way to an understanding that unions play an important role in reducing transactions costs by constraining strategic behavior by management. Because workers value job security, firms can obtain lower labor costs if they can credibly promise to refrain from opportunistic conduct. One way of bonding that promise is to sign a collective bargaining agreement with a union. Collective bargaining transforms the decisionmaking process from unconstrained management prerogative to limited managerial discretion bounded by claims of right sounding under the agreement. The seniority system, with its ports of entry, internal promotion ladders, and protection from lay-offs, offers job security. Union monitoring helps ensure compliance by the firm with its contractual obligations. Grievance procedures allow for dispute resolution. Collective bargaining thus becomes a burden on the enterprise, in that it raises the transaction costs associated with decisionmaking processes and limits management discretion. Yet, because that burden serves to make the firm’s promises to its employees more credible, it is one rational managers would accept. (Putting the theory into practice, of course, has been a problem. Unions have been plagued by internal agency costs and been a source of social costs.) For a more detailed explanation see my articles Employee Involvement in Workplace Governance Post-Collective Bargaining and Corporate Decisionmaking and the Moral Rights of Employees.
