How Labor Unions Affect Our Economy

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Views on labor unions are normally predicated on already existing economic views. Demand side economists normally support unions, while supply side economists do not. The basic variable is the market as a rational system of relations. If you believe the market always makes rational decisions about wage and price allocation then unions are seen as market distorters. If you believe on the contrary that the market is not always fair and, therefore, irrational then unions are normally seen as necessary.

Two Views

Supply side economists hold that the market is the most rational institution in economic life. There is a market for labor just as there is a market for beans and pork. Workers get paid what the market requires at any given time -- skills are marketable objects. To “artificially” raise wages is to distort the market and invite unemployment. Demand side economists argue that markets create unemployment on their own, and generally cannot use all the skills available to it. Therefore, unions are necessary because they protect the rights of workers, raise pay and benefits and force employers to be more fair. This reduces unemployment because these higher wages are spent and create jobs.

The Positive Affect of Unions

Those arguing for the importance of labor unions normally want to see demand stimulated by higher wages. Economists Lawrence Mishel and Matthew Walters of the Economic Policy Institute hold that unions increase wages by a factor of almost 18 percent. Union members have better benefits, more time off, better health plans and pension plans. In general, unions do better with lower skilled workers than others, and hence eliminate some inequality. Unions also improve benefits rather than wages more markedly, but all of this ends up spurring demand and improving the economic life of all union members. The point is that those arguing for unions hold that the economic affect is to stimulate demand, create contented workers and equalize labor with management.

Who Pays for Union Benefits?

Economic writer James Aune writes that in those businesses with strong unions, management receives pay of only about 80 percent of non-union firm managers. In Europe, this difference is even higher, with managers getting five times the salary in non-union firms than unionized ones. In addition, unionized firms higher fewer managers in general. Aune's conclusion is that union members get more money and benefits, and this comes directly out of the salaries of owners, managers and executives. In other words, unionization is a vehicle for equality and the recognition of equal pay for equal work.

The Negative Affect of Unions

Economists Richard Vedder and Lowell Galloway, writing in the "Journal of Labor Research," argue that unions are destructive. In general, their argument is that unions harm productivity. Unions are directly responsible for the destruction of the American automotive, mining and steel industries since their demands and lack of productivity forced many firms to relocate overseas or invite foreign competition. Regardless of the material improvements of labor within unions, the aggregate affect has been totally negative.

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