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Reason Foundation

New Report Challenges Economic "Benefits" of Labor Unions

Leonard Gilroy
May 28, 2009, 5:33pm

Our friends at the Heritage Foundation released a handy primer last week examining myths vs. facts on unions that's well worth a read. The main report itself offers a great distillation of the theory and practice of labor cartels, and it also includes short summaries of over three dozen academic journal articles on the subject. Here's the main takeaway:

Unions simply do not provide the economic benefits that their supporters claim they provide. They are labor cartels, intentionally reducing the number of jobs to drive up wages for their members.

In competitive markets, unions cannot cartelize labor and raise wages. Companies with higher labor costs go out of business. Consequently, unions do not raise wages in many newly organized companies. Unions can raise wages only at companies that have competitive advantages that permit them to pay higher wages, such as successful R&D projects or long-lasting capital investments.

On balance, unionizing raises wages between 0 percent and 10 percent, but these wage increases come at a steep economic cost. They cut into profits and reduce the returns on investments. Businesses respond predictably by investing significantly less in capital and R&D projects. Unions have the same effect on business investment as does a 33 percentage point corporate income tax increase.

Less investment makes unionized companies less competitive, and they gradually shrink. Combined with the intentional efforts of a labor cartel to restrict labor, unions cut jobs. Unionized firms are no more likely than non-union firms to go out of business--unions make concessions to avoid bankruptcy--but jobs grow at a 4 percent slower rate at unionized businesses than at other companies. Over time, unions destroy jobs in the companies they organize. In manufacturing, three-quarters of all union jobs have disappeared over the past three decades, while the number of non-union jobs has increased.

No economic theory posits that cartels improve economic efficiency. Nor has reality ever shown them to do so. Union cartels retard economic growth and delay recovery from recession. Congress should remember this when considering legislation, such as EFCA, that would abolish secret-ballot elections and force workers to join unions.

Leonard Gilroy is Director of Government Reform


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