Private Sector Union Density and the Wage Premium: Past, Present, and Future

Abstract

This paper examines the relationship between private sector union density and the wage premium, identifying where we have been and where we may go. The starting point is that labor unions are in decline and now represent a small proportion of the private sector workforce. This trend poses a dilemma for society, workers, and public policy. Although the effects of unions in the workplace vary enormously, the evidence suggests that on balance unions are detrimental to company performance and economic efficiency. But union representation and collective bargaining provide workers with varying degrees of workplace democracy, collective voice, monitoring of working conditions, protection from discrimination, and enforcement of contractual provisions. For the 90% of private sector workers not unionized, effective worker voice and participation may be provided at less than optimal levels, with substantial reliance instead on governmental regulation, workplace mandates, and a litigious enforcement process.

There are a variety of reasons why unions are in decline. In this paper, we focus on the link between what is surely one of unions' principal functions, raising wages and other forms of compensation, and the consequent decline in their membership and coverage. We conclude that unions (and society) are caught in a paradox. As long as the U.S. remains a competitive open economy with a decentralized, partially organized collective bargaining system, the attempt by unions to acquire and maintain high wages ensures that the union sector will remain small. Similar to Freeman and Medoff, we argue that the "monopoly" face of unions is putting organized labor out of business, resulting in too little "collective voice." From society's point of view, the monopoly face should be blunted and the voice face emphasized. Tweaking the current system of labor law is unlikely to accomplish to a satisfactory degree the "less monopoly/more voice" outcome. Rather, we discuss the desirability of a more fundamental shift involving "conditional deregulation" and/or a change in the default workplace governance structure. The goal of such fundamental reform is to enhance collective voice in the largely nonunion private sector, while at the same time constraining those forms of worker rent seeking deleterious to economy-wide economic performance.