What Do Unions Do for Economic Performance?

Abstract

Twenty years have passed since Freeman and Medoff's What Do Unions Do? This essayassesses their analysis of how unions in the U.S. private sector affect economic performance- productivity, profitability, investment, and growth. Freeman and Medoff are clearly correctthat union productivity effects vary substantially across workplaces. Their conclusion thatunion effects are on average positive and substantial cannot be sustained, subsequentevidence suggesting an average union productivity effect near zero. Their speculation thatproductivity effects are larger in more competitive environments appears to hold up, althoughmore evidence is needed. Subsequent literature continues to find unions associated withlower profitability, as noted by Freeman and Medoff. Unions are found to tax returnsstemming 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 capitaland from firm-specific advantages. Lower profits and the union tax on asset returns leads toreduced investment and, subsequently, lower employment and productivity growth. There islittle evidence that unionization leads to higher rates of business failure. Given the decline inU.S. private sector unionism, I explore avenues through which individual and collective voicemight be enhanced, focusing on labor law and workplace governance defaults. Substantialenhancement of voice requires change in the nonunion sector and employer as well asworker initiatives. It is unclear whether labor unions would be revitalized or furthermarginalized by such an evolution.

Keywords: investment, profits, productivity, economic performance, unions, growth, collective voice

JEL Classification: J5, L1, D2