Competition key to determining effects of increased unionization

Ever since “Striketober” last year, unions have been making headlines. There’s been a continual drumbeat of attempts to form unions at Starbucks cafes, Amazon logistics centers and Apple stores. The media attention crescendoed last week after railway companies and railway unions came to an 11th-hour provisional agreement that may have headed off a strike that would have caused severe and widespread harm to the economy.

What’s behind this latest unionization push? And what will the broader economic effects be? As is generally true in economics, there are both pros and cons, and the answer can be boiled down to “incentives matter.”

The pandemic-related labor shortage – much of which is attributable to increased retirements and limits on immigration – has given workers unusually strong bargaining power. This has decreased the risk of engaging in organizing activity, which they previously may have shied away from to protect their jobs.

Labor leaders are using this to their advantage by pushing for union certification votes wherever they can. Data from the first three quarters of fiscal year 2022 show that union election petitions to the National Labor Relations Board are on track for a 30 percent increase over the eight-year pre-pandemic average. In response, employers are raising wages and expanding benefits to deflate workers’ motivation to unionize (as well as to avoid losing them to competitors).

We often take it for granted that businesses would prefer to bargain individually with workers, rather than collectively through a union. A cynical explanation might be that profit-hungry corporations prioritize greed over worker welfare, but academic research offers some deeper insight. It shows that companies that are unionized experience reductions in product quality and face a higher likelihood of going out of business.

Professors Omesh Kini (Georgia State University), Mo Shen (Auburn University), Jaideep Shenoy (University of Connecticut) and Venkat Subramaniam (Tulane University) find that unionized manufacturers experience a higher rate of product recalls than non-unionized companies. The authors’ methodology is meticulous and their data are extensive, using 6,735 product recalls over 11 years across 42 different industries. Recalls increased for companies in which the union won a close election relative to companies in which the union lost a close election, and the effect is stronger in states that have compulsory unionization laws.

The authors also detail how this might occur. The smoking gun seems to be that the cost of union-produced goods substantially increases following union certification elections. These increased costs can lead to reduced operational flexibility and increased financial pressure on the company, which has the potential to crowd out investments that would otherwise improve product quality.

Matching previous research, the authors also find that union certification seems to be associated with decreased employee morale and degraded corporate culture. If workers are not engaged and motivated to report problems, product quality could suffer.

Lastly, the authors find evidence consistent with the idea that unions might hinder technological upgrades that reduce the company’s demand for labor. This issue made headlines during the severe backlog of container ships needing to be unloaded at the Ports of Los Angeles and Long Beach earlier this year. The dockworker unions, which monopolize the supply of labor to the ports, have for many years ardently fought automation technology that would increase throughput at the terminals. Disputes over the next union contract are already reducing productivity, and the issue of automation is once again front and center.

This isn’t to say that unions universally harm productivity and product quality. Just last week, 15,000 medical professionals in the Minnesota Nurses Association engaged in a three-day strike across 15 hospitals. Wages and safety issues were part of their motivation, but so was prioritizing patient welfare by pushing back against increasing patient-to-nurse ratios.

Here’s a general rule that could integrate these contradictory outcomes: Under current labor law (which turns unions into miniature monopolies), unions tend to insulate workers from the immediate consequences of lower quality production. However, this effect lessens the more that workers have a stake in the customer’s welfare. In fact, in the case of the semi-monopolized health care industry, unionized workers might well be a bulwark against corporate practices that could harm their customers.

The common theme is monopoly power. Competition – whether it’s for one’s customers, employees or job – is a powerful force that motivates greater attention to quality. The lack of competition commensurately reduces this incentive. We would all benefit from more competition in the economy — and the only protest will probably come from the monopolists themselves.

Michael Farren is a senior research fellow with the Mercatus Center at George Mason University.