Quantitative analysis of economic impact of labor laws
Introduction
The establishment of union labor laws in United States was done with an aim of enhancing income inequality among workers and in turn ensures there is power redistribution. The role of trade unions involves ensuring there is redistribution of income and power and has sought to do this by participating in policy debates associated to economic and social inequality. How unions are able to affect income distribution has been strong debate among social scientists with early view being that unions seemed to raise wage inequality. Such views were later changed after research using micro data on workers in unions and those in non-union sectors. The research showed that unions had an inequality reducing effects that were larger than inequality raising effect. The associated between income inequality and labor unions has been of great interests to economists as they try to explain the increasing income inequality in industrialized countries such as US. This paper aims at a quantitative analysis of the impact of labor laws on the economy and more specifically the effect of labor unions laws on income inequality in United States.
Discussion
There has been a well-established income inequality and rise in wages over the past almost 4 decades in United States. The factors that could have led to fall in wages at lower wage distribution in comparison to the upper one continue to attract a log of research in the labor market. Research has suggested that a major factor could be labor market changes, and possibly the most prominent one being a reduction in union density (Card, 1996). Traditionally, the role of labor unions has been to help improve wages for middle-wage and lower employees and hence reducing inequality in the society. In the last century the relationship between income inequality and unionization is clearly seen (Jacobs& Myers, 2014). During the middle 20th century, the membership of unions increased and remained quite high while workers earning low wages were able to earn a bigger portion of the total income. The 1951 -1978 period shows that the union membership increased according to estimates by Bureau of Labor Statistics (Card, 1996). Since that period, the union membership has been on the decline in United States. Many studies have tried to measure the difference in wages between workers within a union and the non-union workers. The results of these studies have been varying but generally, many of them found that after labor market, job and individual characteristics are controlled, the union workers’ wages ranged from 10 – 20 percent more than nonunion workers’ wages. There have also been suggestions that union workers wage premium has reduced in recent times. A conclusion by of such studies was that the wage differential among unionized salary and wage workers in the end of 1970s was about 21 – 23 percent (Card, 1996). The wage differential among the same workers by 2000- 2001 is seen to have reduced to nearly 14 percent.
Inequality and premium wage
In addition , wage premium among union workers is, in general , higher for workers with less skills than the skilled workforce , higher among blue-collar workforce than white collar workforce , higher among younger workforce than older workforce , and higher workforce with less education than those who have graduated from college (Rios‐Avila & Hirsch, 2014). The conclusions of such research seem to show that union reduce wages and hence, reduce inequality within sectors that are unionized in the economy. The overall impact of unions on the distribution of workers’ wages depends on the kind of unionized workers and wage premium of the union. Workers within a union still control a significant share of wage premium – about 25 percent- as compared to nonunionized workers but this premium has been declining over last few decades (Rios‐Avila & Hirsch, 2014). The membership of unions has been more representative of the entire population with female members share and share of those with college education increase quickly. Various series of data about union membership over the whole of past century exists that point to largely consistent narrative that union membership as part of overall employment increased quickly after Great Depression and WW II. It then stagnated in 1995- 1975 period and has been reducing constantly since then (Hirsch & Schumacher, 1998). By 2014, there was a drop in share to less than 10 percent, almost the same level as during mid-1930s. There were about 14.6 million workers with unions’ membership in the same year and more 1.6 million workers under a Collective Bargaining Agreement but who are not unionized (Lafer & Davis, 2015).
Figure 1- subgroups’ wage premium for unions
Figure 2
There are some reasons why labor unions are able to negotiate better wages and workers benefits while not having adverse effects on organizations. One of these is rent-sharing potential, and such an opportunity may occur when profits increases or in case of labor market frictions like cost related to employment search and which leads to disconnect between what businesses wants to pay and amount acceptable to workers (Card, Lemieux & Riddell, 2004). In such a scenario, labor unions may manage to negotiate better wages if the increase will lead to higher productivity of the worker and the businesses are able to benefit from increased wages of the workers. A major aim of Collective Bargaining is to increase union’s members’ compensation. Research has indicated that such a collective bargain under unions lead to higher wages for members than nonunion counterparts and hence, unionization can lead to reduction in income inequality (Card, Lemieux & Riddell, 2004). The unionized workers are more likely to enjoy pension coverage, paid leave and even coverage for their health care.
Effect of Union on employment benefits
Figure 3
The various estimates done during late 1960s-1990s show those workers in unions earned about 25 percent more wages than nonunion workers, even though difference in wage premium depended on region and occupation. The wage premium among the unionized workers over the recent years peaked during the mid-1990s, for workers in private sector in line with general reduction in unionization. This decline in premium seems to have happened in many industries. As per 2015, across the private and public sector unions, median wage premium was around 9 percent with a range of 0 to above 30 percent (Graham et al. 2015). The wage premium may be an indication that unions are offering workers a bargaining power so that they can negotiate for bigger portion of profits of a firm. It may also indicate that selection has a significant role, as workers who are more productive are likely to be unionized and hence, would obtain better wages because of their increased productivity.
In many of the studies, decrease in unionization has led to higher inequality because unions appear to increase wages for workers who are paid low wages and this pulls up the wage distribution bottom. The unionization decline can be said to have led to 15-20 percent raise in wages for male workers in 1978- 1993 periods (Rios‐Avila, & Hirsch, 2014). Comparison among various sectors indicates that unionization significantly reduced growth in wage inequality across the public sector during the aforesaid years. The same is shown to have persisted to about 2001. Another research finds that unionization decline can explain about a fifth of increased inequality in wages during 2007-2009 periods among women and a third inequality increase among men (Rios‐Avila, & Hirsch, 2014). The studies show that union labor laws that provide workers with opportunities to join unions assists in reducing the level of income inequality in United States. In period where unionization is seen to increase, there is subsequent decline in the level of income inequality. In both private and public sectors, labor unions have provided workers especially those in the lower income distribution quartile with an opportunity to negotiate for better compensation.
Conclusion
The analysis in this paper has presented argument showing the effects of labor unions on addressing income inequality in United States. The analysis shows that various studies have concluded that labor unions largely help in addressing income inequality since they ensure that wage and salary inequality in private and public sectors is decreased. The unions’ role has to help in decreasing the wage difference between high income earners and low income earners by offering the latter a chance to bargain for higher pay. The decline in workers unionization over the years has subsequently led to increased income inequality for workers as their Collective Bargaining power is reduced.
References
Rios‐Avila, F., & Hirsch, B. T. (2014). Unions, wage gaps, and wage dispersion: New evidence from the Americas. Industrial Relations: A Journal of Economy and Society, 53(1), 1-27.
Card, D., Lemieux, T., & Riddell, W. C. (2004). Unions and wage inequality. Journal of Labor Research, 25(4), 519.
Hirsch, B. T., & Schumacher, E. J. (1998). Unions, wages, and skills. Journal of Human Resources, 201-219.
Card D., (1996).The Effect of Unions on the Structure of Wages: A Longitudinal Analysis: Econometrica, Vol. 64, No. 4 (Jul., 1996), pp. 957-979
Jacobs, D., & Myers, L. (2014). Union strength, neoliberalism, and inequality: Contingent political analyses of US income differences since 1950. American Sociological Review, 79(4), 752-774.
Graham, B. S., Hahn, J., Poirier, A., & Powell, J. L. (2015). Quantile regression with panel data (No. w21034). National Bureau of Economic Research.
Lafer, G., & Davis, A. (2015). “RIGHT TO WORK” IS THE WRONG ANSWER FOR WISCONSIN’S ECONOMY. Economics Policy Institute, January, 23.
