Worker voice, representation, and power

How Unions Can Increase Firm Productivity and Strengthen Economic Growth

Kate Bahn, Joe Peck September 06, 2023

Traditional labor unions, by design, combine the power of individual workers through collective bargaining and collective action. In doing so, they shape labor dynamics to help achieve the promises of a competitive market. Unions have the ability to help businesses operate more efficiently by bringing workers’ knowledge of how to do their jobs and preferences for various attributes of job quality to the foreground in structuring workplaces and production. When workplaces have more equitable operations that include worker voice, they tend to experience lower turnover, reducing associated costs to businesses while also ensuring workers are paid equal to the value they contribute. Through widespread collective bargaining, market failures can be corrected, decades of income inequality may be reversed, and economic growth can be supported. Evidence suggests that the benefits of labor unions are widespread for the American economy, for businesses and workers alike.

Worker voice in production improves outcomes

In the United States, unions generally have a positive impact on productivity, and this effect is particularly strong among manufacturing firms.

In part, this positive relationship is helped by unions giving employees methods to express their opinions. Often, they are avenues for workers to express wage and benefit preferences. But they can also allow employees to notify managers about inefficiencies within company policies and the production process.

Some research finds that the positive relationship between productivity and worker voice is more pronounced when employees directly influence company decisions. Employee participation in decisionmaking has a significant and positive impact on firm productivity. This also appears to be true even for other forms of worker voice, like employee ownership that aligns workers with firm incentives. With a growing interest in forms of worker power—such as codetermination—that involve employees directly in company decisionmaking, methods of worker representation like these could be an avenue for firms to increase their output while catering to worker needs.

Unions reduce turnover, which reduces associated costs for businesses

In addition to supporting productivity by allowing workers to engage in decisionmaking in workplaces, unions may also improve business outcomes by helping firms hold on to tenured workers who tend to be more productive. Unionized workers are less likely to express intent to leave their jobs. This in turn supports the necessary stability for investments in firm-specific human capital and training. Unions also reduce turnover by insulating workers from retaliation when communicating discontent to managers rather than otherwise quitting to manage bad work situations.

Unions may also reduce turnover by increasing job satisfaction. While previous research found an ambiguous or negative relationship between unions and worker job satisfaction, more recent evidence finds that unions improve job satisfaction since the Great Recession. This effect is reinforced by the ability of unions to mitigate job losses during downturns, avoiding the negative consequences of unemployment on workers’ well-being.

Collective bargaining helps structure workplace benefits to the average worker rather than the marginal worker, which improves overall worker well-being

Unions are institutions of collective employee voice. They must collectively vote on union contracts and elect individuals to union positions. This means that they are more likely to promote the interests of the average rather than the marginal worker; in other words, they are more likely to reflect the democratic preferences of the majority than of the worker most likely to leave the job because they are unsatisfied with their wage and benefits.

This does not necessarily mean employers spend more but that they spend money on different priorities. In absence of collective bargaining to establish job quality standards, economic theory predicts that employers will structure jobs to recruit individuals on the margin of taking a job or quitting, which may result in inefficiency across the workplace. For example, as the average worker usually skews older than the marginal worker, collective bargaining encourages employers to spend more on benefits and less on wages, which may be a better reflection of the average preferences of workers.

Unions correct for labor market failures that result from an intrinsic lack of competition

Mounting evidence has shown there is a pervasive lack of competition across the labor market that leads to suboptimal wage and employment levels. This phenomenon, known as monopsony, results from a variety of factors including corporate concentration, idiosyncratic worker preferences for job attributes, and constraints on workers’ mobility. These factors are intrinsic to the complicated process of matching workers into jobs and result in pay that is lower than would be predicted in a hypothetical competitive market.

While competition policy, such as antitrust enforcement, offers partial solutions, evidence also suggests that unions are critical components of ensuring competitive market outcomes. Collective action through unions can improve social welfare, with higher wages and higher employment resulting from more competitive-like outcomes. However, these outcomes also depend on institutional support for unionization such as effective enforcement of labor laws.

Unions raise worker wages, offset economic inequality, and boost the economy

That unions have a positive and significant impact on wages is well established in economics. Over the course of a lifetime, the average male worker will earn $1.3 million more if they have consistently been a member of a union. This is true despite union workers on average retiring earlier. Unions have played a significant role in reducing income inequality, and likewise, their decline is correlated with a rise in income inequality in the last 50 years.

In particular, unions raise wages more for workers with less formal education and experience, who tend to be paid less. They can also help families build wealth, particularly Black, Latinx, Native American, and Asian American households. This can bolster economic activity across the economy, as lower-income workers spend a higher share of their income on consumption. Given that lower-income workers frequently have less wealth, they typically have consumption that fluctuates with their income compared to those who have higher wealth to use for spending as incomes fluctuate.

In addition to income inequality, unionization has an inverse relationship with the labor share of income —or how much of economic growth goes to workers. The decline in worker power has been associated with an increase in economic rents in the form of profits going to companies. Furthermore, this phenomenon risks stymying economic growth, as workers’ share of national income has a positive impact on economic growth in the long run.

“Rather than worker interests being seen as inherently at odds with business interests, aligning them through the collective bargaining process can improve firm outcomes and benefit the broader economy.”

In addition to firm-level effects like higher productivity and decreased turnover, these macroeconomic effects ultimately benefit businesses as well, which can share in the gains of greater productivity and higher economic growth. Rather than worker interests being seen as inherently at odds with business interests, aligning them through the collective bargaining process can improve firm outcomes and benefit the broader economy. Policies that ease the path to unionization ultimately support a more robust economy.

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