Wednesday, August 23, 2006

On Inequality and Unions

The blogosphere has been engaged in an intriguing debate about Paul Krugman's conjecture (probably wrong, in my judgment) that increasing inequality over the past three decades has been driven by policy and politics, as opposed to exogenous forces such as technology and demography. Paul writes in an email to Mark Thoma:
So what are the mechanisms? Unions are probably top of the list; I believe that there's a qualitative difference between wage bargaining in an economy with 11 percent of workers unionized, which is what we had in the early 30s, and one with 35 percent unionization, which is what emerged from World War II. That's discontinuous change, partly driven by a change in political regime. And the process went in reverse under Reagan.
I don't know to what extent increasing inequality has been driven by declining unionization (the answer is only 10 to 20 percent, according to this David Card paper, but apparently more according to another David Card paper). But I am skeptical of Paul's suggestion that declining unionization can be attributed to policy. I am more inclined to agree with Princeton labor economist Hank Farber, who writes:
the causes of the divergence in employment growth rates between the union and nonunion sectors are fundamentally related to the structure of the U.S. economy. Employment has shifted away from the sectors in which unions were strongest such as manufacturing, transportation, and communications.
Although I do not pretend to be an expert on this topic, my guess is that declining private-sector unionization is related to the declining share of manufacturing employment, which is attributable to rapid productivity growth in manufacturing, which in turn is attributable to technological advance in that sector. (See this related talk I have given on manufacturing.) So even if declining unionization is part of the story of increasing inequality, this factor should probably be put in the technology-driven column rather than the policy-driven column.

Two other factors come to mind to explain the decline in unions that are, perhaps, more closely related to policy than technology. One is globalization. As the economy becomes more open, firms are increasingly operating in competitive markets. This means they have less economic profit that could be a target for unions. The auto industry is an example.

A second factor is Reagan's famous firing of the air traffic controllers and other policy decisions related to union organizing. Here is Farber on the topic:
Although this decline is often linked to President Reagan's showdown with the air traffic controllers' union (PATCO) in August 1981 and the installation of a Republican majority on the NLRB in May 1983, we find little evidence that either event precipitated the downward trend in organizing activity.
So the decline in unions should probably not be blamed on (or credited to) Reagan et al.

If the decline in unions is related to the person in the White House, it is more likely that they have a common third cause: The voters who vote for conservative Presidents also vote against unionization. Here is a passage from economist Morgan Reynolds writing in the Concise Encyclopedia of Economics:
The degree of union representation of workers has declined in all private industries in the United States in recent decades. A major reason is that employees do not like unions. According to a Louis Harris poll commissioned by the AFL-CIO in 1984 [the year of Reagan's landslide over Mondale], only one in three U.S. employees would vote for union representation in a secret ballot election. The Harris poll found, as have other surveys, that nonunion employees, relative to union workers, are more satisfied with job security, recognition of job performance, and participation in decisions that affect their jobs.
Finally, this discussion raises the issue of whether declining unionization is a good or bad development. The economics profession does not offer a single view on this question. Some economists view unions as a "countervailing power" against the market power of large corporations. Other economists view unions as a cartel aimed at keeping prices high in order to enrich their members, inducing all the inefficiencies and inequities inherent in the exercise of monopoly power.

By the way, any textbook authors out there want to start a union with me to ensure we get a fair price for our efforts? How about it, Paul?

Update: A former student emails me some good observations:

Two other possibilities to add to your list:

(1) Daron Acemoglu, in a series of papers and the J Ec Lit review you once cited in your blog, argues that deunionization is, at least in part, caused by inequality. Specifically, in his model unions compress wages. With larger rewards for skills, this compression becomes less incentive compatible for high skilled workers. So they opt out - or vote for more anti-union policies.

(2) Paul Krugman's Jackson Hole conjecture was that inequality and high unemployment are two sides of the same coin. So Europe and the United States are both subject to the same SBTC [skill-biased technological change] shock. But we have lower unionization, so it manifests itself as inequality, while they have more unionization so it manifests itself as unemployment.

Update 2: A friend who knows this literature better than I do tells me the two Card papers I cited are in fact more consistent than they first appear:
Card still only finds the union decline accounts for about 10 percent of rise in U.S. male wage variance and 0 percent of the action for women in his preferred models....The zero impact for women should raise a red flag for unions as a general explanation since the rise of wage inequality has been at least as great for women as for men.