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What exactly do unions do?

Marketplace Staff Jul 18, 2007

What exactly do unions do?

Marketplace Staff Jul 18, 2007


Kai Ryssdal: There was more in that inflation report this morning than just news of rising prices. Worker wages went up as well — half a percent, and that’s after adjusting for inflation.

What it doesn’t adjust for, though, is the sinking influence of organized labor. Last month, Senate Republicans blocked a Democratic proposal to help unions organize in private-sector companies.

Commentator David Frum says in the long-running battle over unions, we’ve forgotten whether they’re relevant.

David Frum: A wonderful joke from the 1960s has a grizzled ex-Communist listening to a bright-eyed New Leftist. The New Leftist goes on and on about Marx and Mao and collective farms until finally, the ex-Communist wearily replies, “Son, your answers are so old, I’ve forgotten the questions.”

When it comes to the ancient debate over unions, the question is, what exactly do they do?

Two economists presented the classic answer to this question more than two decades ago. Richard Freeman and James Medoff concluded that unions do raise wages. More important, Freeman and Medoff explained how unions do it.

Contrary to what you might expect, the firms where unions score the greatest success are not those with the most market power.

Microsoft, for instance, has enormous market power. It can charge a very high price for its products without fear of losing marketshare to a competitor. Yet Microsoft is famously un-unionized.

The firms where unions score are ones with heavy fixed investments — tangible investments like the huge factories of a General Motors, or intangible, like the gates and landing rights of a United Airlines.

Unions can in effect tax those investments and force companies to accept lower rates of profit, sharing more of their proceeds with employees instead.

The trouble for unions is that in our modern world, companies are mobile. They look more like Microsoft, less like General Motors. Workers have lost out, and legislation cannot alter that fact.

We need newer answers. Workers are losing in part because health-care costs are rising so fast. In fact, health care gobbled up all the increase in compensation in the past six years. And less-skilled workers are losing to the huge influx of immigration since 2000 — probably 8 million workers, at least half of them illegal.

Control immigration. Contain health-care costs. That will do more for American labor than any union — or any union legislation.

Ryssdal: David Frum is a resident scholar at The American Enterprise Institute.

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