Effect of Labor Unions Economic Performance

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Effect of Labor Unions Economic Performance

Dec. 10, 2012
Kidong Kang(Kenny)

I. Introduction
According to the Bureau of Labor Statistics in 2011, 11.8% of workers are members of unions in the labor force as a whole. Especially in the private sector, there was obvious tendency to decrease of unionization. Only 6.9% workers in the United States belong to labor unions in 2011. That was more than 2% drops compared to in 2000 era. The basic dilemma faced by unionization is the need to serve the interests of their members and be seen to serve the interests of society as a whole at the same time. The labor unions solved this dilemma by playing several key roles within the US manufacturing-based economy such as auto industries from 1940s to the 1970s. The wage increase negotiated in collective bargaining ensured that consuming power kept constant pace with the economic capacity to produce. However, since the 1980s, the postwar solution to the unions’ basic dilemma had lost its power, and union density had fallen below a quarter of the workforce. In an economy with rising imports and lagging productivity growth, union wage increases and work rules were seen as contributing to inflation and making US products less competitive. (Stephen Herzenberg, 2000) In this view point, this paper will seek to review the research evidences discussing whether unionization have fundamental and positive effects on the economic performance of corporations or not. In addition, I’d like to examine in what are the effects of unions about profit or productivity after all.

In this paper, I will show the effect of labor union on the economic performance of firms by three research factors. The first one is that the relationship between compensation and the profit in the firm with unionization because employee wages or compensation directly affect the firm’s profitability. The second one is the employee engagement with unionization. This may explain the evidence of relationship between union existence and productivity. Finally, I research that how the union existence affect the turnover rate with economical view point because the turnover which refers to the dissolution of the employment relationship definitely affects the firm’s cost such as separation, replacement, training and salary differences.

II. Effect of labor unions on the profit
1. The relationship between compensation and the profit in the firm with unionization
Controversy continues to surround our working environment and direction of union effects on economic performance. The general belief is that unions have a negative effect on profits. In the case of auto industry in US, unions have even been blamed for the bankruptcy of firms. This perception explains the negative attitude of the unionization. Therefore, their impact on the economy as a whole is thought to be negative. There has been much research on whether unions diminish corporate profit. (Freeman, 1983; Freeman and Medoff, 1984) For instance, Freeman and Karier concluded that unions cut profits in economically concentrated industries. However, only a few studies have looked directly at the union’s impact on the fundamental views. Most of the research has focused only on the wage effect of unions. The research which focused only on the wage effect cannot be used to support that labor unions increase the bankruptcy threat. Because the reduction in profit caused by unions may not cut into the company’s normal bottom line but may take the form of sharing of surplus profit. Of course, it is the fact that unionized workers in the US are covered by more extensive employee benefits than comparable nonunion workers. (Buchmueller, DiNardo, and Robert G. Valletta, pp. 610-27) For example, the below data table shows that unionized workers are 17.1 percentage more likely than similar nonunion workers to be covered by union premium wage differentials. Those differentials have been continued until the present at almost all the...
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