Overcoming Stagnant Wages: Stronger Unions and Higher Minimum Wages are Not the Answer

Recently, many economists and politicians have expressed concern about stagnant wages and rising income and wealth inequality. Such concerns prompted 20 states and the District of Columbia to raise the minimum wage this year. Some economists, such as former treasury secretary Larry Summers, also argue that steps should be taken to increase the number of workers who are members of labor unions so they can bargain for a greater share of corporate earnings. Strengthening unions and raising minimum wages, however, will do little to help low- and middle-income Americans, and will instead reduce job opportunities for young and inexperienced workers.

Progressive economists, such as Lawrence Mishel of the Economic Policy Institute, argue that low- and moderate-income workers’ wages have been held down by their lack of bargaining power, which is partly the result of reductions in the influence of labor unions and of minimum wages that have not kept up with inflation. The percentage of workers who are members of unions fell by more than half between 1973 and 2007. Union membership in the private sector declined even more. Adjusted for inflation, the minimum wage is now 25 percent below its peak in 1968.

A higher minimum wage would affect more than 15 percent of the workforce directly and another seven percent indirectly. More than 10 percent of those who would be directly affected by an increase in the minimum wage are single parents and more than half work full time. If the minimum wage were raised, some workers who now earn more than the minimum wage would also be offered higher wages as firms try to hire them to replace minimum-wage workers.

Unions and minimum wages increase the wages of some workers, but at the expense of others.

Some evidence suggests that unions reduce wage inequality, but most of that reduction is within unionized firms. Higher union wages reduce the number of workers employed in unionized industries. Workers who are unable to find jobs in unionized industries will compete for jobs in other industries, pushing down wages in nonunionized firms.

There is nothing wrong with workers joining labor unions to enhance their bargaining power. The problem is that unions’ ability to bargain for higher wages is the result of laws and coercive practices that limit competition from nonunionized workers. This includes closed shop laws, which require all workers in unionized firms to pay union dues, as well as the threat of strikes, which all too often have been accompanied by violence against nonunion workers who cross picket lines during a strike.  During the late 1970s, numerous deaths and millions of dollars in property damage resulted from union violence.

Labor unions have been granted a privileged position in the economy. They are immune from anti-trust laws and injunctions from federal courts.  Unions have declined in the United States because many workers no longer agree with the agendas that unions are pursuing or do not think that the benefits of unions are worth the costs.  In addition, growing competition, particularly from imported goods, has resulted in unionized firms losing market share and in some cases, going out of business.

A study by the Organization for Economic Cooperation and Development reports that countries where unions and collective bargaining affect a large percentage of the labor force have higher unemployment rates. If enough workers belong to unions, unions can create an effective wage floor that works like a minimum wage, causing unemployment.

Because they apply to all workers, minimum wages cause unemployment if they are higher than what some workers would be paid in a free market. Firms will only employ a worker if the value of the additional output he contributes exceeds the wage he is paid. Thus minimum wages result in fewer jobs for inexperienced workers with limited skills. Minimum wages also reduce the incentive of firms to train workers. Many firms will not be willing to spend much on training workers unless they can offset the cost of training by paying lower wages during the training period.

Recent improvements in technology make it easier for firms to reduce employment in response to higher minimum wages or higher wages that result from union bargaining. To avoid paying mandated higher wages, some firms are replacing unskilled workers with robots.

More important than reducing inequality is providing opportunities for the poor and middle class to improve their standards of living. The poor would have more job opportunities if minimum wages were lowered, not raised. Good job opportunities, especially for young and inexperienced workers, are more likely to be found in nonunionized industries, since unions tend to protect older, more experienced workers from competition.

Instead of more regulation of the labor market, entrepreneurs need more freedom to develop innovative arrangements that will offer opportunities, even for workers from disadvantaged backgrounds, to gain the skills and habits needed to succeed in a changing economy.