The EconomistNovember 9th 2019 Finance & economics 71T
he dissonancecould hardly have been more apparent. Ameri-
ca’s most recent employment figures captured a jobs market in
fine fettle: firms added 128,000 new workers in October, while un-
employment held near historically low levels and wages rose at a
respectable clip. The data would probably have looked better, how-
ever, had they not been depressed by a costly labour dispute, only
recently ended, at General Motors (gm). Workers around America
are showing their restlessness; members of the Chicago Teachers’
Union returned to work on November 1st, after striking to demand
higher pay and more investment per student. The unrest may
seem odd given the robust state of the labour market. In fact it is
neither a bad omen nor entirely unwelcome.
In their book on organised labour, “What Do Unions Do?”, Rich-
ard Freeman and James Medoff argue that unions play two princi-
pal economic roles. They provide workers with a voice; through a
union frustrated workers, who might otherwise simply quit, can
communicate their dissatisfaction to the firm. Communication
can raise efficiency by boosting morale, and by helping firms to re-
tain workers and identify and fix problems. But unions also func-
tion as monopoly providers of labour. By controlling labour supply
they are able to extract rents—and thus raise members’ compensa-
tion—reducing economic efficiency.
The book was published in 1984, at a critical moment. Across
the rich world the share of workers covered by unions had fallen
steadily from their post-war peaks (outside a handful of northern
European countries). Declines in the employment share of highly
unionised industries, like manufacturing, bore some of the blame.
But government policy also played a role. The mood turned against
labour in the 1980s, first in America and Britain, then elsewhere;
politicians seized on the moment. In 1981 President Ronald Rea-
gan, who once led America’s actors’ union, summarily fired 11,000
striking air-traffic controllers. In the years since, labour has spo-
ken softly and carried a twig. America experienced an average of 16
major work stoppages (affecting 1,000 workers or more) each year
from 2001 to 2018, down from 52 per year between 1981 and 2000,
and 300 per year from 1947 to 1980.
Unions, though weakened, survive. In America they represent
37% of public-sector workers and 7% of private-sector ones. In
2018 nearly half a million American workers were involved in work
stoppages, the most since 1986. That militancy owes something to
labour-market conditions. One might expect periods of economic
strength to be placid ones, because firms can be conciliatory.
When profits are high, they can afford pay rises—whereas in times
of economic stress, holding the line on pay may mean the differ-
ence between survival and failure. Moreover, the opportunity cost
of a work stoppage is higher when demand is robust. When con-
sumers are hoovering up new cars, lost production time is very
costly. Reflecting this, gmsuffered operating losses of nearly $2bn
during the recent stoppage, according to one estimate, or nearly
twice the sum of wages lost to workers.
But strong labour markets lend more encouragement to frus-
trated workers than pause to firms. Striking workers face the loss
of pay and, potentially, of employment—threats that frighten less
when good jobs are plentiful. Workers can more credibly withhold
their labour from firms when there are no long lines of unem-
ployed workers waiting to replace them. A strong jobs market may
also give workers more to bargain for. Fighting over a larger share
of a firm’s earnings makes little sense when there are no earnings
to fight over. gmfiled for bankruptcy in 2009, but has since reor-
ganised and begun turning a healthy profit.
Strikes are more than arguments over profits gone wrong. They
are also a way to elicit information, as John Kennan of the Univer-
sity of Wisconsin-Madison and Robert Wilson at Stanford Univer-
sity describe in a paper published in 1993. Unions often cannot tell
if a firm’s claim that it cannot afford pay rises is credible or merely
cheap talk. By holding its bargaining position as the losses from a
strike mount, a firm can convey to a union that its arguments are
rooted in reality. gm’s seemingly were. Striking workers failed to
secure a larger pay rise than they had won in their previous con-
tract negotiation, or to get the firm to reopen a plant in Ohio. They
did win more profit-sharing—probably the best a profitable but
vulnerable firm can do, given the risk of agreeing generous pay
packages that cannot be amended in times of financial stress.A more perfect union
The situation could be different in other parts of the economy,
however. When economists argue that unions impose economic
costs, they typically assume that markets are competitive. Across
much of the American economy that is not always the case. Some-
times one or a few big employers dominate local labour markets,
and can thus impose below-market wages on vulnerable workers,
a condition economists call “monopsony”. In recent testimony in a
congressional hearing on antitrust issues, Kate Bahn of the Wash-
ington Centre for Equitable Growth, a think-tank, noted that
though wages in manufacturing industries are close to the level
one would expect in competitive markets, those in some others,
like health care, are not. For workers frustrated by stagnant pay, a
work stoppage may be the only way to determine if an employer is
constrained by competitive markets or abusing its market power.
In the latter case, interventions by unions could prove econom-
ically useful. In a paper published last year, Mark Stelzner of Con-
necticut College and Mark Paul of the New College of Florida, ar-
gued that in the presence of monopsony power, collective
bargaining can reduce the rents collected by dominant firms and
increase economic efficiency. In practice, America’s diminished
labour movement cannot on its own fix the problem of uncompet-
itive markets, or strike much fear into the hearts of employers.
Nonetheless, workers are daring to try. 7Free exchange When the iron is hot
Belligerent unions are a sign of economic health