Study Proves Economic Harm of Collective Bargaining

A new CEI study by economist Lowell Galloway and public policy expert Jonathan Robe demonstrates the harmful economic effects of unionization on a state-by-state basis.

Among the states most adversely affected by unionization, Michigan has suffered the most with a 23.1 percent loss in real per capita income because of unionization since 1964. Michigan is the latest state to abandon forced unionism by passing a right to work law, and Michigan workers are probably kicking themselves for not passing one sooner.

Among the other states most adversely affected by unionization are Alaska with a 20.2 percent loss in real personal per capita income (RPCI), Nevada with a (19.6 percent RPCI loss), New York (19.5 percent), and Hawaii (18.7 percent).

The study also shows the connection between unionization and “dead-weight loss”—the amount of lost economic output due to artificially raised labor costs in certain industries.

CEI labor policy analyst Aloysius Hogan summarizes the process that causes this dead-weight loss:

By raising the cost of labor, unions decrease the number of job opportunities in unionized industries. That, in turn, increases the supply of labor in the nonunion sector, thereby driving down wages in those industries. The effect of this situation is to increase the natural rate of unemployment, thus imposing a deadweight loss of economic output on the economy.

As Hogan explains, Richard Vedder and Lowell Galloway built this study on a formulation devised by labor economist Albert Rees to quantify the dead-weight losses from unionization. Rees’s formulation requires that three factors are known: the percentage of unionized employees (union density), wage premiums associated with union presence, and the general elasticity of demand for labor.

Including consideration of five independent variables (manufacturing, income tax rates, RPCI, politics, and college education equivalency), the study finds that dead-weight loss from the unionization rate has played a statistically significant role in real per capita income loss in states with higher union density.

Specifically, the study finds that, for every additional percentage point in the average unionization variable during the study period, real per capita income was reduced by 1.73 percent.

The cost of heavy unionization is best seen when examining a 50-year period in which the average Michigan worker lost $11,000 real per capita income compared to a $1,239 loss for the average South Carolina worker (South Carolina has had a right to work law for decades).

These findings vindicate critics of the National Labor Relations Act of 1935 (NLRA), which encourages wage-depressing unionization. Collective bargaining hurts more people than it helps. Therefore, Congress should consider amending—or ideally, repealing—the 79-year-old NLRA.

In the meantime, states can take matters into their own hands by passing right to work laws.