Since 1979, there
has been a significant decline in trade union membership in both the UK and US,
with membership falling by 45.8% and 27.5% respectively (Economist, 2015).
Reasons for the fall include anti-union legislation and policy, a deregulated
labour market, government reform and a decline in manufacturing sector, where
union movement was the strongest, due to technological advancements (DeLord et
al., 2008). Overall, union bargaining power has fallen largely and union
strikes have been at their lowest since records began in 1893 (Ruddick, 2016).
This essay will evaluate the way in which trade unions theoretically benefit
their members using the labour leisure choice model. This will be followed by analysing
differentials in pay and fringe benefits between unionised and non-unionised
workers. The paper will use data from the ONS/BIS (UK) and the BLS (US).
2.0 Benefits of trade union
Workers join a union if the union offers them a wage-employment package
that provides more utility net of union dues than one offered by a non-union employer.
However, higher wages (w) demanded by a union increase firm’s costs, potentially
causing employment cutbacks. If a firm’s demand curve for labour (n) is
inelastic, employment reduction is small. The labour leisure model (figure 1)
isolates the person’s wage rate and income as the key economic variables
guiding the allocation of time between the labour market and leisure
activities. Initially, we are at equilibrium “P”, where tangency is observed
between indifference curve “U*” and a non-unionised workers budget line
“AT”. This point provides non-unionised
workers with a wage of “w*” and illustrates maximised utility. However, if a
union proposes a wage increase (w*-wU), this will cause shifting of the
budget line from “AT”to”BT”.
However, effects of unionisation greatly depend on the elasticity of
labour demand. If the firm being offered to unionise has an elastic labour
demand (commonly seen in private sector jobs), this would result in a potential
new equilibrium at “P0”. Despite higher wages (w*-wu),
utility falls from “U” to “U0” units, as the employer cuts back
hours of work to “h0”, and the firm would cut back employment to
relieve itself from the increase in wages. This results in workers becoming worse
off, and thus, not supporting unionisation.
In contrast, if labour demand for the firm is inelastic (commonly seen
in public sector jobs), a wage increase (w*-wu) would result in
equilibrium at point “P1”. This benefits workers, as utility moves
from “U” to “U1”, thus, workers would support unionisation.
The BLS states that in 2010, full-time
employees in unionized work force earned a median salary of $917 p/w. During
the same year, non-unionized employees earned a median salary of $717 p/w. Similarly,
using International Social Survey Program (ISSP) data (Table 1, see appendix),
the positive effect of unions can be seen using the percentage of union wage
premium increase in seventeen countries. Although, five countries – France,
Germany, Italy, Netherlands, and Sweden, had a union wage premium of zero, Blanchflower
and Bryson (2003) explain that this is “primarily due to the fact that unions
are also able to control wage outcomes in the non-union sector” by extension of
collectively bargained rates.
it is important to understand that differences between unionised and non-unionised
wages vary depending on the density of the unionised industry and occupation
(Balsvik, 2014). Barth et al. (2000) provide evidence of the relationship
between union density and wages. Both studies estimate a union wage premium of
around 7%, i.e. when union density increases by 10 percentage points then wages
increase by 0.7%. Blanchflower and Bryson (2003) suggest that the relationship
between union density and union wages depends on level of density. They argue
that a strong effect would be achieved when density is higher than 40%. In the UK,
results from the ONS (2016) illustrate that trade union density in public sector
is approximately 52%, while the private sector’s is 14% (see chart 2, in
appendix). Thus, analysing differences of trade union membership impact on private
and public sector workers is useful in understanding how trade unions benefit
Theoretically, unionised workers have more bargaining power
(Booth, 1995). Thus, it is
expected that wage increases are greater and more frequent, effectively
reducing inequality by evenly distributing profits from employer to employees. However,
when analysing wage differences of different occupations, the unionised private
sector and government workers receive different pay differentials for the same
occupation. This is proven by recent statistics in the UK illustrating
how the trade union wage gap (percentage difference in average gross
hourly earnings of union members compared with non-members) is 16.1% in the
public sector, while only 7.7% in the private sector (ONS, 2015).
Table 2 illustrates data collected from
BLS by (Long GI, 2013). The table’s results help explain the labour leisure model (figure 1),
through the comparison of pay differentials between private and government
workers, due to differences in their elasticities. G. Ehrenberg et al.
(1983) states that private sector workers appear highly elastic when compared
to public sector workers.
This is reflected by the wage differentials between the two sectors, as
unionised workers in the private industry with ‘management and professional
related occupations’ receive a wage premium of -7.70%, while government workers,
with the same occupation, receive a wage premium of 29.69%. Similarly, workers
in the private industry with ‘sales and office’ occupations receive a wage
premium of 3.88%, which is a very small figure compared to the 26.38% wage
premium received by workers in the government sector with the same occupation.
By comparing the wage differentials between the highly elastic (private sector)
and inelastic (government) workers, we are able to comply Golombek’s
(2017) conclusion that “public-sector unionised workers have enormous clout at
the bargaining table, compared to their private-sector employees”. An example combining
our results and the labour leisure model (figure 1), is how if a car
manufacturing company (private sector) was newly unionised, the firm would cut
back on employment (replacing factory workers with machines in relief of
increasing wages). This causes a decrease in workers utility received from
unionisation (U0) due to cutting of hours (h*-h0).
2.2 Fringe benefits
analysis of fringe benefits is essential, as they play a big role in overall
workers benefits to unionisation. Table 3 below illustrates data collected from
the BLS by (Long GI, 2013).
The data illustrates that union workers tend to have greater access to employee
benefits than their non-union counterparts in both private and government
sectors, regardless of elasticity of labour demand. Walters and Mishel (2003)
similarly state how the most advantage for unionized workers lies in fringe benefits.
Unionized workers are more likely to receive paid leave, are 18% to 28% more
likely to have employer-provided health insurance, and are 23% to 54% more
likely to be in employer-provided pension plans. Fringe benefits hold great
importance to both employees and employers, such benefits positively impact job
satisfaction, and thus worker productivity increases (Uppal, 2005).
conclusion, the analysis of the labour leisure choice model illustrates that
wage differentials substantially explain wage differentials between highly
elastic (private sector) and inelastic (government sector), as unionised
employees working for firms with an inelastic demand for labour are harder to
replace, increasing their ability to benefit through a substantially higher
wage premium. In contrast, employees working for firms with elastic demand for
labour witness a tiny, non-existent or even negative premium. Therefore, it can
be concluded that union benefits depend on the elasticity of the firm’s labour
demand and density of unionised workers. However, the theory does not take into
account fringe benefits or the fact that not all workers looking to unionise
experience a wage increase (shift from AT-BT, figure 1). The analysis of fringe
benefits emphasises this, as the results show that being part of a union
greatly increases access to fringe benefits, regardless of the firms labour