What is Organized Labor’s Place in a Capitalist Economy?

In 2022, the global economy faced widespread inflation, the residual effects of the COVID-19 pandemic, and rapidly increasing inequality. The resulting  changes to social, political, and economic systems are shifting attention to the role of labor and trade unions in the economy. In the past couple years, employees at major global companies, including Amazon and Starbucks, established labor unions. In the United States, Hollywood writers, actors, and Auto Workers went on strike, successfully securing favorable contracts. Meanwhile, in Europe, an unprecedented number of strikes among transportation workers has significantly disrupted travel in Germany, the United Kingdom, and France. This renewed attention comes at a time when unions have been experiencing a global decline and raises important questions. Do unions have a place in democratic and capitalist economies? If so, what role should they play and what policy should govern them? 

A labor or trade union is an association of workers that works to advance those workers’ interests on workers’ pay, hours, benefits, and health and safety policies. They often advocate through a process known as collective bargaining to establish a contract with the employer and engage in political activities. Early unions were predominantly skilled trade unions. The rapid growth of labor unions can be traced back to the eighteenth-century Industrial Revolution that transformed the United States and European economies. As workers concentrated in urban areas to work large-scale manufacturing jobs, the demand for improved working conditions grew. In both the United States and Europe, organized labor movements are credited with limiting child labor, as well as improving working conditions, hours, wages, and health benefits. Unions have pursued many venues to improve the lives of workers through politics and collective bargaining negotiations with industries. While early unions excluded women, Black, and immigrant workers, unions eventually came to play an important role in social movements such as the American Civil Rights Movement (Boyle). 

Today, there is a general global decline in union membership and influence but this varies widely between countries. In 1985, the average trade union membership in OECD countries was 30% and today, that has fallen to just 16% (McCarthy). Economist  Zachary Schaller argues that much of this decline is due to the shift away from manufacturing jobs due to technology-driven productivity enhancements and globalization, an industry in which unions were heavily established (Kenny et al.). He also argues that union activity was most successful in periods of economic growth and proposes that unions are less desirable in periods of economic decline and stagnation. 

Each country has different laws governing unions. Some measures of union activity and strength include collective bargaining coverage which is the percentage of employees with the right to bargain with employers, the percentage of employees in a trade union, the number of workers involved in strikes, and the total number of days not worked due to strikes. One potential influencing factor over the strength of unions is also the strength of the labor laws in a given country. Labor Market Regulations measure the laws, policies, and rules that govern the relationship between employers and employees in the workplace, including issues related to wages, working conditions, and employment contracts. These laws can favor either the employer or employees. This makes it difficult to see a clear connection between labor market regulations and labor union activity. Given the vastly different political and legal environments in which unions operate, this case study will focus on broader themes and theories surrounding the interplay of unions with capitalism and democracy. 

The economic literature on unions broadly recognizes two predominant perspectives on unions’ effects on a capitalist economy. The Economist Freeman and Medoff propose that there are two competing views about the effects of unions on society, a  “monopolistic” view and a “collective voice/institutional response” view (Freeman and Medoff). 

From the monopoly perspective, unions are detrimental to capitalist systems by raising wages beyond an efficient level, which produces economic inefficiency and inequality. While many economists have found that unions do often increase efficiency, many economists argue that these gains are not proportional to increases in worker compensation. Hirsch argues “Unions in effect tax company returns via wage increases not offset by productivity gains” (Hirsch). These wage increases in turn can cause unemployment, inflation, and waste. He uses this perspective to emphasize the disadvantage of unionized businesses to be competitive in a capitalist economy. Unionization has also been linked to reduced capital investments, reduced profits, and slower growth for a business (Addison and Hirsch). These economists also believe that the decline of unionization is a result of the lack of success of unionized businesses and industries that are less able to compete and invest in capital growth. Globalization and the need to compete more broadly are seen as a major drawback of unions in countries because they impede the productivity of that country. One study found that when countries move to free trade agreements the public’s well-being is better off in nonunionized and less unionized sectors when compared to highly unionized countries (Bastos and Kreickemeier). 

From the collective voice/institutional response perspective, unions give workers a meaningful voice necessary to increase workplace equality and efficiency. These perspectives argue that ​​these benefits are more important than any negative monopoly effects. They assert that unions enhance productivity by decreasing turnover, fostering effective communication between employees and employers, boosting morale, and reducing disparities in compensation and power (Freeman and Medoff). Many studies have expanded on and provided evidence for these claims. One study found that unionization leads to productivity gains due to major changes in management and procedures (Clark). Additionally, evidence shows that countries with more unionization have more equality in wages and slower growth in top incomes, reducing income inequality. Figure 1 shows the negative relationship between unionization and wages for both the lower and upper half of wage distribution (Ahlquist). 

There is a wealth of evidence showing that unions foster more active participation in politics and democratic practices such as possessing political knowledge, interest, and turnout (Ahlquist). Additionally, unions as organizations engage in many political activities including lobbying, campaign contributions, and candidate endorsements. These actions can make politicians more accountable to worker interests and many argue serve as a counterbalance to the influence that wealthy corporations and individuals have on democratic governance systems. This political activity is typically found to be very skewed to the left. One cross-national comparative analysis concluded that union-centered or union-linked civic mobilization achieves a balance of class power (Lee). 

Unions are often also credited with making the workplace more democratic by giving workers more say over how a corporation or business operates through increased communication and labor contracts. However, unions, like other institutions, can fall into corrupt and undemocratic processes and represent special interests to the detriment of average workers and society. Many experts have called attention to the need to balance central authority and individual worker representation to be an effective union. There have been instances of unions engaging in undemocratic practices, suspension of opponents, and arbitrary interventions in local affairs (Taft). Furthermore, unions can primarily focus on benefiting their core members to the disenfranchisement of other and unemployed workers (Ness). 

Addison, John, and Barry Hirsch. “Union Effects on Productivity, Profits, and Growth: Has the Long Run Arrived?” Journal of Labor Economics, vol. 7, no. Jan, 1989, pp. 72-105. store, https://www.jstor.org/stable/2534990.

Ahlquist, John. “Labor Unions, Political Representation, and Economic Inequality.” Annual Review of Political Science, 2017, https://www.annualreviews.org/doi/pdf/10.1146/annurev-polisci-051215-023225.

Bastos, Paulo, and Udo Kreickemeier. Unions, competition and international trade in general equilibrium, vol. 79, no. 2, November 2009, pp. 238-247. ScienceDirect, https://www.sciencedirect.com/science/article/pii/S0022199609000920?casa_token=-1Ov0DkP_5gAAAAA:3wNu4HvwSfzO0MDp6Z04us8h1tRoAHfKsje0ROrMKtdOpI59LA2ynOlFGySVNzq3eQJYBR90VJc.

Boyle, Michael J. “The History of Unions in the United States.” Investopedia, 2022, https://www.investopedia.com/financial-edge/0113/the-history-of-unions-in-the-united-states.aspx. Accessed 13 December 2023.

Clark, Kim. “The Impact of Unionization on Productivity: A Case Study.” ILR Review, vol. 33, no. 4, 1980, pp. 451-469, https://doi.org/10.1177/001979398003300401.

Freeman, Richard, and James Medoff. “The Two Faces of Unionism.” The Public Interest, vol. 57, no. Fall, 1979, pp. 69-93.

Hirsch, Barry. “Sluggish Institutions in a Dynamic World: Can Unions and Industrial Competition Coexist?” The Journal of Economic Perspectives, vol. 22, no. Winter, 2008, pp. 153-176. jstore, https://www.jstor.org/stable/27648228.

Kenny, Charles, et al. “Why Factory Jobs Are Shrinking Everywhere.” Bloomberg.com, 28 April 2014, https://www.bloomberg.com/news/articles/2014-04-28/why-factory-jobs-are-shrinking-everywhere. Accessed 19 December 2023.

Lee, C. “Labor Unions and Good Governance: A Cross-National, Comparative Analysis.” American Sociological Review, vol. 72, no. 4, 2007, pp. 585-609, https://doi.org/10.1177/000312240707200405.

McCarthy, Niall. “The State Of Global Trade Union Membership [Infographic].” Forbes, Forbes, 2019, https://www.forbes.com/sites/niallmccarthy/2019/05/06/the-state-of-global-trade-union-membership-infographic/?sh=59def3aa2b6e. Accessed 13 December 2023.

Ness, Immanuel. Trade Unions and the Betrayal of the Unemployed: Labor Conflicts During the 1990’s. 1 ed., Routledge, 1998, https://doi.org/10.4324/9781315790602.

Taft, Philip. “Democracy in Trade Unions.” The American Economic Review, vol. 36, no. 2, 1946, pp. 359-369. jstore, https://www.jstor.org/stable/1818218.