How Unions Can Create Jobs

Senator Markwayne Mullin and Teamsters General President Sean O’Brien had an animated exchange during a recent Senate hearing. At one point in the conversation, the senator asked whether Mr. O’Brien has created any value or jobs for the salary he has enjoyed working for the labor union. Mr. O’Brien responded by pointing out that he works twice as many hours as the senator and the Teamsters create opportunities because they hold employers accountable.

I was a bit disappointed by Mr. O’Brien's response to the senator’s antagonistic question. Instead of getting into a useless comparison of who works more hours and vaguely referring to opportunities, O'Brien (assuming he is an effective salary negotiator) could have stated plainly that he has created plenty of jobs.

How could a union negotiate for higher salaries while also creating more jobs for union members? Many would expect employers to invariably hire fewer workers as wages increase, since they generally have downward sloping labor demand curves. It is true that if a labor market is in a competitive equilibrium then an increase in wages due to greater bargaining power for labor would lead to a decrease in the amount of labor demanded. Nonetheless, it is possible, particularly in a labor market that is not functioning well, for a union to negotiate for greater compensation and boost employment.

In a well-functioning labor market we expect to see a very strong correlation between productivity and compensation, particularly over long periods of time. However, The Economic Policy Institute estimates that from 1979 to 2021 productivity in the U.S. grew 64.6% while compensation rose only 17.3%. This divergence between productivity and pay suggests that labor markets are not perfectly competitive, and that employers have an edge over employees when it comes to negotiating compensation. In short, it appears that employers have monopsonistic market power to set wages.

Just as prices are too high in markets dominated by monopolists, wages are too low in labor markets with monopsonistic employers. Workers in these markets are paid less than what they would earn in a competitive market, where employers do not have more bargaining power than workers. Moreover, the low rates of compensation also result in less labor supplied. In sum, monopsony results in too few workers, who get paid too little.

The figure below illustrates this phenomenon using a simple supply & demand framework depicting a monopsonistic employer. The employer will maximize profits by choosing to employ L_M units of labor, where the marginal product and the marginal cost of labor are equal. The wage consistent with this decision is W_M, which is the lowest wage necessary to incentivize L_M units of labor to be supplied by workers. For comparison, note that in a competitive market equilibrium L_C is the level of employment and W_C is the equilibrium wage. From the figure it is clear that the monopsony wage and level of employment are both less than those in the competitive equilibrium.

So market power for employers could be an explanation for the combination of low (relative to productivity) wages and the shortage in labor. Another way of looking at this is that the combination of wages not keeping up with productivity and the labor shortage is consistent with labor markets in which employers enjoy monopsonistic power. This is where labor unions come in, as their primary purpose is to bolster the bargaining power of workers and serve as a countervailing force against the market power of employers.

As unions boost labor’s bargaining power they should be able to negotiate for higher wages. These higher wages will increase the quantity of labor supplied, up to a maximum number of jobs (L_C) if the wage is equal to the competitive wage (W_C). Employers would be willing to hire these additional workers at such a wage because it is less than their marginal product, with the difference going to the employer. Bargaining for wages higher than that would render less labor than in the competitive equilibrium, so this can only go so far. Regardless, the bottom line is that it is possible for unions to create jobs as they negotiate for higher salaries, and the current labor shortage suggests we have been in an environment in which this could happen.