The Impact of Unions on the Economy

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Trade Unions are formed by workers of a particular trade, company or industry. They are also known as labour unions. They are birthed with the specific purpose of raising wages and improving the working conditions and status of the members of the union.

Trade unions first began to form in Britain and Europe in the 1800’s. The United States soon followed. However the early union face harsh opposition from the employers and government groups. Government group recognised the economic and political potential of such associations.

Despite being regularly prosecuted the formation of trade unions continued to grow. This came to be known as the Labour Movement. Unionization finally achieved a legal foundation in Britain when the Trade Union Act was passed in 1871. In the United States, unions became accepted through a series of legal cases which eroded opposition to the movement. In 1866 the National Labour Union was formed that represented diverse trades such as shoemakers, railway workers, coal miners and spinners. The National Labour Union (NLU) later became the American Federation of Labour (AFL) in 1886. At first only skilled workers were represented, but by 1941 this policy changed and the AFL represented 15 million workers in the US. The principal tool of Trade Union in the USA is that of collective bargaining. In Britain the movement became politicised and the Labour Party was formed in 1906.

Trade Unions soon became industrial unions and wielded tremendous power. The impact of the unions is hotly debated and there is no firm conclusion. One trend that emerged was that Trade Union has much less support in times of plenty, when wages were rising constantly.

Globalization has served to erode the power of Trade Unions as employers who feel harassed by the Unions shift their production units to countries with less powerful and preferably no trade unions.

Some sources especially those affiliated to Labour Unions claim that with the erosion of unionization there has been unprecedented growth in inequality of house hold incomes. The reports of various studies conclude that between 1973 and 2001 hourly compensation in the US rose by 10.7%. The period 2003 to 2013 when trade unions were on the decline, is a decade of no wage growth. The inequality of earnings between the top and middle level workers is on the increase as is the inequality between the earnings of the white and blue collar workers. The presence of Unions brings about 13.6% overall wage growth, as well as employer sponsored pension and health insurance plans. The decline in unionization has led to 1/3rd growth in wage inequality.

The erosion of unionization has come about due to many factors. Trade pressures, the shift to services, technological changes and most importantly the employers’ militant stance against unions have all contributed to their decline.

Economists too have found that by and large the negative impact of unionization on the economy far outweighs the positive effects especially with reference to resource allocation and efficiency. The most commonly cited example is that of the unionization of automobile manufacturing units in Detroit. The United Auto Workers of Detroit Auto Makers was successful in raising the wages of the workers. Unfortunately this led to an average price mark up of $800 per unit on Detroit manufactured cars. As a result demand fell, leading to a decrease in production. Loss of job opportunity in the auto industry followed. Non-auto and ancillary industries also suffered as demand for parts, steel and plastic reduced. Thus in this case the positive impact of the Trade Union was short lived. The negative impact snowballed into the decline of the entire Detroit automobile industry.

Another impact of unionization is that investors are wary of financing firms that have trade unions. The market value of the firm immediately falls, despite the fact that there is no evidence that effective unionization impacts productivity.

Economists aver that when trade unions bargain in bad faith businesses close, millions of jobs are lost and unemployment rises.

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