The Right Way to Raise Wages

The government's June employment report showed that the number of new private jobs continues to remain far too low to reduce unemployment from its current 9.5% rate. The pressure is mounting in Washington to get the economy on the right track. But recent decisions by President Obama and his administration to increase unionization are steps in the wrong direction.

These steps include executive orders that increase union bargaining power, including one that gave preference to union labor on big federal construction projects, and a recent revision of a 75-year-old National Labor Relations Board ruling that now makes it easier for airline and railroad workers to organize.

From the beginning of his term in office Mr. Obama has made union priorities his priorities, most conspicuously by supporting the Employee Free Choice Act (EFCA). This misleadingly named bill would replace the secret ballot with a signature on a card, the so-called card check, in union elections. It would also require mediation if the union and the employer can't reach an initial union contract, and impose binding arbitration if mediation is unsuccessful.

EFCA is currently stalled in Congress because of the controversial card-check provision. Nevertheless, Craig Becker, whom Mr. Obama put on the National Labor Relations Board, argued in a 1993 law review article that the NLRB can rewrite union election rules without Congressional approval. The five-member board is made up of three Democrats and two Republicans.

Those want more unionization claim it is necessary to raise wages. Instead it will further depress the economy. My research suggests that if unionization rates returned to 1970s levels (roughly in the mid 20% range of the private work force), and if new unions could achieve the same wage premium as existing unions have achieved over nonunion workplaces, then employment could decline by about 4.5 million and real GDP could fall by about $500 billion per year.

Why? Unions raise members' wages by restricting competition, much as a business monopoly raises prices by restricting competition. Economists criticize business monopolies for raising prices above what they would be in a competitive marketplace, which reduces employment and output. Unionization reduces employment and output much the same way by raising wages above underlying worker productivity.

Small businesses would be particularly impacted--about 55% of union elections occurred at businesses with 30 or fewer employees between 2003 and 2006. Negotiating costs are high for smaller firms, many of which do not have collective bargaining specialists in house. Add this cost to low profit margins, and expanding unionization presents a significant burden to these employers.

Worse, workers with low educational attainment and low wages will be most at risk. Research published in Econometrica in 2000 by myself, Per Krusell, José-Víctor Ríos-Rull and Giovanni Violante suggests that rapid technological advances are making sophisticated capital goods cheap substitutes for low-skilled workers, and are an important reason why wages for these workers have declined in recent years. This means that the job loss from increased unionization will tend to fall disproportionately on the lowest-paid workers.

Americans should place a high priority on policies that raise wages and expand employment opportunities. But there are ways to do so at a fraction of the cost of higher unionization. Promoting wage growth in a competitive economy boils down to raising worker productivity. One way to do so is by increasing financial aid for education and job training.

The foundation for this positive approach already exists with Mr. Obama's $12 billion community college initiative. Increasing education and job training opportunities--not restricting competition through higher unionization--will expand incomes, increase global competitiveness, and provide opportunities for workers to succeed.

Lee E. Ohanian is an adjunct scholar at AEI.

Photo credit: iStockphoto/Rob Friedman

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