Labor unions are often most known to be in the center of controversial political debates. Framed as either the champions of the working class or the brakes on economic efficiency, they provide for a fascinating economic discussion. Do unions actually help broken labor markets, and do they make workers more or less productive?

Firstly, it’s important to understand the basic idea behind forming a worker union. It would be logical to assume that workers have the freedom to ‘shop’ for the best employer, which would keep wages competitive. Unfortunately, this is often unrealistic. When a small group of employers dominate the hiring process, workers lose their ability to negotiate. This is known as Monopsony. It’s similar to a monopoly but instead of a single seller, it’s a single buyer. This is where a union comes into play, by organizing workers into a single bargaining unit, they can successfully counterbalance the power that employers hold. The result isn’t just a redistribution of income, but actually a movement in the market closer to efficiency. The level of employment will often rise rather than fall due to the attractiveness of higher wages, which leaves nearly everybody better off.

While the Monopsony problem is a relatively clean economic argument, the productivity debate is far from it. The traditional economic critique on labor unions is that they cause an overall decrease in productivity due to restrictive work rules. These work rules often raise costs, for example, forcing a qualified maintenance worker to stop working and hiring a specialist to come in to do the work instead. Labor unions are also often resistant to technological advancements that threaten jobs, which also hurts productivity.
On the other hand, Richard Freeman introduces The Exit-Voice Framework in his book “What do Unions Do?”. This explains that unions let workers ‘voice’ their concerns without consequences, which results in a much lower turnover rate and more stable labor relations. A high turnover rate is costly due to the troubles of having to find qualified workers so often.

The reality on whether unions are actually beneficial or not is that the context will always matter. Unions in competitive, innovative industries might suffer real costs, but unions in industries with few employers might be needed. What’s important is to realize that the economics of unions is complex, and demands more careful analysis.