What’s the point of unions?

Unions are associations that allow workers to approach their employers not as individuals, but as a more powerful collective. This power makes unions pretty controversial; some people think they’re necessary for keeping employers in check, but others think they’re too powerful and hurt the economy.

While some economists think that wages are mostly determined by how productive a worker will be in a given job, others think it has more to do with the bargaining power of each side. Workers generally want higher wages and better working conditions. Employers on the other hand usually want to keep costs down. Wages, and working conditions in this theory are determined by how much power each side has to make the other give in to their demands.

Employers are in a pretty powerful position because they can hire and fire people. When there are tons of jobs to go around this is less of an advantage, because fired workers can just get jobs somewhere else. But when there’s high unemployment, being fired can be a really serious problem for workers. Unemployment gives employers some leeway in deciding how much to pay workers; if one person won’t accept a lower wage, someone else probably will.

One way workers limit this power is by organizing into unions which allow workers to speak out together and bargain collectively with employers. Within a union workers can vote to stop working in order to put economic pressure on the business (called going on strike). The idea is that it would be very costly for a business to fire or discipline all the workers at the same time, so they’ll hopefully agree to compromise and raise wages instead.

Historically unions have been really important for creating a lot of things we see as basic working rights in rich countries, like safe workplaces, 8 hour workdays, weekends, and the end of child labor. Unions and collective bargaining have played a big role in the creation of middle class jobs in most well-off countries.

But unions also draw a lot of criticism. A lot of people agree with the basic premise of unions, but think in practice that they have gone too far. In many rich countries, the decline of manufacturing has been blamed on unions that wanted to keep wages high, even when competition increased from overseas. Some people say that unions make it harder to fire bad workers, which hurts employers, customers and other employees. Public sector unions create even more debate, as wage increases for government workers can mean higher taxes for everyone else.

Some economists also argue that when unions win wage increases, they actually create bigger problems for unemployed people, who are willing to work for lower wages than the high wages negotiated by the union. That’s called the insider outsider problem, because the insiders (workers with jobs) create a bigger problem for outsiders (people who want jobs). Other economists don’t think this effect is actually that big in practice, and is outweighed by the extra economic activity created by giving workers more money to spend in the local economy.