Academic journal article Economic Inquiry

Do Unionized Firms Hire Better Workers?

Academic journal article Economic Inquiry

Do Unionized Firms Hire Better Workers?

Article excerpt

I. INTRODUCTION

Many economists firmly believe that union firms offset higher union wages by hiring better workers. The contrasting view--that union employers react to higher union wages by hiring poorer-quality workers--is regarded as impossible.(1) Yet, this contrasting view is highly plausible in the context of standard economic modeling and with what is known about labor markets. There is evidence supporting this view.

The standard story for unionized firms hiring better workers goes like this: A union raises wages and the firm foils the union by hiring better-quality workers. The problem with this myopic story is that it ignores what happens in the future. It assumes that unions will sit idly by and let union firms whittle away any union wage differential by hiring better-quality workers. I would argue that it is more likely that unions would respond to better-quality workers by raising wages even more. Employers, anticipating this, may respond by hiring lower-quality workers.

This article is the first to consider how unionized firms choose worker quality when they anticipate the future consequences of quality on wages. Under reasonable conditions, these consequences cause employers to hire lower-quality workers. While I do not contend this always occurs, I do argue that there are reasonable grounds for rejecting the "better quality" proposition. In addition, there is evidence that unionization often does result in lower-quality workers. The results presented here suggest that economists should look again at how unions affect wages, productivity, equality, and society.

This is not the first paper to suggest unions lead to lower-quality workers. It is, however, the first to suggest this result is due to employers making profit-maximizing decisions when they anticipate the future consequences of their actions. There are two other articles that also suggest unions can lead to lower-quality workers. First, Robinson [1989] assumes that unionized employers do want higher-quality workers, but do not hire them because nonunion firms pay them more (as the nonunion firms are assumed to have better monitoring technology and a more flexible reward system). Second, Bronars and Lott [1989] show that unions that seek the maximum dues will want poorer-quality workers.

While these models focus on factors that may prove to be important, the model presented here is theoretically more forceful. First, it is based upon standard economic modeling. Second, using Ochkam's razor, it assumes the least added factors. And finally, its central assumption--that people anticipate the future--has a large body of economic evidence behind it. By demonstrating that the better-quality proposition is not supported by conventional economic analysis, this article shows the "better-quality" proposition should not be given a greater weight in the priors of economists. Having done this, these other models then should, and hopefully will, be examined more closely.

II. THE CASE FOR UNIONS LEADING TO BETTER-QUALITY WORKERS

In discussing the wage gap between union and nonunion workers, H. Gregg Lewis [1986, 46] concisely presents the case that union firms select better workers: "I have strong priors on the direction of the [selectivity] bias. Let a union through collective bargaining impose on an employer higher wages for his workers than he otherwise would pay them with worker quality not tightly specified in the collective bargaining agreement. The higher wages will lengthen the queue of the applicants for the unionized jobs, including some applicants of greater productiveness than otherwise would have applied. The employer has an incentive to evade the increase in his labor costs by employing workers of greater quality. The evasion will take time and will be impeded by the cost of screening workers, imperfect substitution in production among worker quality, and employment constraints in the collective bargaining agreements. …

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