The impact of unions on the functional distribution of income has been widely debated by economists. Orthodox economists generally argue that rather than reducing profits, union wage gains come at the expense of non-union workers (Pencavel 2005). In part, this position is based on the view that the economy is perfectly competitive in both the product and labor markets. If markets are viewed as being competitive, then social and institutional forces will not influence the distribution between labor and capital. Post-Keynesians and other heterodox economists have challenged this view, arguing that it is entirely possible for wage gains to come at the expense of profits. This perspective is based on viewing the economy as being imperfectly competitive in both the product and labor markets (Kalecki 1971; Erickson and Mitchell 2007). Thus, from a post-Keynesian and heterodox perspective, social and institutional factors are important determinants of the distribution of income between labor and capital (Kalecki 1971; Robinson and Eatwell 1973).
The mainstream economics perspective argues that social and economic policy cannot be used to address growing concerns of rising inequality. Rising inequality is largely attributed to skill-biased technological change, which is seen as an exogenous variable outside the control of public policy. In contrast, heterodox economists argue that rising inequality is the direct result of public policy changes. Many have argued that American corporations have consciously opted for a "low road" strategy eroding social safety nets, holding down minimum wages, destroying unions, increasing the use of temporary workers, and investing in finance while divesting from manufacturing (Harrison and Bluestone 1988; Harrison 1994; Gordon 1996; Koeniger et al. 2007).
The purpose of this paper is to determine the impact of unions on labor's share of income in the U.S. manufacturing sector using 1997-2006 panel data. This paper is important for three reasons. First, it sheds light on whether social and institutional forces play an important role in determining the distribution of income between labor and capital. Second, it helps to explain recent increases in wage inequality. Third, it has implications for understanding the potential impact of legislation, such as the Employee Free Choice Act, that would make it easier for workers in the U.S. to unionize.
The paper is organized as follows. The next section presents a review of the literature. The third section examines the decline in labor's share of income in the U.S. manufacturing sector. The following section presents a model of the factors that determine labor's share of income based on the assumption that a firm maximizes profits in an oligopolistic industry. The fifth section presents an empirical model, discusses the data used in this paper, and presents the estimates of the model. The final section presents a summary and conclusions.
Review of the Literature
The impact of labor unions on labor's share of income has been the subject of numerous studies. Early studies were mainly descriptive in nature and relied on time series data. Summaries of early research can be found in Kerr (1957), Dobb (1959), Simler (1961), and Rees (1962). In this early literature, the general consensus was that unions did not appear to have a significant effect on labor's share of income. For the most part, these early studies were descriptive and examined how labor's share of income changed over time and compared the changes to the growth in unionization.
Some studies, for example, Johnson (1954), used aggregate time series data. Johnson (1954)--who Rees (1962) cites as providing evidence that unions did not appear to have an impact of labor's share of income---only mentions unions once in the article. Rees' conclusion was based on Johnson's observation that union growth did not coincide with the rise in labor's share of income. …