THE UNION WAGE PREMIUM AND THE NAIRU
What have we found so far about the NAIRU? First, the jobs summit with its focus on mismatch unemployment and its emphasis on training and retraining as a solution, at best, looked at only a small part of the picture. An increase in mismatch unemployment has not been shown to be the major reason the NAIRU has increased. Second, business costs have increased. The oil price shocks and other shocks in the 1970s caused business costs to go up dramatically, but these shocks could only have temporarily increased the NAIRU since they have, by and large, been reversed. Government-imposed costs in the form of regulations have also increased dramatically, and these cost increases have not been reversed. In fact, they appear to be increasing. This imposed-cost factor may very well be linked to the higher U.S. NAIRU. Third, unemployment insurance and welfare payments can lead to more unemployment. Changes in these programs may also have contributed to a higher NAIRU. Reform of these programs may also significantly reduce unemployment.
This chapter looks at another factor that may have contributed to an increase in the U.S. NAIRU. It examines the effect labor unions have on business costs through their effect on wages and benefits.
By increasing the relative wages and/or benefits of union workers, labor unions increase business costs and reduce the amount of labor that employers can use profitably In addition, workers who are laid off from relatively high-wage union jobs will have high reservation wages. That is, because they are accustomed to a relatively high wage (an uncompetitive wage), they will be reluctant to quickly accept jobs that pay competitive wages and will choose to be unemployed for longer periods of time while they search for a job that pays wages close to their previous union-inflated wage level. Union-induced high reservation wages reduce the effectiveness of unemployment in combatting inflation because unemployed work