Economy

Fewer Labor Unions Means More Income Inequality

CREDIT: Shutterstock

Lower rates of workers belonging to unions are strongly associated with more income going to the wealthiest, according to a new paper from International Monetary Fund (IMF) economists Florence Jaumotte and Carolina Osorio Buitron.

The authors write, “[W]e find strong evidence that lower unionization is associated with an increase in top income shares in advanced economies during the period 1980–2010.” In particular, they found that the decline in unionization explains about half of the rise in incomes for the richest 10 percent and about half of the increase in the Gini coefficient, a measure of income inequality. It’s also associated with less redistribution of income between the best off and the least well off.

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CREDIT: IMF

While it can be hard to say for sure whether the decline in unionization is a direct cause of growing income inequality, they found that it is a “key contributor” to steep increases in income at the top, which holds true even after they controlled for other factors such as shifts in political power, labor market trends like the growing power of Wall Street and deindustrialization, and top marginal tax rates.

The authors also found that reductions in country’s minimum wages have increased inequality “considerably.”

Why would lower unionization rates have such an impact? The authors explain it in two different ways. Lower union density reduces workers’ bargaining power, which means corporate managers and shareholders stand to see higher returns if workers don’t have the power to ask for a bigger share. A lack of bargaining power may also mean that workers have less influence on corporate decisions, which could led to policies that better benefit top earners like higher executive pay. Unions also play a political role and can push parties to pass policies that would better redistribute income, but if they are weakened they don’t have the same influence.

The authors also note that while some economists argue that stronger unions and higher minimum wages increase unemployment, there isn’t strong evidence to support the claim. For example, one review of research from the Organisation for Economic Co-operation and Development only found three studies out of 17 that showed a robust association between unions and unemployment.

Union membership in America has been on a steady and steep decline since the 1980s. Last year, 11.1 percent of workers belonged to a union, down from 20.1 percent in 1983. In that same time period, income inequality has been skyrocketing, and in 2012 the top 10 percent of earners took home more than half of all income, the highest amount ever recorded since 1917.

Research in the United States has also linked these two trends. As union membership steadily declined since 1967, the middle class’s share of income has also dropped off:

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CREDIT: Center for American Progress

One reason could be that belonging to a union is associated with making more money. The few workers who belong to one have median weekly earnings that are $207 more than for non-union workers. The middle class also makes much more in states with higher unionization rates.

The IMF’s findings could present a challenge for potential Republican presidential candidates who have recently started talking about the dangers of income inequality. Republicans have blocked all recent attempts to raise the federal minimum wage. Meanwhile, state-level Republicans have steadily chipped away at unionization and Congressional Republicans have attacked the National Labor Relations Board, which is in charge of protecting workers’ right to organize.