Cost of Unionization

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Cost of Unionization - EPF 2003

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ContemporaryIssuesinEmploymentandWorkplacePolicy

der

-.-

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~.~~~~~~~

March14,2003

FinancialOutcomesinUnionandNon-UnionWorkplaces

Introduction

This

IssueBackgrounder

examinesthreeaspectsofunionizationoncompany

performance:

laborcosts,productivityandproductivitygrowth.Thisanalysisisbasedonareviewofrecenteconomicstudiesoftheimpactofunionizationontheperformanceofprivatesectorfirms.Moststudiesshowunionimpactresultingfromhighercompensationcosts,butmanyalsoshowanegativeimpactonproductivityandproductivitygrowth.Theconclusionthatunionizationreducescompanyprofitsisunquestionedevenbyeconomistswhofindfavorableeconomicoutcomesfromunions.Thedisagreementisoverthesourcesandthesizeofthefinancialimpact.

TheEPFanalysisfoundthatacompanywith10percentofitsworkforceunionizedcouldexperience2.6percenthigherunitlaborcostand21percentlowerbefore-taxprofitthanitsnon-unioncounterpartunlesstheunionimpactcanbeoffsetbycharginghigherprices.

TheEmploymentPolicyFoundation(EPF)appliedtheresearchfindingsonunionimpactsoncompensationcost,productivityandproductivitygrowth

output,costandprofitestimatesforatypicalcompanyderivedfrom2001privatesectorNationalIncomeandProductAccountsdata.EPFanalysisfoundthatacompanywith10percentofitsworkforceunionizedcouldexperience2.6percenthigherunitlaborcost,and21percentlowerbefore-taxprofitthanitsnon-unioncounterpartunlesstheunionimpactcanbeoffsetbycharginghigherprices.Thisfindingwasbasedonthecombinedeffectof16percenthighercompensationcostsandonepercentloweroutputperlaborhour.Higherlevelsofuniondensity,ahigherunioncompensationpremium,andlowerinitialproductivitywouldmagnifythesedifferences.Thereductionofprofitswouldbelessiftheunionizedfinnexperiencedaproductivitygaininsteadofproductivityloss.Reducedprofitabilitymakesitharderfortheunionizedfinntoattractinvestmentneededtoexpandfacilitiesandadoptmoreefficienttechnology.Theresultmaybeslowerproductivitygrowth-annualincreaseinoutputperemployee-comparedtothenon-unioncompetitor.Slowerproductivitygrowthmeans

that

acompetitivedisadvantage

termsofoutputperlaborhourwillemergeovertimeeveniftheunionizedfinnstartsevenoraheadofthenon-unionfinn.Tenyearsafterunionorganization,theunionizedcompany'soutputperemployeewould

2.4percentlessthantheoutputperemployeeofitsnon-unioncompetitor,iftheunionizedcompanyexperiencesjust0.25percentslowerproductivitygrowthfromanequalstartingbasis.Unlesstheproductoftheunionizedcompanycanbesoldforahigherpriceorothercostsavingsattained,theunionizedcompanyislikelytoresult

profitsperlaborhour14percentlessthananon-unionworkplace.Withinacompany,theimpactofaunionizedsegmentofthelaborforceonoverallcompanycostsandperformancedependsonthestrategicimportanceoftheunionizedsegment.Asmallproportionofthe

issuebackgrounder

workforceunionizedmayhaveamajorimpactonoperations,iftheunionizedsegmentaffectskeyelementsoftheproductionordistributionprocess.Unionizationofasegmentoftheworkforceofacompanymayalsohaveaspill-overeffectoncostsandproductivityifunionwagescales,benefits,andworkrulesbecomeamodelforhumanresourcepolicies

that

applytothenon-unionworkforce.Locationofcompanyoperationscanalsohaveanimpactoncompanyperformance,regardlessoftheshareofthelaborforceunionized.Operations

stateswithhighunionmembershipdensitymaybemorecostlyorlessproductiveregardlessoftheactualpercentageofthecompanyworkforcethatisunionized,ifthecompanyhastomatchlocalstandardsofcompensationandworkrulesthatreflectunionpresenceinthelabormarket.

ahighuniondensitylocale,anon-unioncompanymayfinditself

adisadvantageintermsofattractingandretainingthemostskilledandproductiveworkersunlessitofferscompensation

and

conditionscomparabletotheunionstandard.Table

I-at

theendofthis

IssueBackgrounder-

showsthewidevariation

uniondensity(privateandpublic)bystate.Thetoptenstatesintermsofuniondensityaccountfor41percentofallunionmembersnationwide.

From1986to2001,unionhourlycompensationcostsaveraged37.5percentmorethannon-unioncompensationcosts.Thisdifferenceoverstatesthehourlycostpremiumattributabletounionization.

Figure

TotalCompensation

HourlyCompensationPerLaborHourbyUnionStatus

Source,EmploymentPolkyFoundationtabulationofBareau

(If

LnborS1111isticsata.

Thecombinedprivateandpublicuniondensityisrelevanttoindicatetheoverallunionimpactonthelabormarketenvironmentbecauseofthesignificantlabor

EmploymentPolicyFoundation

Marcil14,2003

mobilitybetweenprivateandpublicsectorjobs.Overalluniondensitymayalsobeafactorinthepoliticalenvironmentthataffectsthelegalandregulatoryframeworkinwhichprivatecompaniesoperate.

ImpactofUnionsonCompensation

Figure1comparesthe

total

hourlycompensation(wagesandbenefits)byunionstatus.From1986to2001,unionhourlycompensationcostsaveraged37_5percentmorethannon-unioncompensationcosts.Thisdifferenceoverstatesthehourlycostpremiumattributable

unionization.

Figure2UnionMembership

Industry.2001

S01...~e:Em!.loy",,,,,':PolkyF<>"ndationtabulation

",f

BUI·eatJ

(If

Labol'

Statisli(sdala,

AsshownbyFigure2,unionmembersaremoreconcentratedinsomeindustriesthanothers.Figure3comparesunionandnon-unionweeklyearningsbymajorindustryin2001_Theimplicationsoftheseunion-nonunionwagedifferencesarecomplicated,notonlybyindustry,butbyvariationsinhoursworked,skills,andlocations.Forinstance,unionmembersintransportationtendtoworkmorehoursperweekandunionmembersinconstructionareconcentrated

skilledtradesandurbanlocales.

Figure

WeeklyEarningsDifference

Industry

UnionMemberandNon-union

Weekly

Wage

Eatnlng$

60%,.·--"-~--~----------------"------·----·-~~~,

50%

+-'---------------

~%+.-.--.-.--.-..-.---.---.-.-....-.-----.~--------_._--------

30%

+--!

---------.-.-.-------.----':::=?-

20%1

1..__._.._.......

-1....."--__

10%

+-:

__"..,O-..r--~""""'~--"'lM~.r.-·-........-.-----

O%";·~w-.~-Jwa-T-~~·--T--~~··-~···

i-\~V$'-<:f,

,fiG'-'"

#-¥f''''

.p.,iti'q,

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~*~

~'$

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SOllWe:EIUIlI(lYIl1~lltPolkyFoundationtab".lntion

Iltu·enuofLabQr

Sluiisllc'dota.

issuehackgronnder

Manufacturingprovidesamoreconsistentindustrycontextforcomparingcompensationofunionandnon-unionworkers.Hoursworkedperweektend

besimilarforunionandnon-unionworkers,andtheskillandlocationdifferencesappeartobelesspronouncedthanisthecasewiththeconstructionindustry.

Figure4

WageandBenefitsComponentsofCompensation

HourlyCompen$tllio!lCos!

fOf

WagesandBeooutn

UnionAffiliaiion,M3nufacluringEmployees,2002.

DollarsPerHour

$30

T~-~·~··-····~···-·-·~-···-·---.-----~--.-.--.-..-.----.---._.-._._._._.__-_..

$25

+._--.-_._._-

$2G

+--~-

$15

+-_._.-

$10

+--------

+-----

+.-~.-~~.~_-.

UnionNon-Union

SOIU~e:EmploymentPulkylIounduHflntabulationofBure,,"ofL"bol'Statisticsdar...

manufacturing,theunionweeklyearningspremiumreportedbyBLSfor2001(6.2percent)isalmostidenticaltothe6.4percentdifferenceinhourlywagecostbetweenunionandnon-unionworkersintheBLSEmployerCostofEmployeeCompensationseriesfor3rdquarter2002.1Figure4showsthatthedifferenceof6.4percentinunionversusnon-unionwagesinmanufacturingisdwarfedbythe36.5percentdifferencebetweenunionandnon-unionbenefitscosts.

EPF'scomparisonofunionversusnon-unionhealthinsuranceplancostsfoundthatplanscoveringunionworkersin

2001

costonaverage

$4.754-14.0

percentmorethanthecostforcoverednon-unionworkers.

Aleadingcomponentofthehighercostofunionbenefitsinmanufacturingandinotherindustriesishealthinsurance.EPF'scomparisonofunionversusnon-unionhealthinsuranceplancostsfoundthatplanscoveringunionworkersin2001costonaverage$4,754-14.0percentmorethanthecostforcoverednon-unionworkers.Unionworkerswerealsofoundtobelesslikelytocontributetothecostofhealthinsuranceandtocontributeasmallersharewhentheydid

contribute.'

Otherbenefitareaswhereemployercompensationcostsforunionworkersexceednon-unioncostsincludepaidleave($.76perhourhigher)andpensionbenefits

March14,2003

($1.15perhourhigher).Overall,thecombinedeffectsofwageandbenefitsdifferencesinmanufacturingresultinthehourlyemployercostofunionworkersbeing16percenthigherthanthehourlyemployercompensationcostfornon-unionworkers.The16percentdifferencebetweenunionandnon-unioncompensationsuggestedbythemanufacturingcomparisonfor2002isconsistentwithunionwagepremiumestimatesfortheoverallprivatesectorbasedoneconometricmodelsthatcontrolformultiplevariationsinworkercharacteristicsbyindustry,occupation,age,experience,education,etc.'

Figure5Impact

UnionCompensationonProfit

EsUmaladBerore-laxProfitPerHourwith16PercentUnionCompensationPremium

DollarsProfitPerHour

$4.00

r~--··-~···-·····-·"'·"'~·-·---···---···-···--···-·····~'---.'~~-"-'''''''-.-'''''~.''''.-.....--.......,---.-.....-"

$3.50$3.00$2.50$2.00I$1.50.$1.00:

$0.50I

$Q.OO

N()Union

10%

25%5%

Uaionn.,nsityinCompallYWo~kforceSour",,:EmploymentPolicyFoundation

tllblll'ltjOIl

ofUm"eJiQofr."borStaHstksdata.

Figure5illustratesthepotentialimpactofhigherunioncompensationcostsonatypicalprivatesectorcorporationbasedonthe16percentoverallhourlycostpremiumperunionmembertypicalofthemanufacturingsector.TheillustrationisbasedonananalysisofNationalIncomeandProductsAccountsdatafornon-farmprivatebusiness

2001.4Theestimatesshownreflectonlytheeffectofhighercompensationcostsassociatedwithunionizationanddonotincludeanypotentialeffectsofunionizationonproductivityorproductivitygrowth(thesepossibleeffectsarediscussedsubsequently).

Tenpercentuniondensityinthecompanyworkforceresultsinestimatedhourlyprofitsof

$3.34-9.4

percentlessthanthenon-unioncase.

Figure5showshourlyprofitperemployeeas$3.68perhourforacompanywithnounionmembersbasedonaverageoveralllaboroutputof$43.39perhour.Foracompanywithunionpresence,theprofitperhourwasfoundtobeless,dependingonthelevelofunionization.Tenpercentuniondensityinthecompanyworkforce

EmploymentPolicyFoundation