The Union Tax: How Unions Cost Companies And Jobs

Unions and their supporters on the Left often argue that unionization is 'good' since it presumably (and arguably) puts more money in workers’ pockets. 

Unfortunately, the corollary question is never asked: What good are higher wages and benefits if one finds oneself on the unemployment line? 

In other words, what good is a union if the union eventually drives your company out of business (as has happened in numerous industries over the last several decades)?

[...and the list goes on.]

Leftists often focus purely on the wage and benefit effect on workers and all-too-often ignore the effects that unions have on companies. 

For example, some years ago, former President Obama’s one-time economic advisor, Larry Summers, wrote:

Another cause of long-term unemployment is unionization. High union wages that exceed the competitive market rate are likely to cause job losses in the unionized sector of the economy.

Summers’ statement, however, was made in the context of unemployment and did not address the overall negative effects that unions have on companies and their ability to compete.

Over and above unions’ impact on a firm’s wage and benefit costs are the unseen economic costs of unionization. 

Even if wages and benefits stay the same after unionization, unions add administrative costs to companies—this is often referred to as The Union Tax.

Jim Gray, a human resource consultant who conducts union cost analyses for employers, finds the costs of unionization far exceed mere wages and benefits:

…Gray estimates that the total additional operating costs (over a union-free company) range from $900,000 for a company with 100 employees to more than $4,000,000 for a company with as many as 2000 employees. These amounts do not include wages and benefits, but do include items such as additional training for managers, additional Human Resources support, attorney’s fees, cost of arbitrations and handling of grievances, plus negotiations, lost productivity, strike planning, security, and lost sales margin, as well as a number of other items.

In 2003, the Employment Policy Foundation’s analysis found:

…a company with 10 percent of its workforce unionized could experience 2.6 percent higher unit labor cost, and 21 percent lower before-tax profit than its non-union counterpart unless the union impact can be offset by charging higher prices.

Another study conducted for the Board of Governors of the Federal Reserve System found that union certification significantly reduces investment.

We find that a winning certification election has, on average, about the same effect on investment as would a 30 percentage point increase in the corporate tax.

More recently, economist Barry Hisrch argued that “a highly competition and dynamic economy has been the principal reason for the long-term decline of private sector union governance.”

A large union workforce requires financially healthy unionized employers.Competitive pressures limit the size of the union sector if union compensation premiums are not fully offset by higher productivity. Compared to nonunion workplace governance, where there is substantial managerial discretion constrained by market forces and law, union governance is formal, deliberate, and often sluggish. Unionized companies, therefore, often fare poorly in dynamic and highly competitive economic settings. Among a host of reasons for declining private sector union density in the US, the most fundamental explanation appears to be the increasingly dynamic US economy coupled with the relatively poorer economic performance among union than nonunion establishments and firms.

This is consistent with Professor Hirsch’s earlier findings that:

  • Unionized firms have profits that are 10% to 20% less than non-unionized firms
  • Capital investment of an average unionized firm is 6% lower than that of a comparable nonunion firm
  • The average unionized firm made 15% lower annual expenditure on Research & Development
  • In studying 510 manufacturing firms, median growth of non-unionized firms was 27%, while the growth rate of unionized firms was zero.

Of course, with unions costing the American economy as much as $50 trillion over a 54-year period, in today’s highly competitive marketplace (domestic and, more recently, global), all of these factors weigh upon the creation of jobs.


A longer version of this article was posted here.


Subscribe to the American Workplace here.

By becoming a patron, you'll instantly unlock access to 17 exclusive posts
By becoming a patron, you'll instantly unlock access to 17 exclusive posts