Chief economist Brian Callaci contributes a strong scoped essay on the fluctuations of employment and wages in the labor market, and the connection to Union power.

The historically low unemployment rates of 2021 and 2022 spurred a once-in-a-generation moment of increased worker bargaining power. Wages rose at their fastest pace in a generation, with gains at the bottom outpacing those in the middle and at the top. Unfortunately, a few months of inflation (mistakenly blamed on a “too tight” labor market) was all it took for the Federal Reserve and influential economists to abandon their brief commitment to maximum employment and increased worker power. 

They are making a mistake. We have had 40 years of policies biased toward disempowering workers. The labor share of national income has declined and wages have lagged productivity for decades. Without wage increases in excess of the inflation rate, how will workers ever catch up? Transferring power from capital back to the working majority would result in a better economy for all, but doing it requires sweeping reforms to empower workers. Most importantly, it demands institutionalized collective power for workers on the job. That means labor unions wielding real clout within firms, industries, and supply chains, as well as in the corridors of political power.

Unions are essential to counter the wage-suppressing power we now know is pervasive across labor markets, in which virtually all employers enjoy monopsony power. Wages are not set by impersonal forces of supply and demand. Rather, employers have some unilateral power to set wages, due to factors like search frictions, commuting distance, and employer concentration. Under these conditions, collective wage bargains with employers can create a more fair and efficient economy. In addition to countering employer power in labor markets, unions also limit the arbitrary power of employer discipline within the boundaries of the firm, through “just cause” provisions and internal disciplinary procedures that limit the authority of supervisors to fire workers. These mechanisms result in more secure jobs and an enhanced role for employee voice over exit, which facilitates more open communication and even stronger ties between employers and employees. In the U.S., with at-will employment governing terminations in almost every state, union-negotiated grievance and arbitration procedures are the only check on arbitrary dismissal.

However, the most important effects of stronger unions are likely to be found in politics and policy — even more than in labor markets and firms. Without unions as a bullhorn to express their collective interests, workers’ policy preferences do not weigh as heavily as those of corporations, financiers, and wealthy individuals in state capitols, courtrooms, and Washington, D.C. As a result, policy is biased toward the rich and powerful, with dire consequences for economic efficiency and even our democracy. With the labor movement in its weakened state, a large array of foundation-funded nonprofit advocacy groups and think tanks have filled the vacuum, speaking for workers in vital policy debates. Without disparaging the good work these institutions do (I work for a think tank), they lack the democratic legitimacy of elected labor leaders. With a financially secure, democratic, and politically powerful labor movement, workers will be able to train or hire more of their own experts, lobbyists, and technocrats, and speak with their own voice in policy debates instead. This would rebalance the political economy in a more fair and democratic manner.

However, for us to actually enjoy these benefits, our political economy must adjust to tolerate a real redistribution of power. Two of the critical remedies are ably explained elsewhere in this collection: Making it easier to join a union in the first place, and allowing unions to bargain on a sectoral basis, setting bargains that bind all employers in an industry.

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