First off, this was very well written. You've also successfully rage-baited me;
"Masters are always and everywhere in a sort of tacit, but constant and uniform combination, not to raise the wages of labour above their actual rate... We rarely hear, it has been said, of the combinations of masters; though frequently of those of workmen. But whoever imagines, upon this account, that masters rarely combine, is as ignorant of the world as of the subject." - Adam Smith
The IBEW was founded in 1891. Mainly because electricians were dying left & right.
"Unions are probably not beneficial to society in the 21st century" is a rather different claim than "Unions should never exist or have existed", so perhaps you would get less angry if you paid attention to which claim the post was making.
In addition to entering into workplace or sectoral negotiations with firms, unions are also important political actors in most countries, with effects on policy across a whole range of domains. Assessing the benefits to unions requires taking that into account, and considering the counterfactual in which unions do not exist. It's political economy all the way down I'm afraid.
As to the claim that public sector labor markets are pareto optimal, I think the most generous response is "citation needed".
I wonder how much of this is driven by unionization in sectors where the employer does not have monopoly rents to be "shared" (tradable goods), some monopsony power in hiring, or where the unionization creates the monopoly rent to be extracted (longshoremen). Likewise, are there reforms of union governance or labor law that could mitigate bargaining for inefficient outcomes (against merit-based pay, "Cadillac" health insurance, unfunded pensions, port modernization)?
Grand! Fascinating read, Nicholas. I feel there's still scope to combine these findings with the missalocation literature. I write from Colombia, so I always like to "land" these insights into the Colombian context: an EM with high informality, low productivity, and ample misallocation. For instance, there's this work from 2005 suggesting that unions both generate a wage premium and increase wage inequality in Colombia, because workers in professional settings have a higher propensity to unionise than those in the informal, low-productivity sector. Here's the link: https://ideas.repec.org/a/col/000090/004561.html
> that unions both generate a wage premium and increase wage inequality in Colombia, because workers in professional settings have a higher propensity to unionise than those in the informal, low-productivity sector.
That’s not an argument against more unionisation but the opposite.
I’m not fully convinced about why it would be the opposite. In a highly informal economy like Colombia, the political economy of unions matters enormously.
Yes, unions may raise wages for organised workers (that’s the wage premium the literature finds), but the key question is which workers are organised. In Colombia, unionisation is concentrated among relatively protected, higher-productivity (mostly manufacturing), formal-sector workers, while informal and low-productivity workers remain largely outside bargaining structures and cannot unionise.
That creates an important trade-off: policies pushed by organised labour, particularly sustained minimum wage increases above productivity growth, can raise labour costs in the formal sector while reducing incentives to hire low-skill or entry-level workers. Colombia is a striking case here: despite repeated real minimum wage increases (the latest around 17% in real terms), roughly half of workers still earn below the minimum wage.
So, the issue is not whether unions help their members; they clearly can, but whether, in a dual labour market with massive informality, they inadvertently raise the bar for the hiring of low-productivity, entry-level jobs.
The unionisation data reinforces this point: private-sector union density is below 3%, while public-sector unionisation is closer to 36%. That suggests organised labour’s political influence may reflect the interests of relatively protected insiders more than those of precarious informal workers.
Also, who represents the unemployed? By raising entry, non-wage and exit costs to the formal labour market, they end up increasing misallocation and lowering the incentives for businesses to increase headcount, especially for low-productivity and entry-level jobs.
That’s why the Colombian case is fascinating. It sits at the intersection of labour economics, macroeconomics, industrial organisation, and political economy, especially because EM labour markets behave so differently from advanced economies.
In some European countries unions will negotiate reduce pay and hours during a downturn to avoid layoffs. Would you consider that a positive effect of unions? Seems better than the turnover cost of hiring during booms and firing during busts that is seen elsewhere.
Unions are the only reason that wages starred to grow after the first 50 years of stagnation at the start of the Industrial Revolution. Capitalism wants to increase profits, not wages. Companies want to reduce all costs and labour is a significant cost. Without unionisation - and historically the changes that unions brought in that have outlasted them - wages would stagnate again. Productivity or no productivity.
seems to me like reduced wages are still a pretty strong incentive for retraining, it just allows the price mechanism to assign who gets the retraining rather than whatever mechanism companies use to determine who gets laid off.
Not in practice, no, not even when there is no downturn but simply a structural change in one industry, eg German carmakers ten years ago, or all the French businesses that put off restructuring until they just went bankrupt.
That's fair enough, people choose being comfortable right now over any longer term horizon and over any broader social analysis.
Since our laws that allow them to make that choice at our cost, of course they do.
There is a fundamental legal and cultural distinction between the US and Europe regarding how adversarial a labor organization must be to remain legal.
In short: US law strictly requires separation and conflict to prevent employer interference, whereas European law permits and structure cooperation within the company.
The key differences between the two systems are structured around how the law treats workplace collaboration.
## 🏛️ The US: Strict Separation and Non-Interference
In the United States, labor law is deeply rooted in an adversarial model to prevent employers from manipulating worker groups.
* Section 8(a)(2) of the NLRA: The National Labor Relations Act makes it an unfair labor practice for an employer to "dominate or interfere with the formation or administration of any labor organization or contribute financial or other support to it."
* No Middle Ground: This creates a strict binary. Any employee committee, group, or council that discusses working conditions, wages, or grievances with management risks being classified as an illegal, employer-dominated "company union."
* Forced Adversarialism: Because independent, external unions are the only fully legal vehicle for collective bargaining, the law inherently structures labor relations as an outside-versus-inside adversarial dynamic. Non-adversarial, joint employer-employee committees are legally restricted if they attempt to negotiate employment terms.
## 🇪🇺 Europe: The Co-Determination and Cooperative Model
European labor law does not equate workplace cooperation with illegal employer dominance. Instead, it legally mandates a dual-channel system that separates day-to-day workplace collaboration from sector-wide wage bargaining.
* Legal Co-Determination: In countries like Germany, Austria, and the Netherlands, laws (such as the German Betriebsverfassungsgesetz) legally require management to share power with employee-elected Works Councils.
* Mandated Peace: Works councils are legally bound by a "peace obligation." They are generally prohibited from calling strikes and are required by law to work with the employer "in a spirit of mutual trust" for the good of both employees and the establishment.
* Financial Support is Legal: Unlike the US, where employer funding equals illegal domination, European employers are legally required to fund the operations of the works council, providing them with office space, IT equipment, and paid time off to perform duties.
* The Independent Buffer: This system only passes muster because sector-wide, completely independent Trade Unions exist outside the company. These external unions hold the exclusive right to strike and negotiate industry-wide wages, ensuring that the peaceful, internal works council cannot be used by the employer to suppress wages.
Ok that I knew, I think (I obviously wasn't going to read all that). But that has nothing to do with acting destructively, which European unions do all the time. For example half the reason German carmakers are in the shit is because their unions wouldn't let them change and adapt fast enough and imposed massive costs on the restructuring they did agree to.
For example the French unions... all the time actually, but most ridiculously lately fighting any cut in pension benefits _even if it would directly benefit the workers they are supposed to represent_!!
It's not that they never act destructively, it's that they aren't legally obligated to do so. German unions feel a cultural imperative to hold up progress, not a legal one. French unions feel a cultural imperative to be agents of chaos in general, not a legal one. Both will occasionally take a time out from these duties to figure out how to help with productivity. If US unions ever tried to help a company be more productive, they would be forcibly disbanded by the government.
I'm glad there is a difference in theory. I'm slightly stuck for practical examples unfortunately, since I don't recall the 70s and 80s when they might have existed.
Re public sector unions, I think the typical argument is that many public sector employers are monopsonists for relevant public sector employees and public sector unions are needed to even out "bargaining power".
One mechanism I could think of is government inefficiently degrading amenities/nonwage job characteristics. Eg you if you have a small workforce relative to the number of people that public sector organization serves there might be an incentive to increase work hours or limit time off beyond what's optimal?
Similarly it might be that they address commitment problems on the part of government. Eg if it would be optimal to commit to a certain schedule of pay rises in order to recruit and retain talent now, but government can't commit to doing so (due to electoral turnover?).
In that case letting the workforce threaten to strike might ensure commitment?
In particular we'd want to consider that due to political economy/public choice considerations government is probably only going to maximise the welfare of the median voter at best. So there's a question of whether public sector unions improve welfare in that world (eg if the equivalent tax and transfer scheme is politically infeasible)
I don't really think public sector unions are good but I also haven't seen a great analysis that handles the steelman case. (Would love to read a follow-up post on public sector unions specifically)
Well they are far from the only reason, supply and demand never went away. And to be clear, I think unions achieved many great things and that they played a positive role in the development of our civilisation.
But they haven't played that role in 30 years at least. Now they just focus on reducing supply (of workers, to those who are unionised) to drive up costs (of labour, much of which is not salary), not to mention largely unrelated ideological campaigning.
Are you accounting for total compensation? I don't see how non-wage benefits calculated in. are That's a significant component to labor negotiations. Also, there is an observed "stickiness" to job seeking, so we know people aren't maximizing on wages. I agree they are maximizing agents, but if the behavior doesn't match the wage-centric model, the model has omitted variable bias.
In addition, I don't feel the value of stability is captured correctly. We know firms exposed to risk will pay quite a premium for long term stability. Perhaps unions are a type of insurance workers will pay a premium for.
I just feel this line of reasoning if applied to a firm would be dismissed. Why don't ask why firms don't abandon markets rapidly to maximize short term profits. Clearly, in that case we identify the broader structural factors and friction that govern corporate behavior.
Maybe this is an interesting quote from a economics Nobel prize winner:
Like most of my age cohort, I long regarded unions as a nuisance that interfered with economic (and often personal) efficiency and welcomed their slow demise. But today large corporations have too much power over working conditions, wages, and decisions in Washington, where unions currently have little say compared with corporate lobbyists. Unions once raised wages for members and nonmembers, they were an important part of social capital in many places, and they brought political power to working people in the workplace and in local, state, and federal governments. Their decline is contributing to the falling wage share, to the widening gap between executives and workers, to community destruction, and to rising populism. Daron Acemoglu and Simon Johnson have recently argued that the direction of technical change has always depended on who has the power to decide; unions need to be at the table for decisions about artificial intelligence. Economists’ enthusiasm for technical change as the instrument of universal enrichment is no longer tenable (if it ever was).
Angus Deaton: Rethinking my economics. Finance and Development, March 2024
First off, this was very well written. You've also successfully rage-baited me;
"Masters are always and everywhere in a sort of tacit, but constant and uniform combination, not to raise the wages of labour above their actual rate... We rarely hear, it has been said, of the combinations of masters; though frequently of those of workmen. But whoever imagines, upon this account, that masters rarely combine, is as ignorant of the world as of the subject." - Adam Smith
The IBEW was founded in 1891. Mainly because electricians were dying left & right.
Your assumptions are hilarious ngl.
"Unions are probably not beneficial to society in the 21st century" is a rather different claim than "Unions should never exist or have existed", so perhaps you would get less angry if you paid attention to which claim the post was making.
?
The author is citing empirical evidence from 2026, and you are citing theoretical arguments from 1776. You should consider the outside view on this.
The author waved away empirical data for feels. And nothing that Adam smith said there, is untrue now.
Public workers have no business unionizing
That right was reserved for workers in the private sector
The end
In addition to entering into workplace or sectoral negotiations with firms, unions are also important political actors in most countries, with effects on policy across a whole range of domains. Assessing the benefits to unions requires taking that into account, and considering the counterfactual in which unions do not exist. It's political economy all the way down I'm afraid.
As to the claim that public sector labor markets are pareto optimal, I think the most generous response is "citation needed".
I wonder how much of this is driven by unionization in sectors where the employer does not have monopoly rents to be "shared" (tradable goods), some monopsony power in hiring, or where the unionization creates the monopoly rent to be extracted (longshoremen). Likewise, are there reforms of union governance or labor law that could mitigate bargaining for inefficient outcomes (against merit-based pay, "Cadillac" health insurance, unfunded pensions, port modernization)?
Grand! Fascinating read, Nicholas. I feel there's still scope to combine these findings with the missalocation literature. I write from Colombia, so I always like to "land" these insights into the Colombian context: an EM with high informality, low productivity, and ample misallocation. For instance, there's this work from 2005 suggesting that unions both generate a wage premium and increase wage inequality in Colombia, because workers in professional settings have a higher propensity to unionise than those in the informal, low-productivity sector. Here's the link: https://ideas.repec.org/a/col/000090/004561.html
> that unions both generate a wage premium and increase wage inequality in Colombia, because workers in professional settings have a higher propensity to unionise than those in the informal, low-productivity sector.
That’s not an argument against more unionisation but the opposite.
I’m not fully convinced about why it would be the opposite. In a highly informal economy like Colombia, the political economy of unions matters enormously.
Yes, unions may raise wages for organised workers (that’s the wage premium the literature finds), but the key question is which workers are organised. In Colombia, unionisation is concentrated among relatively protected, higher-productivity (mostly manufacturing), formal-sector workers, while informal and low-productivity workers remain largely outside bargaining structures and cannot unionise.
That creates an important trade-off: policies pushed by organised labour, particularly sustained minimum wage increases above productivity growth, can raise labour costs in the formal sector while reducing incentives to hire low-skill or entry-level workers. Colombia is a striking case here: despite repeated real minimum wage increases (the latest around 17% in real terms), roughly half of workers still earn below the minimum wage.
So, the issue is not whether unions help their members; they clearly can, but whether, in a dual labour market with massive informality, they inadvertently raise the bar for the hiring of low-productivity, entry-level jobs.
The unionisation data reinforces this point: private-sector union density is below 3%, while public-sector unionisation is closer to 36%. That suggests organised labour’s political influence may reflect the interests of relatively protected insiders more than those of precarious informal workers.
Also, who represents the unemployed? By raising entry, non-wage and exit costs to the formal labour market, they end up increasing misallocation and lowering the incentives for businesses to increase headcount, especially for low-productivity and entry-level jobs.
That’s why the Colombian case is fascinating. It sits at the intersection of labour economics, macroeconomics, industrial organisation, and political economy, especially because EM labour markets behave so differently from advanced economies.
this is one of the best comments I've ever read
Thanks for reading!
In some European countries unions will negotiate reduce pay and hours during a downturn to avoid layoffs. Would you consider that a positive effect of unions? Seems better than the turnover cost of hiring during booms and firing during busts that is seen elsewhere.
No it is terrible as well, this reduces incentives for retraining and slows down adoption of new technologies and business models.
I'm sorry there really is just no bright side.
Unions are the only reason that wages starred to grow after the first 50 years of stagnation at the start of the Industrial Revolution. Capitalism wants to increase profits, not wages. Companies want to reduce all costs and labour is a significant cost. Without unionisation - and historically the changes that unions brought in that have outlasted them - wages would stagnate again. Productivity or no productivity.
seems to me like reduced wages are still a pretty strong incentive for retraining, it just allows the price mechanism to assign who gets the retraining rather than whatever mechanism companies use to determine who gets laid off.
No, not in practice at least, because the option value of having the job is too high
isn't that relative to how long the downturn is going to last?
Not in practice, no, not even when there is no downturn but simply a structural change in one industry, eg German carmakers ten years ago, or all the French businesses that put off restructuring until they just went bankrupt.
That's fair enough, people choose being comfortable right now over any longer term horizon and over any broader social analysis.
Since our laws that allow them to make that choice at our cost, of course they do.
European unions and US unions are such different creatures they really should not have the same word.
If a union in the US even attempts to refrain from acting destructively, it will be banned as a "company union."
I'm not sure what the difference is?
Google's AI explains it as follows:
There is a fundamental legal and cultural distinction between the US and Europe regarding how adversarial a labor organization must be to remain legal.
In short: US law strictly requires separation and conflict to prevent employer interference, whereas European law permits and structure cooperation within the company.
The key differences between the two systems are structured around how the law treats workplace collaboration.
## 🏛️ The US: Strict Separation and Non-Interference
In the United States, labor law is deeply rooted in an adversarial model to prevent employers from manipulating worker groups.
* Section 8(a)(2) of the NLRA: The National Labor Relations Act makes it an unfair labor practice for an employer to "dominate or interfere with the formation or administration of any labor organization or contribute financial or other support to it."
* No Middle Ground: This creates a strict binary. Any employee committee, group, or council that discusses working conditions, wages, or grievances with management risks being classified as an illegal, employer-dominated "company union."
* Forced Adversarialism: Because independent, external unions are the only fully legal vehicle for collective bargaining, the law inherently structures labor relations as an outside-versus-inside adversarial dynamic. Non-adversarial, joint employer-employee committees are legally restricted if they attempt to negotiate employment terms.
## 🇪🇺 Europe: The Co-Determination and Cooperative Model
European labor law does not equate workplace cooperation with illegal employer dominance. Instead, it legally mandates a dual-channel system that separates day-to-day workplace collaboration from sector-wide wage bargaining.
* Legal Co-Determination: In countries like Germany, Austria, and the Netherlands, laws (such as the German Betriebsverfassungsgesetz) legally require management to share power with employee-elected Works Councils.
* Mandated Peace: Works councils are legally bound by a "peace obligation." They are generally prohibited from calling strikes and are required by law to work with the employer "in a spirit of mutual trust" for the good of both employees and the establishment.
* Financial Support is Legal: Unlike the US, where employer funding equals illegal domination, European employers are legally required to fund the operations of the works council, providing them with office space, IT equipment, and paid time off to perform duties.
* The Independent Buffer: This system only passes muster because sector-wide, completely independent Trade Unions exist outside the company. These external unions hold the exclusive right to strike and negotiate industry-wide wages, ensuring that the peaceful, internal works council cannot be used by the employer to suppress wages.
Ok that I knew, I think (I obviously wasn't going to read all that). But that has nothing to do with acting destructively, which European unions do all the time. For example half the reason German carmakers are in the shit is because their unions wouldn't let them change and adapt fast enough and imposed massive costs on the restructuring they did agree to.
For example the French unions... all the time actually, but most ridiculously lately fighting any cut in pension benefits _even if it would directly benefit the workers they are supposed to represent_!!
It's not that they never act destructively, it's that they aren't legally obligated to do so. German unions feel a cultural imperative to hold up progress, not a legal one. French unions feel a cultural imperative to be agents of chaos in general, not a legal one. Both will occasionally take a time out from these duties to figure out how to help with productivity. If US unions ever tried to help a company be more productive, they would be forcibly disbanded by the government.
I'm glad there is a difference in theory. I'm slightly stuck for practical examples unfortunately, since I don't recall the 70s and 80s when they might have existed.
Re public sector unions, I think the typical argument is that many public sector employers are monopsonists for relevant public sector employees and public sector unions are needed to even out "bargaining power".
One mechanism I could think of is government inefficiently degrading amenities/nonwage job characteristics. Eg you if you have a small workforce relative to the number of people that public sector organization serves there might be an incentive to increase work hours or limit time off beyond what's optimal?
Similarly it might be that they address commitment problems on the part of government. Eg if it would be optimal to commit to a certain schedule of pay rises in order to recruit and retain talent now, but government can't commit to doing so (due to electoral turnover?).
In that case letting the workforce threaten to strike might ensure commitment?
In particular we'd want to consider that due to political economy/public choice considerations government is probably only going to maximise the welfare of the median voter at best. So there's a question of whether public sector unions improve welfare in that world (eg if the equivalent tax and transfer scheme is politically infeasible)
I don't really think public sector unions are good but I also haven't seen a great analysis that handles the steelman case. (Would love to read a follow-up post on public sector unions specifically)
Good God, the linear algebra to separate the effects of firms and workers is the work of legit brain champions. I'm in awe.
Well they are far from the only reason, supply and demand never went away. And to be clear, I think unions achieved many great things and that they played a positive role in the development of our civilisation.
But they haven't played that role in 30 years at least. Now they just focus on reducing supply (of workers, to those who are unionised) to drive up costs (of labour, much of which is not salary), not to mention largely unrelated ideological campaigning.
> My best read of the evidence is that a union raises wages by around 7% for currently unionized employees.
Facts.
> I do not believe that unionization is efficient.
Feelings.
Are you accounting for total compensation? I don't see how non-wage benefits calculated in. are That's a significant component to labor negotiations. Also, there is an observed "stickiness" to job seeking, so we know people aren't maximizing on wages. I agree they are maximizing agents, but if the behavior doesn't match the wage-centric model, the model has omitted variable bias.
In addition, I don't feel the value of stability is captured correctly. We know firms exposed to risk will pay quite a premium for long term stability. Perhaps unions are a type of insurance workers will pay a premium for.
I just feel this line of reasoning if applied to a firm would be dismissed. Why don't ask why firms don't abandon markets rapidly to maximize short term profits. Clearly, in that case we identify the broader structural factors and friction that govern corporate behavior.
Maybe this is an interesting quote from a economics Nobel prize winner:
Like most of my age cohort, I long regarded unions as a nuisance that interfered with economic (and often personal) efficiency and welcomed their slow demise. But today large corporations have too much power over working conditions, wages, and decisions in Washington, where unions currently have little say compared with corporate lobbyists. Unions once raised wages for members and nonmembers, they were an important part of social capital in many places, and they brought political power to working people in the workplace and in local, state, and federal governments. Their decline is contributing to the falling wage share, to the widening gap between executives and workers, to community destruction, and to rising populism. Daron Acemoglu and Simon Johnson have recently argued that the direction of technical change has always depended on who has the power to decide; unions need to be at the table for decisions about artificial intelligence. Economists’ enthusiasm for technical change as the instrument of universal enrichment is no longer tenable (if it ever was).
Angus Deaton: Rethinking my economics. Finance and Development, March 2024
https://www.imf.org/en/publications/fandd/issues/2024/03/symposium-rethinking-economics-angus-deaton