Why the PRO Act is Good for the Economy

by David J. Lyon

The Protecting the Right to Organize (PRO) Act is one of the most consequential pieces of pro-labor legislation in decades, and it’s halfway along its journey, having been passed by the House of Representatives.  It is sorely needed: while unions are a critical market correction to the wage-suppressing power of large employers, they have been decimated over the past 40 years, with membership falling by half, largely due to management’s relentless campaigns of both legal and illegal activities to stymie attempts to organize (for a good summary of these anti-union tactics, see the Economic Policy Institute’s short video on the topic here).   

For context, it is important to note that during this same period, big business has successfully lobbied for numerous deregulatory measures that increase its ability to organize ownership – measures that have dramatically reduced anti-trust enforcement – and this has resulted in ever-increasing market concentration that far exceeds “optimal scale” in many industries, as I document in my recent paper The Free Market Fallacy.  But this rise in market concentration increases the need for unions, because it increases market power, the ability to suppress wages or hike prices beyond competitive values. 

There is a lot of similarity between the economics of unionization and the economics of the minimum wage.  Both are important correctives in concentrated labor markets, because concentrated markets give companies market power that enables them to suppress wages below competitive-market rates.  Doing so increases corporate profits but hurts the economy overall, reducing output and what economists call “total surplus” or total gains to society. 

Correctives to market power, happily, unwind this situation, returning competitive-market wages to workers while increasing overall output and economic growth.  The money for those higher wages comes directly from “excess” or supranormal profits, the profits made off market power.  For example, in the manufacturing sector, excess profits from wage suppression amount to about $25 billion a year out of total industry profits of $240 billion a year, based on estimates from the Economic Policy Institute that the weakening of unions has cost manufacturing workers about $3,000 a year. 

Such correctives in concentrated labor markets can even increase employment as overall output goes up, as demonstrated pretty thoroughly at this point with regard to the minimum wage.  To date, the literature on employment effects from unionization mostly finds losses, but that may be because, unlike the case in fast food and retail, manufacturing plants are not tied to a particular location.  Since the Washington Consensus of the late 1980’s and 1990’s began allowing companies to move operations abroad, companies can simply move their operations to a low-wage country rather than negotiate with a union.  Intriguingly, one study found that unionization in the service sector (tied to place) has a positive employment effect. 

It is no surprise that the conventional wisdom about unions and their effect on the economy is pretty confused: corporate interests have been engaged in an “all-out and unrelenting battle” against unions since the 1935 passage of the National Labor Relations Act and continuing ever since.  They vastly outspend labor groups on elections and lobbying, by a ratio of 30:1, and promote the false narrative that unions hurt workers and the economy in general. 

One silver lining is that all this spending by corporations against organized labor still has not convinced a majority of American voters: as of 2017, Pew Research found that 60% of Americans view unions favorably (unions are becoming more popular even among Republican voters, 44% of whom now have a positive opinion).  By encouraging Congress to finish the job and pass the PRO Act, we can help workers and our economy at the same time.

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