Labor unions are having a bit of a moment right now. Not, quite the size moment of the Swift-Kelce “romance,” but still pretty darn big. This big union moment makes sense, given the continued tightness of the labor market. As of this writing, unemployment remains below 4 percent, with jobs being generated at a quick pace. With labor in high demand, the bargaining power that has been lacking these last several decades is currently on workers’ side. Union workers are likely optimistic that they can get a good deal.

But, non-union workers should keep their eye on union power too. Why? The picture below comes from a paper by Laura Feiveson, the Deputy Assistant Secretary for Microeconomics at Treasury. The figure shows two simple lines. First, the blue line shows the share of U.S. workers that were unionized from the early 1900s until today. Second, the red line shows the share of income going to the richest 1 percent of earners. These lines are basically inversions of each other. When unions represent fewer people, the rich seem to get richer. When more workers are unionized, inequality falls.

Figure. Share of Workers in Unions and Top 1 Percent Share of Income, 1917-2022

Source: Feiveson (2023).

So, even though unions peak at just 35 percent of workers, they seem to have an outsized relationship to inequality. What could be going on here?

Inequality and Unions: Correlation or Causal?

The pattern above could be one of two things. The first possibility is that strong unions just happen to coincide with low inequality. The other possibility is that the existence of strong unions reduces inequality causally. No, not casually like an Applebee’s (rim shot!), but actually causes inequality to drop. Let’s take each in turn.

Possibility 1: It’s Just a Coincidence

When looking at the picture above, a few stark swings appear. Union membership jumped in the 1930s as laws signed during the Roosevelt Administration increased the power of labor in response to the Great Depression. Unionism remained high through the 1950s before beginning to fall during the 1960s and then drop precipitously in the 1970s and 1980s.

Thus, the rise of unionism in the U.S. coincided with a few things that also drastically improved workers’ situation vis a vis the very rich, who tend to own capital. The first was WWII, a time in which every school child knows the labor shortage was so severe that women — who didn’t work much at the time — were pressed into the labor force.

A second, related, issue were high tax rates on the rich. During WWII, and in the decades that followed, tax rates on the rich were incredibly high. The highest marginal tax rate in the U.S. exceeded 90 percent until 1963. So, owners of capital and top executives had little to gain by paying themselves huge sums of money, and may have been more willing to play ball with unions. When taxes drop, incentives change — negotiating with unions probably started to become less attractive as it took more money out of the pockets of owners and managers.

Finally, the 1940s, 1950s, and early 1960s largely preceded the growth in automation technologies that I have written about extensively. Even in my awesome book (4.5 stars!). So, the inequality inducing effects of those advancements hadn’t started yet. And, they also hadn’t started making workers replaceable, and thus unionization harder.

So, maybe high rates of unionization just happened at a time when workers had an upper hand. And, the vanishing of unions just went along with a worsening hand as technology won out and the sorts of jobs that used to be unionized — like in manufacturing — went away too.

Possibility 2: Unions Cause Lower Inequality

So, if unions have never represented more than 35 percent of workers, how could they cause such a big drop in inequality? The answer hinges on how unions affect the wages of non-union workers. A paper by Bruce Western and Jake Rosenfeld makes the argument that there is an effect, and that it is rather large.

This effect comes through two avenues. The first avenue is something economists call a “threat” effect. The idea is that non-union workers can negotiate for higher wages and benefits and threaten their employer with unionization if the employer doesn’t give. So, even a small number of unionized workers reduce inequality by allowing non-union workers to gain some leverage. The other avenue is that the existence of unions enforces rules of equality through the “moral economy.” This squishy notion of morals frightens me as an economist, so I’ll let the authors speak for themselves:

“Across countries and over time, unions widely promoted norms of equity that claimed the fairness of a standard
rate for low-pay workers and the injustice of unchecked earnings for managers and owners. … The U.S. labor movement never exerted the broad influence of the European unions, but U.S. unions often supported norms of equity that extended beyond their own membership. In our theory of the moral economy, unions help materialize labor market norms of equity.”

Western and Rosenfeld, 2011

To analyze the impact of unions on non-union workers, the authors explored how variation across place and industry in unionization impacted inequality among non-union workers. Their findings suggest that a full third of the increase in inequality observed between 1973 and 2007 for male workers was associated with union decline. So, it stands to reason that if unions come back, inequality would fall.

So, unions are having a moment. Will it cause a drop in inequality? Much like the survival of the Taylor and Travis love story, only time will tell.