The Rise and Decline of Unions

By Michael Wachter
Special to's Think Tank Town
Wednesday, July 18, 2007; 12:00 AM

Union membership, as a percentage of the private sector workforce, has been in unrelenting decline for nearly half a century. There is a single cause for this decline: the United States' change from a corporatist-regulated economy to an economy based on free competition. Unions are central to a corporatist regime and are peripheral in a liberal pluralist regime.

Following the Great Depression's onset, many key policy debates about antitrust, labor and corporate governance were decided in favor of corporatism over free competition. The codes of competition for individual industries, which were at the heart of the New Deal's National Industrial Recovery Act (NIRA), offered industrial firms a deal: They could legally act in concert with each other to halt what had become cut-throat price competition in the wake of the Depression, but the firms would have to share the profits of the supra-competitive, "fair" prices with their unionized workers in the form of supra-competitive, "fair" wages. This merged corporate interests with labor interests, and enabled firms to engage in cartel behavior without fear of antitrust litigation.

NIRA got off to a fast start, but it soon fell prey to corporate defections from the cartels, and the Supreme Court ultimately ruled the arrangement unconstitutional. Undaunted, the New Dealers tried to resurrect elements of corporatism in the National Labor Relations Act (NLRA). But the NLRA only carried over the labor policy elements of NIRA while abandoning its corporate and antitrust elements. Labor law thus lost its critical supports of corporate and antitrust policies. However, New Dealers also turned to industry-specific regulatory mechanisms -- for example, the Motor Carrier Act of 1935, and the Civil Aeronautics Act of 1938 -- that controlled the entry of new firms and the exit of existing firms in specific industries. To assure these regulated firms' profitability, prices were set administratively, usually with heavy input from the corporations. This prevented profit-threatening price competition that might jeopardize the ability of firms to pay unionized wage rates. These regulated sectors became the most strongly unionized, with the highest union wage premiums.

Under New Deal corporatism, union membership increased 33 percent from 1933 to 1935, when NIRA was in operation. Union density -- the percentage of employees who were union members -- jumped from 11 percent of the economy to 26 percent between 1932 and 1940. By 1945, union density reached its peak level of 34 percent. In the same period, union membership increased nearly five-fold from 2.9 million in 1932 to 13.8 million in 1945.

The subsequent 46 years have seen that density decline slowly to pre-NIRA levels. Why the decline, and why has it been so slow? The simple answer is that it has taken a long, drawn-out process to dismantle the U.S. corporatist economy. Various economic controls remained popular through the 1960s, industry-specific regulation from the New Deal was not significantly rolled back until the 1980s, and -- most fundamentally -- policymakers had to transition their thinking from the belief that society benefits from corporatism to the belief that society benefits from competition between suppliers of goods and services, including labor.

Unions still bargain for a fair wage, but antitrust or industrial regulation no longer provides for above-competitive prices to pay those above-market wages. The unraveling of the coherent corporatist theory, a theory combining corporate, labor and antitrust elements, leaves unions alone. Unions are a corporatist institution; they do not prosper in a competitive economy. If my analysis is correct, then no change in labor law or labor market policies, absent changes in overall industrial policy, will allow unions to become the mass movement they were in 1945.

Unions may be able to prosper as a niche movement in the government sector, which is the sole remaining noncompetitive sector, and in sectors where individual firms or industries take advantage of either uninformed or immobile workers to enforce below-competitive pay packages. Neil Chamberlain, one of the great figures in industrial relations, wrote in 1959 that "unions' chief contribution to their members' welfare has been to free them from the tyranny of arbitrary decision or discriminatory action in the work place." In those cases where individual firms exercise exploitative power to set wages below competitive levels, the same beneficial results emerge -- unions can and should improve the functioning of labor markets.

Michael Wachter is the William B. Johnson Professor of Law and Economics and co-director of the Institute for Law and Economics at the University of Pennsylvania Law School. This essay summarizes academic articles by Professor Wachter that appear in issues of the University of Pennsylvania Law Review and the Cato Institute's Regulation Magazine.

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