What Do Unions Do? - by Nicholas Decker - Homo Economicus

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What Do Unions Do?<br>Understanding the size and causes of the union wage premium

Nicholas Decker<br>May 20, 2026

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A union is a collusive cartel of workers. By bargaining as one unit, they are able to increase their bargaining power relative to bargaining individually, and raise their wages. In some circumstances, this will be inefficient, with the union commanding monopoly rents; in others, the bargaining power of the union will balance out the bargaining power of the company, raising employment and output. In either case, theory suggests the wages of unionized firms are higher. But by how much? Does this even hold in practice? And does doing this raise welfare?<br>Because there are reasons to believe that unionization will reduce wages for workers. In the United States, a firm becomes unionized when 50% or more of a workplace votes for it. The remaining workers are forced to be represented by the union, whether they like it or not. Since unions compress the payscale, such that better workers are paid less and worse workers are paid more, people could be voting for unions in order to redistribute from their coworkers to themselves. Employees might also vote for a union which will redistribute to them, at the cost of the company being more likely to go bankrupt long after they retire.

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My best read of the evidence is that a union raises wages by around 7% for currently unionized employees. The wage gains from a redistribution of rents evenly across workers. Wage compression exists, but redistribution from worker to worker is only a small part. These are the current effects – unionizing more of the economy will have declining marginal returns, and will likely turn negative quickly.<br>I do not believe that unionization is efficient. While precise figures are lacking, it is unlikely to be a better method of supporting the poor or working class, both because union workers are not disproportionately poor, and also because their methods of extracting surplus are not restricted to just wages. I will note that the best paper on the effects of unions of productivity finds a positive partial equilibrium effect, but that is only for some markets, does not benefit the consumer, and the aggregate effects are likely negative.<br>Understanding what the real effects of unions are is extremely difficult. Everything is endogenous, which will invalidate the basic exercises which we would have hoped were possible. Consider simply regressing wages on union membership. We will naturally need to control for things which might systematically vary with both income and union membership, like education and skills. Doing so gives you a premium of about 13-15% of wages. Firms which are unionized are also substantially more productive than those which are not. These controls are clearly insufficient, though – the decision to unionize is not a random one. Employees unionize precisely when the gains are expected to be largest, which will bias our estimates of the wage premium upwards. How do we get around this?<br>One appealing method is to use a regression-discontinuity approach at the 50% threshold for unionization. The idea is that a vote which passed by 51% is probably awful similar to a vote which failed with only 49% of the vote. Dinardo and Lee (2004) are the first to do this, and rather surprisingly find no effect on anything. There’s no increase in firm exit, no change in employment, and most surprisingly of all, no change in wages.<br>But this is also not good enough, for two reasons. The first is that the key assumption – that votes at 51% are awful similar to votes at 49% – does not actually hold in the data. Frandsen (2021) finds that close union elections get systematically tampered with depending on which party is in office, leading to close elections actually being substantially different in characteristics. The “tampering” which we’re talking about might be, for instance, waiting until after the election results are known to take up the argument that the “workplace” was improperly defined, and some votes should not be counted. This will make the firms which had a close election that passed substantially different from those whose vote just failed.<br>After correcting this, Frandsen finds that the wage effect is still zero. The firms, however, are badly affected. They employ fewer people, pay workers less, and are more likely to exit.<br>The other issue is more fundamental. With a regression discontinuity, you identify the local average treatment effect. You see what the gain to being unionized is, if your union is right on the threshold of being beneficial to workers. If the union were obviously promising to workers, then we would expect it to pass by a wide margin. We are going to badly underestimate the firm wage premium using only close elections. There is suggestive evidence for this in Lee and Mas (2012) – unionization...