Friday, 12 June 2015

Trade unions drive up wages in L.A., but not for their own members

A couple of weeks ago, I posted about the latest research on the minimum wage, demonstrating that minimum wages do reduce employment. At about the same time, the Los Angeles city council voted to raise its minimum wage from $9 to $15 per hour. That isn't the most newsworthy bit though. As The Economist reports, the Los Angeles County Federation of Labour (a labour union) lobbied for a last minute change to the law, that would make unionised firms exempt from the higher minimum wage.

Yes, read that last sentence again. The trade union was lobbying for lower wages for its members. Why would they do that? The Economist explains:
Indeed, by exempting unionised businesses from the minimum wage, unions are creating more incentives for employers to favour unionised workers over the non-unionised sort. Such exemptions strengthen their power. This is useful because for all the effort unions throw at raising the minimum wage, laws for better pay have an awkward habit of undermining union clout. Britain’s minimum-wage law in 1998, for example, precipitated a decline in union membership. Once employers are obliged to pay the same minimum wage to both unionised and non-unionised labour, workers often see less reason to pay the dues to join a union.
So maybe it's not as crazy as it at first sounds. In ECON110 we talk about the effect of trade unions pushing wages above the equilibrium wage and increasing unemployment, and that this unemployment tends to be concentrated among non-unionised workers (who lack collective bargaining power and the job protections of union members). We refer to this as the insiders-vs.-outsiders problem. However in this case, the insiders (trade union members) are pushing up the wages for the outsiders (non-members) but not their own wages.

If unionised employers are exempt from the higher minimum wage, then their labour costs will be lower than non-unionised employers. And if unionised employees are more likely to be offered employment, then workers will be more likely to join the union. A win-win for employers and trade unions, as well as for non-union employees who receive the higher minimum wage. Trade unions are likely to be especially happy - trade union density has been declining for years (to a low of 10.8 percent in 2013 according to OECD data; or 16.3 percent in California in 2014 according to BLS data).

So, if there are so many winners, who loses from this proposal? While some non-union employees may be better off initially (from the higher minimum wage), available jobs for these employees are likely to reduce substantially. Why would employers employ a non-union employee for $15 per hour, when they can employ a union employee for much less? So, non-unionised workers are going to be made worse off. Which, according to BLS data (PDF) probably means the youngest and oldest workers, latinos, and women. Unless they are incentivised to join up to a trade union - which was likely the union's goal in the first place.

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