The Union Threat

This paper studies the impact of unions on wage inequality, output and unemployment. To do so, it proposes a search and matching model of union formation in which unions arise endogenously through a voting process within firms. In a union firm, workers bargain their wages collectively. In a nonunion firm, each worker bargains individually with the firm. Because of this wage setting asymmetry, a union lowers the profit of a firm and compresses the wage distribution of the workers. Furthermore, to prevent unionization, nonunion firms distort their hiring decisions in a way that also lowers the dispersion of wages. After being calibrated on the United States, the model shows that, even though a partial equilibrium estimate would predict a small impact of unions on inequality, removing the threat of unionization increases the variance of wages substantially. Completely outlawing unions increases wage inequality further. Also, outlawing unions increases welfare and output, and lowers unemployment. These results suggest that, even with a small membership, unions might have a significant impact on the economy through general equilibrium mechanisms and the way they distort firms' decisions.