The Effect of Labor Unions on Wages
What is the effect of labor unions in wage determination and earnings differentials? Traditionally formed to negotiate with one voice over wages, hours, and conditions of work, labor unions are viewed by economists as affecting the labor market via their effects on labor supply and labor demand. There are at least two, and now effectively three, distinct approaches to protecting or boosting worker wages. These are, respectively, craft unions, industrial unions, and municipal (public sector) unions. The first is through exclusive unionism, which restricts the pool of available labor supply, in ways and means similar to that of any trade or professional associations trying to protect standards, such as teachers, dentists, home inspectors, etc. Thus, having union status allows members to claim what economists refer to as "rents," a stream of income from exerting control over a scarce resource, i.e., restricting or slowing down its supply to the labor market, job, or workplace.
However, most unions, in both the private and public sectors, unlike the building trades, do not have the luxury of limiting membership. Rather, their bargaining leverage comes from organizing everyone available across the entire industry into a single "bargaining unit," and negotiating a compensation level "floor" beneath which no one would work. This is known as inclusive unionism.
Note that unions can also increase their members' wages if they can induce productivity improvements. However, productivity enhancement is often undermined by the frequently complex, arbitrary or stringent work rules of unions, and their inherent need to recruit and retain membership, regardless of their individual productivity. However, unions can help raise MRP by boosting demand for the product or service produced by their employer, encouraging adoption of capital that complements (rather than substitutes for) labor, and promoting greater occupational safety and health procedures.