The Workers’ Union Disadvantage

Commentary, Economy, Matthew Lau

A recent story covered in The Monitor – a magazine published by the left-wing, union-friendly think tank Canadian Centre for Policy Alternatives – provides an important lesson in basic economics. The headline of the story triumphantly proclaimed: “Gig workers win the right to unionize.”

The end result was an unfortunate one for the workers, however. An editor’s note right at the top of the story noted that just a couple months after winning the right to unionize, the workers lost their jobs – their employer, Foodora, shut down its Canadian operations because it concluded that it could not compete in the Canadian market.

The company denied that the push to unionize was behind its decision to exit the Canadian market, citing competitive pressures as the reason instead; but as the Financial Post reported, the Ontario Federation of Labour president nevertheless suggested that Foodora’s decision amounted to “union busting.”

Indeed, given that the company shut down just as its industry, food delivery is being increasingly relied on by consumers and restaurants as a result of the government-imposed lockdowns. It is difficult not to draw a connection between the drive for unionization and Foodora’s decision to shut down its Canadian operations.

Even if unionization was not directly responsible for the company’s closure, it surely contributed to its inability to compete. After all, the usual story told by union activists is that unionization is beneficial because the higher wages for workers will simply be paid for out of the profits of wealthy corporations – in other words, the union makes the business less competitive.

The basic economic truth ignored by union activists is that businesses that do not expect to be profitable tend not to expand, or increase hiring, or invest more in capital that would make workers more productive. By reducing business profits, unionization ultimately makes workers worse off by reducing employment and total wages across the economy.

At bottom, in order for wages to increase and working conditions to improve in the long run, the businesses paying the higher wages or providing the better working conditions must receive some compensating benefit in the form of increased worker productivity.

Unfortunately, unionization does not increase worker productivity, and usually reduces it, by weakening the link between compensation and productive output. The effects of unionization, therefore, in the long run, is to reduce workers’ incomes and make them worse off. 

Notably, the case of Foodora is not representative of all attempts by workers to unionize. In some cases, unions do benefit some workers by raising wages. However, because unions reduce the productivity of workers, any gains they achieve for their members is invariably more than offset by a greater loss to everyone else in the economy.

For example, extremely powerful unions have secured very attractive compensation packages for public school teachers. But these gains to public sector teachers are more than offset by a greater economic loss to everyone else, including taxpayers and the aspiring teachers who cannot find placements in the public schools.

The economic damage in the form of lower worker productivity and higher costs to employers brought about by unionization are undesirable even in the best of times. Today, with skyrocketing unemployment, cratering incomes, businesses struggling to survive, and governments running massive deficits, unions have become more unaffordable than ever.

 

Matthew Lau is a research associate with the Frontier Centre for Public Policy.