Unions, Productivity, and the 2010 Economic Report of the President

I’ve become a fan over the years of the annual Economic Report of the President, released around this time each year by the Council of Economic Advisers. The more than 100 tables in the back of the book provide an invaluable picture of the economy over many decades, covering all the major indicators from output and employment to interest rates and trade. Each report also contains chapters explaining the economic thinking behind administration policies.

Chapter 10 of the latest report focuses on “Fostering Productivity Growth through Innovation and Trade.” For critics of trade, it offers sound economic reasons why trade raises U.S. productivity and, thus, over the long run, U.S. living standards.

One of ways trade promotes growth is “Firm Productivity.” Economists have come to appreciate that firms within an industry will differ in their productivity. Those that are more productive will tend to grow and prosper in larger and more competitive global markets. As a result,

when a country opens to trade, more productive firms grow relative to less productive firms, thus shifting labor and other resources to the better organized firms and increasing overall productivity. Even if workers do not switch industries, they move from firms that are either poorly managed or that use less advanced technology and production processes toward the more productive firms.

The report doesn’t mention this, but one reason why firms differ in their productivity is unionization. As I spell out in an “Economic Watch” column in today’s Washington Times, and explore in more detail in the latest Cato Journal, unionized firms tend to lose market share to non-unionized firms:

The weight of evidence indicates that, for most firms in most sectors, unionization leaves companies less able to compete successfully. The core problem is that unions cause compensation to rise faster than productivity, eroding profits while at the same time reducing the ability of firms to remain price-competitive. The result over time is that unionized firms have tended to lose market share to non-unionized firms, in domestic as well as international markets.

Compared to equivalent non-unionized competitors, unionized firms are associated with lower profits, less investment in physical capital, and less spending on research and development. By exposing an industry (say, automobiles) to more vigorous international competition, trade accelerates the shift from less competitive unionized firms to more competitive non-unionized firms.

Economists serving a Democratic administration would be understandably reluctant to say such a thing explicitly, but it is certainly there between the lines in Chapter 10 of the new Economic Report of the President.