Who Pays for Unions?

This paper studies who bears the cost when unions raise worker wages — consumers, shareholders, other workers, or nobody, if productivity offsets the cost — using a legislative change in Norway that quadrupled the maximum tax deduction for union dues between 2002 and 2010 as a quasi-exogenous, firm-level shock to union density. Combining an instrumented dose-response difference-in-differences design with matched employer-employee, firm accounting, and product-level export customs data (2001–2014), the paper finds that the incidence of unionization depends sharply on the degree of product- and labor-market power a firm holds. In the average manufacturing firm — which the authors show has substantial monopsony power in local labor markets and pricing power in product markets — a 1 percentage point increase in union density raises worker compensation by roughly 1 log point, raises employment by about 1 log point (rather than reducing it, consistent with monopsony), raises product-price markups by 1.8 percentage points, and is fully passed through to consumers via higher output prices (1.6–1.9 log points at the product level), with no decline in profits — profits in fact rise slightly, as revenue and market share reallocate from smaller, less-unionized firms to larger, more-unionized ones. In the broader, more competitive private sector, the opposite pattern holds: the same union-density shock reduces employment (−1.6 log points) and output, generates no price pass-through, and weakly reduces profits. A stylized partial-equilibrium model combining labor monopsony, product-market monopoly, and a union-driven shift in product demand (via reduced price elasticity from higher market share, or via a product-quality/productivity channel) reconciles both patterns. Back-of-envelope calculations attribute roughly 12.8% of Norway’s 2001–2014 aggregate price-level increase and about 15.2% of manufacturing wage growth over the same period to the subsidy-driven rise in union density, implying that unionization’s net effect in this setting is primarily a transfer from consumers to workers rather than from shareholders to workers.

Samuel Dodini | Macro Paper Warehouse

Who Pays for Unions?