Who Pays For Unions?

Abstract
This paper provides a comprehensive assessment of the margins along which firms respond to shifts in union density. Despite higher personnel costs driven by a union-induced wage premium, the average manufacturing firm increases employment and scales up production, charges higher prices in the product market, enjoys higher value added per worker, and experiences a marginal positive increase in profits. We show that this result is a direct implication of the labor- and product market power that the average manufacturing firm possesses in combination with a reallocation of inputs and industry revenue shares from smaller to larger firms. Larger firms are, therefore, increasing employment and output at the same time their ability to mark up prices is growing, thereby increasing profits. For the broader private sector in which firms do not hold much price- or wage-setting power, we observe the opposite result. We synthesize these results through a model of firm decision-making that incorporates union bargaining, product-market price-setting power, and labor market monopsony power.