Who Pays for Unions?

When unions boost worker wages, the question arises: who bears the financial burden? A thorough analysis of firm reactions to increased unionization in Norway, utilizing changes in the tax deductibility of union dues as a quasi-exogenous variation factor, was conducted. The findings indicate that in the typical private sector firm, higher union density leads to increased labor costs, prompting firms to reduce employment and production, thereby decreasing profits without raising the labor share.

Consumers absorb a portion of the cost through higher prices, while shareholders suffer lower profits, with the remaining costs offset by productivity improvements. The total wage bill decreases, primarily affecting less-committed "outsider" workers. Firms' responses differ significantly based on the level of market competition.

In manufacturing, characterized by less competitive product and labor markets, firms expand employment and production, lower labor markdowns, and do not face profit declines. In such cases, higher labor costs are primarily passed on to consumers via elevated prices, with the remainder recovered through productivity gains. Workers benefit from both higher wages and employment.

These patterns suggest that unions can counteract employer monopsony power, and firm responses—determining who ultimately shoulders the cost—depend significantly on market structure. The study concludes that unionization in this context primarily redistributes from consumers rather than shareholders and leads to varying outcomes across firms, including an overall shift toward larger and more productive entities.

The underlying mechanisms are explained using a partial-equilibrium model of union bargaining with product- and labor-market power. This research is set to be published in the Quarterly Journal of Economics by Samuel Dodini, Anna Stansbury, and Alexander Willén.