U.S. Economy

Unions and collective bargaining in the United States are markedly

different from such organizations and procedures in other industrialized

nations. U.S. unions generally practice what is often described as

business unionism, which focuses mainly on the direct economic interests

of their members. In contrast, unions in Europe and South America focus

more on influencing national policy agendas and political parties.

The different focus by U.S. unions partly reflects the special history of

unions in the United States, where the first sustained successes were

achieved by craft unions representing skilled workers such as carpenters,

printers, and plumbers. These skilled workers had more bargaining power

and were more difficult for employers to replace or do without than

workers with less training. Unions representing these skilled workers

were also able to provide special services to employers that allowed both

the unions and employers to operate more efficiently. For example, craft

unions in large cities often ran apprenticeship programs to train young

workers in these occupations. And many craft unions operated hiring halls

that employers could call to find trained workers on short notice or for

short periods of time.

Most of these craft unions were members of the American Federation of

Labor (AFL), founded in 1886. The strong bargaining position of these

skilled workers, and the fact that these workers typically earned much

higher wages than most other workers, led the AFL unions to focus on

wages and other financial benefits for their members. Samuel Gompers, the

president of the AFL for nearly all of its first 38 years, once

summarized his philosophy of unions by saying, “What do we want? More.

When do we want it? Now.”

By contrast, industrial unions—which represent all of the workers at a

firm or work site, regardless of their function or trade—were generally

not successful in the United States before Congress passed the National

Labor Relations Act of 1935. This law, also known as the Wagner Act after

its sponsor, Senator Robert F. Wagner of New York, changed the way that

unions are recognized as bargaining agents for workers by employers, and

made it easier for unions representing all workers to win that

recognition. The Wagner Act largely put an end to the violent strikes

that often occurred when unions were trying to be recognized as the

bargaining agent for employees at some firm or work site. The act

established clear procedures for calling and holding elections in which

the workers decide whether they want to be represented by a union, and if

so by which union. The Wagner Act also established a government agency

known as the National Labor Relations Board (NLRB) to hear charges of

unfair labor practices. Either employees or employers may file charges of

unfair labor practices with the NLRB.

After the Wagner Act was passed, the number of workers who belonged to

unions increased rapidly. This trend continued through World War II (1939-

1945), when unions successfully negotiated more fringe benefits for their

members. These fringe benefits were partly a result of wage and price

controls established during the war, which made large wage increases

impossible. In the 1950s union strength continued to grow, and the

national association of industrial unions, known as the Congress of

Industrial Organization (CIO) merged with the AFL.

Since the late 1970s, total union membership has fallen. The percentage

of the U.S. labor force that belongs to unions has decreased dramatically

in the last half of the 20th century, from more than 25 percent in the

mid-1950s to 14 percent in 1997. A number of reasons explain the decline

in union representation of the U.S. labor force. First, unions are

traditionally strong in manufacturing industries, but since the 1950s

manufacturing has accounted for a smaller percentage of overall

employment in the U.S. economy. Employment has grown more rapidly in the

service sector, particularly in professional services and white-collar

jobs. Unions have not had as much success in acquiring new members in the

service sector, with the exception of government employees.

Union membership has also declined as the government established laws and

regulations that mandate for all workers many of the benefits and

guarantees that unions had achieved for their members. These mandates

include minimum wage, workplace safety, higher pay rates for overtime,

and oversight of the management of pension funds if employers fund or

partially fund pensions.

Third, many U.S. firms have become more aggressive in opposing the

recognition of unions as bargaining agents for their employees, and in

dealing with confrontations involving existing unions. For example, it is

increasingly common for firms to hire permanent replacement workers if

strikes occur at a firm or work site.

Finally, workers with college degrees held a larger percentage of jobs in

the U.S. economy in the late 1990s than in earlier decades. These workers

are more likely to be in jobs with some level of managerial

responsibilities, and less likely to think of themselves as potential

union members.

Unions, however, continue to play many valuable roles in representing

their members on economic issues. Equally or perhaps more importantly,

unions provide workers with a stronger voice in how work is done and how

workers are treated. This is particularly true in jobs where it is

difficult to identify clearly how much an individual worker contributes

to total output in the production process. During the 1990s, many U.S.

manufacturing firms adopted team production methods, in which small

groups of workers function as a team. Any member of the team can suggest

ideas for different ways of doing jobs. But management is likely to

consider more carefully those that are recommended by the union or have

union support. Workers may also be more willing to present ideas for job

improvements to union representatives than to managers. In some cases,

workers feel that the union would consider how the changes can be made

without reducing jobs, wages, or other benefits.

Unemployment

A persistent problem for the U.S. economy and some of its workers is

unemployment—not being able to find a job despite actively looking for

work for at least 30 consecutive days. There are three major kinds of

unemployment: frictional, cyclical, and structural. Each type of

unemployment has different causes and consequences, and so public

policies designed to reduce each type of unemployment must be different,

too.

Frictional unemployment occurs as a result of labor mobility, when

workers change jobs or wait to begin a new job. Labor mobility is, in

general, a good thing for workers and the economy overall. It allows

workers to look for the best available job for which they are qualified

and lets employers find the best-qualified people for their job openings.

Because this searching and matching by employees and employers takes

time, on any given day in a market economy there will be some workers who

are looking for a new job, or waiting to begin a job. Even when

economists describe the economy as being at full employment there will be

some frictional unemployment (as much as 5 to 6 percent of the labor

force in some years). This kind of unemployment is generally not a major

economic problem.

Cyclical unemployment occurs when the economy goes into a recession. The

basic causes of cyclical unemployment are decreases in the levels of

consumption, investment, or government spending in the economy, or a

decrease in the demand for goods and services exported to other

countries. As national spending and production levels fall, some

employers begin to lay off workers. Cyclical unemployment varies greatly

according to the health of the economy. Some of the highest unemployment

rates for the last decades of the 20th century took place during the

recession of 1982 to 1983, when unemployment levels reached almost 10

percent. The highest U.S. unemployment rate of the 20th century occurred

in 1933, when the Great Depression left almost 25 percent of the labor

force without work.

Sometimes the government can use monetary or fiscal policies to increase

spending by businesses and households, for instance by cutting taxes. Or

the government can increase its own spending to fight this kind of

unemployment. . Perhaps the most famous example of this kind of tax cut

in the United States was the one designed in 1963 and passed in 1964 by

the administrations of U.S. president John F. Kennedy and his successor,

Lyndon B. Johnson.

Structural unemployment occurs when people who are looking for jobs do

not have the education or skills to fill the jobs that are currently

available. Most policies designed to reduce structural unemployment

provide training programs for these workers, or subsidize education and

training programs available from colleges and universities, technical

schools, or businesses. In some cases, the government provides support

for retraining when increased competition from imported goods and

services puts U.S. workers out of work or when factories are shut down

because production is moved to another state or country.

Unemployment rates also vary sharply by occupation and educational

levels. As a group, workers with college degrees experience far lower

unemployment rates than workers with less education. In 1998 the

unemployment rate for U.S. workers who had not graduated from high school

was 7.1 percent; for high school graduates, the rate was 4.0 percent; for

those with some college the rate was 3.0 percent; and for college

graduates the unemployment rate was only 1.8 percent.

Income Inequality

Another issue involving the operation of labor markets in the U.S.

economy has been the growing difference between the earnings of high-

income and low-income workers at the end of the 20th century. From 1977

to 1997, families who make up the top 20 percent of income groups have

seen their money income rise from 40.9 percent of the national income to

47.2 percent. Over the same period, families in the lowest 20 percent of

income groups have experienced a decline from 5.5 percent of the national

income to 4.2 percent. This trend is the result of several factors.

Wages for skilled workers, those with more education and training, have

increased quickly because the supply of these workers in the U.S. has not

risen as quickly as demand for these workers. In addition, wages for

unskilled labor in the United States have been held down more than in

other nations as a result of U.S. immigration policies. The United States

has admitted a larger number of unskilled workers than other

industrialized nations. Other countries often consider job market factors

more heavily in determining who will be allowed to immigrate. As a

result, the supply of unskilled workers in the United States has

increased faster than in other countries, pushing wages in low-paying

jobs lower.

Finally, government assistance programs for low-income families tend to

be more extensive and generous in other industrialized market economies

than they are in the United States. That is perhaps one of the reasons

that workers in those countries are less willing to accept jobs that pay

lower wages, and why unemployment rates in those countries are

substantially higher than they are in the United States. The exact

relationship between those factors has not been determined, however.

It is clear that it has become increasingly difficult for U.S. workers

who have not at least completed high school to achieve a high or moderate

level of income. In 1996 the average annual income for graduates of four-

year colleges was $63,127 for males and $41,339 for females, while the

average annual income for those who did not graduate from high school was

only $25,283 for males and $17,313 for females.

GOVERNMENT AND THE ECONOMY

Although the market system in the United States relies on private

ownership and decentralized decision-making by households and privately

owned businesses, the government does perform important economic

functions. The government passes and enforces laws that protect the

property rights of individuals and businesses. It restricts economic

activities that are considered unfair or socially unacceptable.

In addition, government programs regulate safety in products and in the

workplace, provide national defense, and provide public assistance to

some members of society coping with economic hardship. There are some

products that must be provided to households and firms by the government

because they cannot be produced profitably by private firms. For example,

the government funds the construction of interstate highways, and

operates vaccination programs to maintain public health. Local

governments operate public elementary and secondary schools to ensure

that as many children as possible will receive an education, even when

their parents are unable to afford private schools.

Other kinds of goods and services (such as health care and higher

education) are produced and consumed in private markets, but the

government attempts to increase the amount of these products available in

the economy. For yet other goods and services, the government acts to

decrease the amount produced and consumed; these include alcohol,

tobacco, and products that create high levels of pollution. These special

cases where markets fail to produce the right amount of certain goods and

services mean that the government has a large and important role to play

in adjusting some production patterns in the U.S. economy. But economists

and other analysts have also found special reasons why government

policies and programs often fail, too.

At the most basic level, the government makes it possible for markets to

function more efficiently by clearly defining and enforcing people’s

property or ownership rights to resources and by providing a stable

currency and a central banking system (the Federal Reserve System in the

U.S. economy). Even these basic functions require a wide range of

government programs and employees. For example, the government maintains

offices for recording deeds to property, courts to interpret contracts

and resolve disputes over property rights, and police and other law

enforcement agencies to prevent or punish theft and fraud. The Treasury

Department issues currency and coins and handles the government’s

revenues and expenditures. And as we have seen, the Federal Reserve

System controls the nation’s supply of money and availability of credit.

To perform these basic functions, the government must be able to shift

resources from private to public uses. It does this mainly through taxes,

but also with user fees for some services (such as admission fees to

national parks), and by borrowing money when it issues government bonds.

In the U.S. economy, private markets are generally used to allocate basic

products such as food, housing, and clothing. Most economists—and most

Americans—widely accept that competitive markets perform these functions

most efficiently. One role of government is to maintain competition in

these markets so that they will continue to operate efficiently. In other

areas, however, markets are not allowed to operate because other

considerations have been deemed more important than economic efficiency.

In these cases, the government has declared certain practices illegal.

For example, in the United States people are not free to buy and sell

votes in political elections. Instead, the political system is based on

the democratic rule of “one person, one vote.” It is also illegal to buy

and sell many kinds of drugs. After the Civil War (1861-1865) the

Constitution was amended to make slavery illegal, resulting in a major

change in the structure of U.S. society and the economy.

In other cases, the government allows private markets to operate, but

regulates them. For example, the government makes laws and regulations

concerning product safety. Some of these laws and regulations prohibit

the use of highly flammable material in the manufacture of children’s

clothing. Other regulations call for government inspection of food

products, and still others require extensive government review and

approval of potential prescription drugs.

In still other situations, the government determines that private markets

result in too much production and consumption of some goods, such as

alcohol, tobacco, and products that contribute to environmental

pollution. The government is also concerned when markets provide too

little of other products, such as vaccinations that prevent contagious

diseases. The government can use its spending and taxing authority to

change the level of production and consumption of these products, for

example, by subsidizing vaccinations.

Even the staunchest supporters of private markets have recognized a role

for the government to provide a safety net of support for U.S. citizens.

This support includes providing income, housing, food, and medicine for

those who cannot provide a basic standard of living for themselves or

their families.

Because the federal government has become such a large part of the U.S.

economy over the past century, it sometimes tries to reduce levels of

unemployment or inflation by changing its overall level of spending and

taxes. This is done with an eye to the monetary policies carried out by

the Federal Reserve System, which also have an effect on the national

rates of inflation, unemployment, and economic growth. The Federal

Reserve System itself is chartered by federal legislation, and the

president of the United States appoints board members of the Federal

Reserve, with the approval of the U.S. Senate. However, the private banks

that belong to the system own the Federal Reserve, and its policy and

operational decisions are made independently of Congress and the

president.

Correcting Market Failures

The government attempts to adjust the production and consumption of

particular goods and services where private markets fail to produce

efficient levels of output for those products. The two major examples of

these market failures are what economists call public goods and external

benefits or costs.

Providing Public Goods

Private markets do not provide some essential goods and services, such as

national defense. Because national defense is so important to the

nation’s existence, the government steps in and entirely funds and

administers this product.

Public goods differ from private goods in two key respects. First, a

public good can be used by one person without reducing the amount

available for others to use. This is known as shared consumption. An

example of a public good that has this characteristic is a spraying or

fogging program to kill mosquitoes. The spraying reduces the number of

mosquitoes for all of the people who live in an area, not just for one

person or family. The opposite occurs in the consumption of private

goods. When one person consumes a private good, other people cannot use

the product. This is known as rival consumption. A good example of rival

consumption is a hamburger. If someone else eats the sandwich, you

cannot.

The second key characteristic of public goods is called the nonexclusion

principle: It is not possible to prevent people from using a public good,

regardless of whether they have paid for it. For example, a visitor to a

town who does not pay taxes in that community will still benefit from the

town’s mosquito-spraying program. With private goods, like a hamburger,

when you pay for the hamburger, you get to eat it or decide who does.

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