So Do We Still Have Unions Now or No? Economics Can (Sort of) Answer That!

Earlier this week, the Supreme Court released a number of decisions, including one that can basically be summarized as follows:

In case you’re curious, you name of the case is Janus v…well, the name of his union, and you can see the full decision here. I’m not here to discuss whether this decision is correct from a legal perspective. Instead, my goal is to walk through the relationship between the decision and the feasibility of unions- in other words, to explain why some people are describing the ruling as a death blow to unions and to assess whether they are correct. (In the discussion that follows, I’m not distinguishing between public-sector unions and unions more generally- this is because there is speculation that the court’s decision could technically apply to all unions. Also, the distinction isn’t crucial to the logic of the situation.)

Since the 4th of July is coming up, I think it makes sense to talk about fireworks displays. (I swear I have a point here and am not just bringing them up because one freaked out my dog last night.) Logistically, it’s hard to restrict a fireworks display to paying customers- for example, I live in Boston and can see the big 4th of July fireworks from the roof of my building…unless somebody’s going to put up a reallllllly tall screen, I get to watch whether I help pay for them or not. So let’s say I like both fireworks and keeping my money- would I pay money to watch the fireworks display? Probably not.

This is what people are referring to when they talk about the free-rider problem- technically, me watching the fireworks display without contributing a payment is me free-riding off of others, and the free-rider problem itself is the suboptimal outcome where no fireworks happen (even though creatures who are not my dog like fireworks) because everybody is waiting for others to pay so they can free ride. (protip: if you’re thinking about how to get something for free, so is everyone else) In the context of the unions, the idea is that unions would shut down due to lack of funding if those who benefit from the union’s negotiation activities aren’t required to contribute to its funding, since everyone would just try to free ride off of others. (In this particular case at least, the union is required to represent the interests of both members and nonmembers.)

In Econ 101, we definitely teach that economically rational individuals will free ride whenever possible, and, as a result, there will be fewer unions and fireworks displays than is optimal for society. This is particularly awkward to teach in summer courses, since it tends to be followed closely by “now here are the best places to watch the giant fireworks display tomorrow.” So what gives? In the case of the fireworks, they’re usually paid for either by governments or by companies that want to sponsor the event. In the case of unions, there’s talk of trying to have the government pay for them, which I guess works in principle (though is potentially still questionable in a legal sense).

Note, however, that “economically rational” was doing some heavy lifting in the previous paragraph, and it’s well-documented that people often behave in “irrational” ways. (This is why the entire field of behavioral economics exists.) So what does behavioral economics (and psychology, to be fair) have to say on the matter? One set of data points shows that “pay what you want” pricing schemes generate significantly more than zero revenue, suggesting that people aren’t pure free riders when given the opportunity. Another data point concerns what economists call “public goods,” of which the fireworks display is a classic example. (note that, while public goods are often provided by governments in practice, this is not why they are called as such) Since public goods are not restricted to paying customers, a temptation to free ride exists…but this temptation is apparently not overwhelming, since there’s lots of documented evidence that people contribute to public goods.

Given these findings, it’s helpful to explore the factors that encourage people to contribute rather than free ride…generally, they’re pretty much what you’d expect. People contribute when the benefits of the good to them is higher, and when people can communicate and coordinate more effectively among themselves. Group size also plays a role, but whether bigger groups are good or bad for cooperation is situation dependent. In addition, people sometimes contribute “by accident”- i.e. they don’t realize that free riding is a possible or desirable option. One warning though- the evidence also suggests that cooperation declines over time, essentially meaning that people learn to free ride off of others, so observing that unions stay solvent in the short run doesn’t mean that that trend is likely to continue.

Overall, however, it appears that unions don’t have to be facing a death sentence, but the inability to coerce payment makes it crucial to think through how to design them to make people excited about participating…which, come to think of it, is probably something that unions should think about regardless of legal restrictions.