Unions Haven't Kept Up With the New Economy

(Bloomberg Opinion) -- Something still feels broken in the labor market. There are many jobs and wages are up. But there is also a sense of uncertainty and misery. Service jobs can be grueling, and despite recent growth, people's wages over the course of their careers aren't increasing as fast as they once did — especially when you account for inflation. And every day brings more technology that might one day take your job.

The Biden administration and labor activists think the answer to these problems is to empower unions. After all, unions historically protected some workers and their wages, and helped jobs feel stable. Despite the political enthusiasm, though, it's not clear workers actually want to be part of these labor groups. Recent unions drives have failed. At their height, about a quarter of employees were part of a union; now only about 10% are, and it falls further each year.

That's not altogether surprising. Why pay dues to an institution that may not serve your needs? Unions in their present form no longer work for our new economy. If they want to play a role going forward they need to reinvent themselves. Here's how.

The union model made some sense in the post-war era, when many jobs were fairly routine and there was lots of value in gaining skills unique to a particular employer; How a company made cars or did word processing tended to be unique to each employer. This meant workers were more beholden to their employers, since their skills had less value on the open market. There was also not much wage variance within a single firm because jobs were more similar and there was a smaller premium on talent. It was harder to monitor who was a better, harder worker. If you were lucky enough to be in a union, it offered job security, higher wages and benefits that rewarded long tenure. People got paid a similar amount, which meant better workers subsidized weaker ones, and that was a fair trade for the security that came from the power of banding together.

Now the world is different. Mechanization means everyone uses the same word processing software and similar manufacturing techniques, so skills are easier to transfer across employers. There is a big premium on talent and data analytics mean it's easier to identify the better employees for higher compensation. If you are a high-value worker there is less incentive to unionize because it would mean subsidizing your colleagues or paying dues to someone other than your employer who can determine (and limit) your career path.

Despite a changing labor market, the Biden administration is trying its best to bring back unions. But it's an attempt to recreate the 1960s economy. Instead unions should reform themselves to adjust to the new economy.

The problem with the labor market is people can't take enough risk — which is how wages go up and people get ahead. We know from finance there are two ways to manage risk: hedging, which means taking less risk and forgoing upside; and insurance, which provides protection from the downside while allowing you to keep the upside. Insurance tends to increase risk taking while hedging reduces it.

Unions traditionally offered hedging, reducing risk by offering stable salaries and discouraging job changing. But that only holds people back. They should instead focus on helping workers take more risks in a more dynamic economy by offering them insurance.

Even as union membership has fallen, so has job switching (last year was a rare exception). Fewer job changes is one big reason wages aren't growing as fast. We also have an entrepreneurship deficit despite the fact that technology makes it easier than ever to work for yourself. People aren't taking these risks in part because health and retirement benefits are tied to employers, making change prohibitively expensive.

Instead of traditional unions that manage your relationship with your employer, unions can become modern day guilds that workers belong to as long as they work in a particular industry — no matter what company employs them. The union could offer benefits for its workers, but not negotiate wages or working conditions with employers.

For example, imagine a gig workers union (or guild) where membership offers quality health insurance (at good rates because workers pool together), disability insurance, or even insurance that offers sick leave. The unions could also offer legal services and counseling for disputes with employers. It wouldn't try to set wages and work conditions with gig platforms, as this forces the workers to give up flexibility, autonomy and upside. Instead, the modern union would fill a hole in the labor market, where workers are under-insured and constrained from taking risk.

This is not a union in the traditional sense because it wouldn't have much direct sway over companies -- and that may make the idea sound radical. But the primary purpose of unions is to protect workers and get them a better deal. The old union model no longer meets that objective. If it did, more people would want to unionize. Unions are already moving into the role I describe, offering benefits. The Screen Actors Guild is one such model: it still does collective bargaining, negotiating minimum pay and working conditions, but a large part of its value is offering benefits like health insurance to its members while top performers continue to get higher rewards. It was built for the superstar economy many other industries are starting to resemble.

Workers need a reliable source of insurance so they can more easily change jobs or work independently. Enabling workers to take more risks will enhance individual bargaining power in a modern economy. That's never had more value for workers, and it's what they need to thrive more than overprotective unions.

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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Allison Schrager is a Bloomberg Opinion columnist. She is a senior fellow at the Manhattan Institute and author of "An Economist Walks Into a Brothel: And Other Unexpected Places to Understand Risk."