Unionized workers are more likely to have health insurance and other non-wage benefits than non-union workers (for US evidence see here or here (gated)). Yet it is not clear why. Some obvious explanations do not stand up to scrutiny:
1. Health insurance receives preferential tax treatment.
2. Workplace insurance is efficient, because it avoids the adverse selection problems that cause private insurance markets to fail. All employees must buy into workplace insurance, not just those who are likely to get sick, making a viable insurance market possible.
These first two considerations explain why employers pay their workers in the form of health insurance benefits rather than cash. But they cannot explain why union employees are more likely to receive health insurance benefits than non-union employees.
3. Unions act as monopolists, restricting the supply of labour, increasing worker compensation, and thus health and other non-wage benefits.
Monopolistic unions can explain why the typical unionized worker earns more, all else being equal, than the typical non-unionized one (Canadian evidence here). But monopoly power does not explain why unions bargain for higher benefits, as opposed to simply pushing for higher wages.
A more interesting and persuasive explanation can be found in some of Richard Freeman's old work (e.g. here):
4. Unions give voice to worker preferences.
Imagine a firm with two types of workers: immobile ones – typically older workers, or workers with family or other ties – and mobile ones – typically younger workers with fewer ties. The employer knows that the immobile workers are likely to stay with the firm regardless, so designs a pay package that will attract and retain the marginal, mobile workers- one with more monetary and less non-monetary compensation. Unions, however, give voice to the preferences of the median worker, and bargain for fringe benefits, because fringe benefits are a relatively attractive form of compensation (see 1 and 2 above), especially for older workers with families.
A related argument is based on the idea that….
5. Unions favour compressed wage structures. Assume unions represent the preferences of the median worker. Imagine, for simplicity, that the total wage bill is fixed. From what is known about wage structures in general, it is reasonable to suppose that, in the absence of unionization, the wage distribution would be skewed. A few high productivity/highly mobile employees would earn relatively large salaries, and the majority would earn much lower salaries. Consequently, the median salary is lower than the average salary. The union wants to make the median worker better off. Accordingly, they push for a more compressed wage structure, which increases median wages, even when the average wage doesn't change. One could say that unions "tax" the salaries of "star" or highly mobile employees to increase the wages of the typical worker. That's an analogy sometimes used in the literature – though one could also say that, in the absence of unionization, employers "tax" the average worker to pay large executive salaries.
Workplace health benefits – because they are worth roughly similar amounts to all employees – tend to compress the wage structure. This could be why unions favour them. But there is one last possibility….
6. People systematically overestimate the benefits of health insurance coverage
It's instructive to compare health insurance to auto insurance. Automobile insurance does not cover the cost of routine maintenance, like oil changes. This is a good thing. Every car is certain to need its oil changed, and it's impossible to insure against certainty. The administrative costs of providing insurance coverage for oil changes is greater than any risk-reduction benefits. Moreover, if insurance covered the cost of oil changes, people might change their oil more often than is strictly necessary, increasing the cost of car insurance.
Yet dental insurance – one of the major forms of private health insurance in Canada – does not work this way. Routine care like scaling or recall exams – the dental equivalent of oil changes – is covered. For example, Carleton's student plan covers 80% of the cost of two units of scaling and one recall exam (here).
This might possibly make sense when employers pay for the cost of health insurance. Employer health insurance contributions are not a taxable benefit, so the tax savings from paying for routine dental exams through insurance might outweigh the administrative and moral hazard (overuse) costs of using the insurance system. But insuring routine dental care makes no sense when the insured individual pays the full cost of the insurance plan – for students, for example.
Insurance is good for protecting people from sudden, large, and at least somewhat random and predictible losses. Automobile insurance works this way. It covers things like compensation to those injured in an automobile accident, or the cost of replacing a totalled brand new Lexus. But the dental equivalent of smashing up a Lexus – getting a root canal for example – are covered at just 10% of the cost in Carleton's student dental plan, up to a maximum of $600 per year.
Why would students vote to buy into insurance plans that paid for the cost of routine treatment, but not serious, expensive dental care?
Part of the answer can be found in the price tag. Carleton's student dental insurance costs $84.33 per year. That's pretty reasonable when two units of debridement (scaling) costs $97. All it takes is one routine visit to the dentist, and the plan pays for itself. Sounds like an offer one can't refuse?
Actually, if something sounds too good to be true, it probably is. A for profit plan can only offer dental insurance for $84 per year if the average person uses less than $84 per year of dental services. Behavioural economics finds that people suffer from "present bias" which makes them overweight current cost and underweight future benefits. People don't go to the gym (even though they mean to), they smoke (even though they know they shouldn't), and don't schedule routine dental check-ups.
Possibly unions bargain for health benefits for the same reason that people buy gym memberships and yoga passes: people think that they'll use the benefits, even though they don't.
Alternatively, it could be that…
7. People systematically understimate the benefits of health insurance.
As noted earlier, to attract capable employees, employers have to pay a wage that is attractive to the marginal worker. Imagine a potential employee with two competing job offers. It is very difficult for that potential employee to compare the two benefits packages on offer – there are just so many different dimensions along which benefits packages differ. So potential employees will tend to pick the offer that pays the greatest monetary amount.
In short, the labour market dictates a lower bound, say w*, on the money wage employers can offer. If a union can negotiate non-monetary compensation, they can raise their members' wages to w*+b.
I think there's something to that last argument, but there's also something not quite right about it.
I'm afraid there's no big conclusion here. I wrote this post because the question was puzzling me, and I wanted it answered.
Worthwhile Canadian Initiative 
Click to access tax_e.pdf
“As I stated, pensions were made a deduction from corporate tax and exempted from payroll tax to make them tax efficient.”
Well, as I noted, since there’s no difference between the treatment of pensions and most other compensation under the corporate tax system, I don’t know why you keep refering to their deductibility under the corporate tax system making them tax efficient. If you think its the exemption from CPP/EI which makes pensions tax efficient, I agree. But since EI and CPP rates have INCREASED since the 1970s, on your theory that should increased the offering of pension benefits.
“Lest you think that deductibility is a given, let us turn our eyes to Disability Insurance.There most plans are not in fact deductible to the employer in and of themselves.”
Determinant, are we talking past one another here, are you sure you understand what it means for an expense to be deductible to the employer? With few exceptions all costs incurred in compensating employees are deductible under section 9 of the Income Tax Act. Disability insurance is treated differently then pension beneits (and certain other benefits)in the sense that it’s treated as a taxable employee benefit to the employee, but that has nothing to do with deductibility for CIT purposes. That’s solely a benefit for the employees. I agree that the differential treatment on the employee side would make DB plans more valuable than forms of taxable compensation to the employee, but that’s not a function of the CIT rates.
Indeed, if you wanted to make that argument, you might suggest that declines in the PIT rate since the 1970s made DB benefits (and other non-taxable benefit) less valuable to employees (since it would reduce the value of the tax benefit), resulting in reduced demand for them. In theory that makes sense, though empirically I think many employees value DB pensions regardless of their tax treatment (perhaps irrationally), so I wouldn’t claim that was a strong factor in the decline of DB benefits.
“Third, you cited in your previous post that there was a small trend to DC pensions in the public sector, I said that was mainly SK and you said it was irrelevant.”
It is largely irrelevant, but in any event the claim that it was largely as a result of Saskatchewan’s shift in the 1970s is belied by the chart I posted, which shows the trend of shifting from DB to DC plans starting largely in the 1980’s (at the same time as for the private sector) and continuing over the next two decades. Chalking that up to Saskatchewan and “a few universities in British Columbia” doesn’t cut it.
“As for your tax-cut narrative, I believe it conflicts with figure 2 in this document. There were large corporate tax cuts in the early 1970’s, 1989-1995 and in 2005 and later. ”
I’m sorry, but how does that conflict with my tax-cut narrative? I observed that there were significant cut cuts in the mid-1970s – as you chart shows – but that the decline in DB pension plans didn’t chart until nearly a decade later (albeit before the second round of CIT cuts in the late 1980s), and then declined steadily, with seemingly little regard to variations in CIT rates (i.e., it doesn’t decline faster when CIT rates are cut). That the rate of decline in DB pension plan coverage seems to be more or less independent of CIT rate changes, at first glance, seems fatal to your proposition that declining CIT rates drove the decline in DB coverage.
“Those items involve ongoing, variable costs to an employer, and it was seen as beneficial to give them favourable tax treatment to encourage wide adoptions”
Sigh, I’m going to say this again. Yes, they get favourable tax treatment, but not to the employer, to the employee. The employer is indifferent (at least under the CIT system) between providing taxable or non-taxable benefits, either way it can claim a deduction. The employee is not indifferent, under the PIT system, in receiving those benefits. The favoured tax treatment is that employees get benefits that aren’t taxed. That has nothing to do with the taxation of the employer.
Enlightening responses, thank you.
I have a very specific example in mind here – which is causing me a great deal of irritation at the moment because union and management agreed to a cumbersome and mindbogglingly inefficient process that has to be implemented by yours truly.
Perhaps part of the dynamics of negotiations is they are not done by administrators?
I’m late to the party, but nobody has mentioned what seems like the most obvious answer to me: Unions are predominantly run by their more senior members, and health benefits disproportionately flow to that demographic. If you’re 55 years old, paying $2000/year for the latest statins, and you’re on the bargaining committee, why would you not give up $1000/year of wages in order to get health benefits? (And in addition to the age / medical costs correlation, employees with greater seniority are more likely to be married and have kids — no surprise that they’d negotiate to receive coverage for their entire families, subsidized by predominantly younger and single junior workers.)
Fun thing that my union has three different drug plan with various coverages and different level of payment for original and generic drugs and various coverages for singles and families. All negociated by us old geezers…