chapter 30 unions and labor market monopoly power

Chapter 30

Unions and Labor Market Monopoly Power

Introduction

What are labor unions?

What are the objectives of unions, and what strategies do they utilize to pursue their goals?

Why have the aims of some unions recently clashed with others?

Learning Objectives

• Outline the essential history of the labor union movement

• Discuss the current status of labor unions

• Describe the basic economic goals and strategies of labor unions

Learning Objectives (cont'd)

• Evaluate the potential effects of labor unions on wages and productivity

• Explain how a monopsonist determines how much labor to employ and what wage rate to pay

• Compare wage and employment decisions by a monopsonistic firm with the choices made by firms in industries with alternative market structures

Chapter Outline

• Industrialization and Labor Unions

• Union Goals and Strategies

• Economic Effects of Labor Unions

• Monopsony: A Buyer’s Monopoly

Did You Know That...

• Half of U.S. labor union members are in only six states?

• Once a union represents all the workers who supply a particular type of labor, an element of monopoly power replaces the competitive outcome?

Industrialization and Labor Unions

• Labor Unions

Worker organizations that seek to secure economic improvements for their members

They also seek to improve safety, health, and other benefits (such as job security) of their members.

Industrialization and Labor Unions (cont'd)

• Craft Unions Labor unions composed of workers who engage

in a particular trade or skill

• Collective Bargaining Negotiation between the management of a

company or of a group of companies and the management of a union or group of unions for the purpose of reaching a mutually agreeable contract that sets wages, fringe benefits, and working conditions for all employees in all unions

• Unions in the U.S.

Knights of Labor

American Federation of Labor

• Early labor issues

8-hour workday

Equal pay for men and women

• The formation of industrial unions

National Industrial Act of 1933

National Labor Relations Act 1935, otherwise known as the Wagner Act

• The Congress of Industrial Organizations (CIO) was formed in 1938.

It was composed mainly of industrial unions.

Prior to the formation of the CIO, most labor organizations were craft unions.

• Industrial Unions

Labor unions that consist of workers from a particular industry, such as automobile manufacturing or steel manufacturing

• Congressional control over labor unions

The Wagner Act (1935)

Gave unions the right to organize workers and to engage in collective bargaining

Taft-Hartley Act of 1947

Allowed right-to-work laws Laws that make it illegal to require union

membership as a condition of continuing employment in a particular firm

Made closed shops illegal A business enterprise in which employees must

belong to the union before they can be hired and must remain in the union after they are hired

A union shop however, is legal Non-union members join later

Prohibited jurisdictional disputes Disputes involving two or more unions over which

should have control of a particular jurisdiction

Prohibited sympathy strikes A strike by a union in sympathy with another union’s

strike or cause

Prohibited secondary boycotts A boycott of companies or products sold by

companies that are dealing with a company being struck

Established the 80-day cooling-off period

A court injunction can be used to delay a strike if it would imperil the nation’s safety or health.

• The current status of labor unions: we consider

Worldwide trends in unionization

U.S. unionization trends

Figure 30-1 Union Membership as a Share of Total Employment in Selected Nations

Figure 30-2 Decline in Union Membership

• Explaining the fall in union membership

Deregulation

Immigration

Shift from manufacturing to services

Table 30-1 The Ten Largest Unions in the United States

Union Goals and Strategies

• Strikes: the ultimate bargaining tool

Purpose is to impose costs and reduce profits of the employer

Workers do not receive wages during the time of the strike, but they may receive some compensation from the union strike fund.

Union Goals and Strategies (cont'd)

• Strikebreakers can reduce the bargaining power of the strike

Temporary or permanent workers hired by a company to replace union members who are striking

• One of the major roles of a union that establishes a wage rate above the market clearing wage rate is to ration available jobs among the excess number of workers who wish to work in unionized industries.

Figure 30-3 Unions Must Ration Jobs

• Unions must ration the available jobs by

Seniority

Apprenticeship

• Union wage and employment strategies

Employ all union members

Maximize member income

Maximize wages for certain workers

Policy Example: Higher FDIC Wages for Some Means Fewer FDIC Jobs for Others?

• Employees of the FDIC are represented by the National Treasury Employees Union (NTEU).

• Over the years, the NTEU has won significant wage increases for its members, including workers at the FDIC.

• During the 2000s, the agency’s earnings failed to keep pace with the NTEU-bargained pay increases.

Figure 30-4 What Do Unions Maximize?

Example: To Save Members Jobs, the UAW Agrees to a Two-Tier Pay Scale

• Many of DaimlerChrysler’s Jeep vehicles are assembled in two plants located in Toledo, Ohio.

• In an effort to reduce hourly wage costs, some pre-assembly work was shifted out of these plants.

Example: To Save Members Jobs, the UAW Agrees to a Two-Tier Pay Scale (cont'd)

• To preserve union jobs, the UAW agreed to adopt a two-tier wage system at the Toledo Jeep plants.

• Workers who specialize in final assembly make $26 per hour; those in pre-assembly make $15 per hour.

• Union strategies to raise wages indirectly

Limit entry over time

Alter demand for union labor

• Limiting entry over time

One way to raise wage rates without specifically setting wages is for a union to limit the size of its membership to the size of its employed workforce when the union was first organized.

Figure 30-5 Restricting Supply over Time

If union membership limited to Q1, wages increase to 21 instead of 20 and employment is reduced

• The demand for union labor can be increased by

1. Increasing worker productivity

2. Increasing the demand for union-made goods

3. Decreasing the demand for non-union-made goods

Economic Effects of Labor Unions

• Do union members earn higher wages?

• Are they more or less productive than nonunionized workers?

• What are broader economic effects of unionization?

Figure 30-6 The Most Heavily Unionized Occupations in the United States

Economic Effects of Labor Unions (cont'd)

• Unions are able to raise wages if they can successfully limit the supply of labor in a particular industry.

• Economists estimate that the average union wage premium is $2.25 an hour.

• Yet annual earnings for union workers are not necessarily higher, because they may work somewhat fewer hours.

• Question How do unions affect labor productivity?

• Answers There is some evidence that

featherbedding creates inefficiency in the unionized industries.

But some economists argue that unions actually enhance productivity by reducing labor turnover.

• Featherbedding

Any practice that forces employers to use more labor than they would otherwise or to use existing labor in an inefficient manner

• Economic benefits and costs of labor unions—two opposing views

1. Unions are monopolies whose main effect is to raise the wage rate of high seniority members.

2. Unions increase labor productivity by promoting generally better work environments.

Monopsony: A Buyer’s Monopoly

• Assumptions

Firm is perfect competitor in the product market: it cannot alter the price of the product it sells, and it faces a perfectly elastic demand curve for its product.

One factory not only hires the workers but also owns all the businesses in the town, this buyer of labor is called a monopsonist, the single buyer.

Monopsony: A Buyer’s Monopoly (cont'd)

• The monopsonist faces an upward-sloping supply curve of labor.

• Consequently, the marginal factor cost of increasing the labor input by one unit is greater than the wage rate.

• Thus the marginal factor cost curve always lies above the supply curve.

Figure 30-7 Derivation of a Marginal Factor Cost Curve, Panel (a)

Figure 30-7 Derivation of a Marginal Factor Cost Curve, Panel (b)

Monopsony: A Buyer’s Monopoly (cont'd)

• Monopsonistic Exploitation Paying a price for the variable input that is

less than the marginal revenue product

The difference between marginal revenue product and the wage rate

• Bilateral Monopoly A market structure consisting of a

monopolist and a monopsonist

Figure 30-8 Wage and Employment Determination for a Monopsonist

Hire Qm where MFC = MRP and pay Wm

MRP > W

Figure 30-9 A Monopsony’s Response to a Minimum Wage

Figure 30-10 Pricing and Employment Under Various Market Conditions, Panel (a)

Firm operating in perfectcompetition in both input and output markets

Figure 30-10 Pricing and Employment Under Various Market Conditions, Panel (b)

Firm operating in perfect competition in the input market but a monopoly in the output market

Why are fewer workers hired in this market compared to perfect competition in both markets?

Figure 30-10 Pricing and Employment Under Various Market Conditions, Panel (c)

Firm operating asmonopsonist in the input market and a perfect competitor in the output market

•Hire where MFC = MRPC

•W = WC

•WC < MRP

Figure 30-10 Pricing and Employment Under Various Market Conditions, Panel (d)

Firm operating asa bilateral monopoly

•Hire where MFC = MRPm

Issues and Applications:Big Labor Breaks Up

• A gradual splintering of goals and strategies: Beginning in the 2000s, seven unions within the

AFL-CIO began advocating for changes in its goals and strategies.

• The big breakup: During years of discussion and then months of

intense negotiation, the seven rebel unions could not reach an agreement with the other unions.

Accordingly, they withdrew and established a new labor organization, called the Change to Win Federation.

Figure 30-11 Membership Shares for Unions in the Change to Win Federation versus Unions Remaining in the AFL-CIO

Summary Discussion of Learning Objectives

• Labor unions

Types of unions Craft unions

Industrial unions

Labor legislation In 1935, the National Labor Relations Act (or Wagner

Act) granted workers the right to form unions and bargain collectively.

The Taft-Hartley Act of 1947 placed limitations on unions’ rights to organize, strike, and boycott.

Summary Discussion of Learning Objectives (cont'd)

• The current status of U.S. labor unions

In the United States, about one in eight workers is a union member.

The percentage of the labor force that is unionized has declined due to Immigration, global competition, and a shift

away from manufacturing employment

• Basic goals and strategies of labor unions

Maximize total income of members

Restrict entry of new workers in the union

Increase worker productivity

Reduce the demand for non-union labor

Increase the demand for union labor

• Effects of labor unions on wages and productivity

Union members hourly wages are higher.

Annual earnings may not be higher.

Unions may reduce productivity due to job rules, or may enhance it due to reduced labor turnover.

• How a monopsonist determines how much labor to employ and what wage rate to pay

Equate MRP and MFC

Set the wage on the supply curve for labor

Wage is less than MRP

• Comparing a monopsonist’s wage and employment decisions with choices by firms in industries with other market structures

Compared to a perfectly competitive firm in both the labor and output market

A monopolist in the output market employs fewer workers

Pays the same wage if faced with perfect competition in the labor market

Pays a lower wage if also a monopsonist

End of Chapter 30

Unions and Labor Market Monopoly Power

chapter 30 unions and labor market monopoly power

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