1. Chapter 29 Unions and Labor Market Monopoly Power

2. Introduction
Every day, some people who might other wise be gainfully employed chose not to work as part of a union-coordinated work stoppage.
What is the economic purpose of a labor union strike? More generally, what are the costs and benefits of labor union activities?
In this chapter, you will contemplate the answers to these questions.

3. 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

4. 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

5. Chapter Outline Industrialization and Labor Unions
Union Goals and Strategies
Economic Effects of Labor Unions
Monopsony: A Buyer’s Monopoly

6. Did You Know That ... Labor Unions
In the U.S., 14.6 million workers belong to labor unions?
Labor Unions
Worker organizations that seek to secure economic improvements for their members
Traditionally, a key rationale for forming a union has been for members to increase their earnings by creating a type of monopoly power.

7. Did You Know That … (cont’d)
Labor Unions
Worker organizations that seek to secure economic improvements for their members
These organizations also seek to improve safety, health, and other benefits (such as job security) of their members

8. Industrialization and Labor Unions
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

9. Industrialization and Labor Unions (cont'd)
Unions in the U.S.
Knights of Labor
American Federation of Labor
Samuel Gompers
Early labor issues
8-hour workday
Equal pay for men and women

10. Industrialization and Labor Unions (cont'd)
The formation of industrial unions
National Industrial Recovery Act of 1933
National Labor Relations Act 1935, otherwise known as the Wagner Act
Gave unions the right to organize workers and to engage in collective bargaining

11. Industrialization and Labor Unions (cont'd)
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

12. Industrialization and Labor Unions (cont'd)
Industrial Unions
Labor unions that consist of workers from a particular industry, such as automobile manufacturing or steel manufacturing

13. Industrialization and Labor Unions (cont'd)
Congressional control over labor unions
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

14. Industrialization and Labor Unions (cont'd)
Congressional control over labor unions
Taft-Hartley Act of 1947 (cont’d)
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

15. Industrialization and Labor Unions (cont'd)
Congressional control over labor unions
Taft-Hartley Act of 1947 (cont’d)
Prohibited jurisdictional disputes
Disputes involving two or more unions over which should have control of a particular jurisdiction

16. Industrialization and Labor Unions (cont'd)
Congressional control over labor unions
Taft-Hartley Act of 1947 (cont’d)
Prohibited sympathy strikes
A strike by a union in sympathy with another union’s strike or cause

17. Industrialization and Labor Unions (cont'd)
Congressional control over labor unions
Taft-Hartley Act of 1947 (cont’d)
Prohibited secondary boycotts
A boycott of companies or products sold by companies that are dealing with a company being struck

18. Industrialization and Labor Unions (cont'd)
Congressional control over labor unions
Taft-Hartley Act of 1947 (cont’d)
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

19. Industrialization and Labor Unions (cont'd)
To understand the current status of labor unions, we consider
Worldwide trends in unionization
U.S. unionization trends

20. Figure 29-1 Decline in Union Membership
Sources: L. Davis et al., American Economic Growth (New York: HarperCollins, 1972), p. 220; U.S. Department of Labor, Bureau of Labor Statistics.

21. Table 29-1 The Ten Largest Unions in the United States

22. Industrialization and Labor Unions (cont'd)
Explaining the fall in union membership
Deregulation
Immigration
Shift from manufacturing to services

23. 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.

24. 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

25. Example: Symphony Musicians “Win” a Lengthy Strike
Recently, the Detroit Symphony experienced a six-month-long strike by many of its musicians.
Following the strike, the new three-year contract’s minimum threshold for a musician’s annual pay was $79,000, a reduction from $104,650 specified in the previous contract.
In addition, the number of musicians playing in the orchestra was reduced.

26. Example: Symphony Musicians “Win” a Lengthy Strike (cont’d)
Yet, the symphony’s union declared victory, because the strike resulted in less of a pay cut than the symphony management had originally proposed.

27. Union Goals and Strategies (cont'd)
Union goals with direct wage setting
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 the unionized industry
The effects of setting a wage rate higher than a competitive market clearing wage rate can be seen in Figure 29-2.

28. Figure 29-2 Unions Must Ration Jobs

29. Union Goals and Strategies (cont'd)
Rationing can be done by
Using the seniority system
Lengthening the apprenticeship period
Instituting other rationing methods

30. Figure 29-3 What Do Unions Maximize?

31. Union Goals and Strategies (cont'd)
Union wage and employment strategies include:
Employing all union members
Maximizing member income
Maximizing wage rates for certain workers

32. What If The government required all workers to be unionized so that they could earn higher wages?
If all workers had to be unionized, then those who were employed would earn higher wages.
Fewer workers would be hired, however, so there would be a higher unemployment rate.
Also, some firms would go out of business due to the higher labor costs.
The result would be higher prices for consumers.

33. Union Goals and Strategies (cont'd)
Union strategies to raise wages indirectly include:
Limiting entry over time
Altering the demand for union labor

34. Union Goals and Strategies (cont'd)
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

35. Figure 29-4 Restricting Supply over Time

36. Union Goals and Strategies (cont'd)
Demand for union labor can be increased by
Increasing worker productivity
Increasing the demand for union-made goods
Decreasing the demand for non-union-made goods

37. Economic Effects of Labor Unions
Do union members earn higher wages?
Are they more or less productive than nonunionized workers?
What are the broader economic effects of unionization?

38. 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

39. Economic Effects of Labor Unions (cont'd)
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

40. Economic Effects of Labor Unions (cont'd)
Featherbedding
Any practice that forces employers to use more labor than they would otherwise or to use existing labor in an inefficient manner

41. Economic Effects of Labor Unions (cont'd)
Economic benefits and costs of labor unions—two opposing views
Unions are monopolies whose main effect is to raise the wage rate of high seniority members
Unions increase labor productivity by promoting generally better work environments

42. International Example: The Global Public-Union Benefits Explosion
In the U.S., about 40 percent of workers in the public sector are unionized. This share is even higher in many other nations:
In the United Kingdom, 56 percent of government workers belong to unions, and in Canada and Ireland, about 70 percent of government employees do.
In Scandinavian countries, public-sector unionization shares exceed 80 percent.

43. International Example: The Global Public-Union Benefits Explosion (cont’d)
Benefits provided to unionized public workforces have expanded, sometimes in the form of early retirement.
When benefits are included in tabulating workers’ overall compensation packages, unionized public workers earn at least 70 percent more than private employees.

44. Monopsony: A Buyer’s Monopoly
Assumptions
The 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 only buyer in market

45. Monopsony: A Buyer’s Monopoly (cont'd)
The monopsonist faces an upward-sloping supply curve of labor
We call the additional cost to the monopsonist of hiring one more worker the marginal factor cost (MFC)
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

46. Figure 29-5 Derivation of a Marginal Factor Cost Curve, Panel (a)

47. Figure 29-5 Derivation of a Marginal Factor Cost Curve, Panel (b)

48. Monopsony: A Buyer’s Monopoly (cont’d)
Employment and wages under monopsony
To determine the number of workers that a monopsonist desires to hire, compare the marginal benefit to the marginal cost of each hiring decision
The marginal cost is the marginal factor cost (MFC) curve, and the marginal benefit is the marginal revenue product (MRP) curve

49. Monopsony: A Buyer’s Monopoly (cont’d)
Figure 29-6 displays how a monopsonist finds its profit-maximizing quantity of labor demanded at A, where MRP = MFC

50. Figure 29-6 Wage and Employment Determination for a Monopsonist

51. 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

52. Policy Example: Can Minimum Wage Laws Ever Boost Employment?
Figure 29-7 on the following slide demonstrates how a monopsony responds to a minimum wage law that sets a wage floor above the wage rate it would otherwise pay its workers.
To maximize its economic profits under the minimum wage, the monopsony equalizes the minimum wage rate with marginal revenue product.
Thus, establishing a minimum wage can generate higher employment at a monopsony firm.

53. Figure 29-7 A Monopsony’s Response to a Minimum Wage

54. Monopsony: A Buyer’s Monopoly (cont'd)
Bilateral Monopoly
A market structure consisting of a monopolist and a monopsonist

55. Figure 29-8 Pricing and Employment Under Various Market Conditions, Panel (a)

56. Figure 29-8 Pricing and Employment Under Various Market Conditions, Panel (b)

57. Figure 29-8 Pricing and Employment Under Various Market Conditions, Panel (c)

58. Figure 29-8 Pricing and Employment Under Various Market Conditions, Panel (d)

59. You Are There: A Union Hires a Nonunion Picketer to Protest Nonunion Hiring
The Mid-Atlantic Regional Council of Carpenters (MARCC) has hired workers who are not union members to march and chant in a picket line protesting the hiring of non-union carpenters at an office complex in Washington, D.C.
By hiring these picketers at the minimum wage of $8.25 an hour, MARCC has revealed both a strategy and an objective.
The strategy is to attempt to raise wages by increasing the demand for union labor.
The objective is to maximize net incomes of all members by hiring non-union picketers rather than their own higher-wage union members.

60. Issues & Applications: Gauging Labor Hours Lost to Union Disputes Each Year
On a worldwide basis, more than 10 million hours of labor are lost to union disputes each year.
Figure 29-9 on the next slide displays how the hours of work lost to labor disputes are distributed across various nations.

61. Figure 29-9 Working Days per Year Lost to Union Disputes in Selected Nations
Source: International Labor Organization

62. Issues & Applications: Gauging Labor Hours Lost to Union Disputes Each Year (cont’d)
Union disputes reduce labor time at U.S. firms by about 300,000 hours annually.
Thus, losses of labor time caused by union work stoppages are smaller in the United States than in several other nations.
Nevertheless, at the 2013 average hourly wage rate of $24, these hours of lost labor otherwise would have generated more than $7 million of labor income.

63. Summary Discussion of Learning Objectives
Labor unions
Craft and industrial unions
In 1955, the American Federation of Labor merged with the Congress of Industrial Organization to form the AFL-CIO
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

64. 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

65. Summary Discussion of Learning Objectives (cont'd)
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

66. Summary Discussion of Learning Objectives (cont'd)
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

67. Summary Discussion of Learning Objectives (cont'd)
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

68. Summary Discussion of Learning Objectives (cont'd)
Comparing a monopsonist’s wage and employment decisions with choices by firms in industries with other market structures
Perfectly competitive firms take the wage rate as market determined
A monopolist in the output market employs fewer workers
A monopsonist pays a wage less than the marginal revenue product of labor