Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Chapter 10 Labor Unions and Collective Bargaining

Why Unions?

10-3 Why Unions? oWorkers prior to industrial revolution were self-employed (i.e., worked for themselves). oIndustrialization separated the functions of management and labor. oWorkers became dependent on owners for employment and income. oWorkers formed unions to protect their interests and bargain collectively with employers.

10-4 US Union History oPrior to Great Depression, social attitudes and the political climate were anti-union Sherman Antitrust used to outlaw strikes and product boycotts because they reduced the flow of goods in interstate commerce Employees had to sign “yellow-dog” contracts to get jobs, agreeing not to join a union. Unions who organized these workers were found guilty of inducing a breach of contract. Firms used lockouts to keep unions from forming and blacklists to keep organizers out of work. Strikebreakers

10-5 Depression & Later Reforms o1932 Norris LaGuardia Act first federal law to regulate union-employer relationship. Restricted employer’s use of courts to prevent organizing and made yellow-dog contracts unenforceable in federal courts. o1935 National Labor Relations Act (Wagner Act) listed unfair labor practices Workers can organize as units and firm can’t discriminate against pro-union employees NLRB can investigate & certifies unions

10-6 Depression & Later Reforms o1947 Taft –Hartley Act curbed union power. Allows right-to-work states (22 in US now). Can’t require union membership to get job. Allows decertification votes of unions Disallows most secondary boycotts by unions o1959 Landrum-Griffin Act limits union corruption Unions must disclose finances Unions must have regular elections

10-7 Depression & Later Reforms o1962 JFK Executive Order allows federal employees to organize o1978 Civil Service Reform Act prohibits federal employees from striking & allows federal workers to either join or not join unions

Labor Unionism: Facts and Figures

10-9 Table 13.1 Union Membership and Bargaining Coverage, Selected Countries, 2004

10-10 Union Membership by Industry, 2008 Unionization tends to be higher in the goods producing industries such as manufacturing and construction. Unionization tends to be lower in service industries such trade and finance, real estate, and insurance. Unionization is high in transportation, communications, and utilities due to low labor demand elasticities.

10-11 Union Membership by Occupation, 2008 White-collar workers such as managers and sales workers tend to have low unionization rates. The low white- collar worker unionization rates are because they have higher wages and some managers are exempt from unionization.

10-12 Figure 13.1 Union Membership as a Percentage of All Workers, by Sector, United States, 1973–2008

10-13 Union Membership by Public Sector Status, 2008 Public sector workers have a much higher unionization rate than private- sector workers. The unionization rate of public sector workers rose rapidly in the 1960s and 1970s when laws allowing public-sector workers to unionize were passed and public sector managers did not aggressively fight the unionization of their workers.

10-14 Union Membership by Demographic Group, 2008

10-15 High Unionization States, 2008

10-16 Low Unionization States, 2008

10-17 Structure of Organized Labor Federations National Unions Local Unions

10-18 Structure of Organized Labor oAt top of pyramid are the federations of national unions AFL-CIO has 56 national unions & 8 million workers. Purpose is not to organize new workers but to push labor interests like minimum wage, trade, political lobbying, etc. Change to Win (started in 2005 in break from AFL-CIO) has 7 national unions with 6 million workers, including Service Employees Intl. and Teamsters. Key agenda: organize new workers, particularly immigrants

10-19 Structure of Organized Labor oNational Unions are federations of local unions organized by industry (autos, steel) or craft (carpenters, electricians). They organize the unorganized in industry or craft They negotiate collective bargaining agreements with employers where product markets are national or regional ∞Want standardized wages (no substitution of low wage for high wage ∞Collective bargaining complex and costly

10-20 Structure of Organized Labor National Education Association (3 million), a national union, is not associated with either AFL- CIO or Change to Win Local Unions are usually subservient branches of national unions (while nationals are not subservient to federations) Locals need national permission to strike Can be disbanded by national Police agreement and resolve grievances

10-21 Collective Bargaining oWhen an industry contains few employers (e.g., autos), union will engage in pattern bargaining, obtaining a contract first with 1 firm then applying it to others oWhen there are numerous local employers, unions will broker a citywide deal with an employers’ association Lower bargaining costs for union Employers have more power as group vs. solo Standardized wages limit individual firm risk

Unionism’s Decline The proportion unionized has been declining since 1950s Why the decline? Structural Changes in the Economy Increased Management Opposition Substitution by Government Changing Political Balance

10-23 Union Membership The unionized sector is a minority component of the labor force. Unionism is on the decline in the U.S. The number of union members peaked at 20 million in 1980 and has fallen to slightly more than 15 million now. The percent of labor force that is unionized fell from 30% in 1950 to 11% now.

10-24 Comparison to Trading Partners oUnion membership has not declined drastically in our trading partners o US is far lower (11%) than Japan (20%), Germany (23%), Canada (28%), UK (29%), Italy (34%) or Sweden (78%).

10-25 Causes of Decline in Unionism oStructural changes The structural-change hypothesis is the labor force and economy has changed in ways that are unfavorable to unions. ∞Demand has shifted from blue-collar manufacturing to white-collar services ∞Growing import competition in manufacturing ∞Small firms growing at expense of large ∞Large increase in women, youths and part- time employment, traditionally nonunion

10-26 Causes of Decline in Unionism ∞ Energy costs shifted production to South & West ∞Unions successfully increased wages in 1970s ~Unionized firms switched to nonunion methods of production where possible. ~Nonunion firms expanded output and employment due to their lower costs. Criticisms ∞Other countries have had similar structural changes w/o unionism decline. ∞In past unions grew by organizing non-unioners.

10-27 Causes of Decline in Unionism oManagerial-opposition hypothesis The managerial-opposition hypothesis argues that in the 1970s high union wages increased firm anti-union acts ∞Firms hire permanent strike breakers ∞ Firms hire consultants ∞ Firms “educate” workers about union negatives, i.e., lost jobs, strikes, etc. ∞ Firms increased illegal actions, like identifying and firing pro-union workers

10-28 Causes of Decline in Unionism oThe substitution hypothesis The substitution hypothesis argues that the government and employers now provide services that used to be gained by unions. ∞The government now provides services such as workers’ compensation and health and safety laws that unions used to provide. ∞Some firms try to prevent unionization by using grievance procedures and providing worker- management communication methods. ∞Willingness to join unions has declined

10-29 Causes of Decline in Unionism oOther factors Unions have decreased their organizing efforts. The National Labor Relations Board, which oversees unionization efforts, became less pro-union under Reagan-Bush. American values of free markets and individualism are at odds with collective unionism.

10-30 Causes of Decline in Unionism oRelative importance Freeman concludes that the total decline in unionization is due to: ∞Structural changes (40%) ∞Increased managerial-opposition (40%) ∞Decreased union organizing (20%) Krueger argues nearly all of the recent decline in unionization is due to decreased demand for unions among nonunion workers.

10-31 Union Responses to Decline oIncreased mergers among unions Example: NEA and AFT oChanges in strategies Unions have increased organizing efforts and targeted white-collar workers. Unions have tried to avoid strikes and used work slowdowns in their place. Less emphasis on wage and more on work conditions, i.e., safety, schedules, parental leave, etc.

10-32 Questions for Thought 1. Critically evaluate each of these statements: (a) “The relative decline of the American labor movement can be explained by the shift from goods- producing to service-producing industries and the closely related shifts from blue-collar to white-collar occupations and from male to female employees. (b) “The success of unions in raising their wages relative to nonunion workers has contributed to the decline in unionism. (c) “Unionized firms have tended to be less profitable, and therefore, employers are more resistant to unionization.

What Do Unions Want? Monopoly Union Model Efficient Contracts Model

10-34 Monopoly Union Model oEconomists usually assume that the goal of a union is to increase both the wages and employment of its members. oEconomists construct union indifference curves that show the combinations of wage and employment where the union is indifferent. Characteristics of indifference curves ∞Negatively sloped ∞Convex

10-35 Monopoly Union Model oThe monopoly union model assumes that the union sets the wage rate and the firm sets the level of union employment based on this wage rate. oThe firm maximizes profits and thus chooses an employment level based on its labor demand curve. The available wage and employment combinations for the union are on the labor demand curve.

10-36 Monopoly Union Model Employ Wage 0 In the monopoly union model, the utility maximizing wage and employment for the union is point u, where union indifference curve I 3 is just tangent to the labor demand curve D L. I1I1 I3I3 DLDL QuQu WuWu u The union raises the wage rate from W c to W u, the firm decreases employment from Q c to Q u, and the union increases total utility from I 1 to I 3. c I4I4 WcWc QcQc

10-37 Efficient Contracts Model Employ Wage 0 The outcome of the monopoly union model is point u. This combination is not efficient for the two parties since at least one of them could be made better off by moving off the labor demand curve. I3I3 DLDL QuQu WuWu u The combinations of wage and employment where at least one party is better off without the other party worse off are called efficient contracts. y I4I4 WyWy QyQy 11 For example, at point y, the union has achieved a higher utility level than at point u by being on a higher indifference curve and the firm is no worse off because it stays on the same isoprofit curve.

10-38 Efficient Contracts Model oThe contract curve is composed of the set of efficient contracts (tangencies of union indifference curves and isoprofit curves). The slope of the contract curve depends on the shapes of the firm’s isoprofit curves and the union’s indifference curves. A vertical contract curve at the competitive employment level is called a strongly efficient contract curve.

10-39 Efficient Contracts Model oIn general, the efficient contract outcome will result in lower wage and more employment than the monopoly union outcome. Economists have suggested this helps explain the requirements for excess labor in union contracts. These stipulations or “feather bedding” take the form of work rules specifying minimum work crew sizes or narrow job descriptions.

10-40 Empirical Evidence oA direct test of the efficient contracts model is whether unions bargain over employment as well as wages. Contrary to the efficient contracts model, union contracts almost always allow firms to unilaterally set the employment level. Some researchers have suggested they may indirectly affect employment by bargaining over capital-labor ratios.

10-41 Empirical Evidence oIndirect tests of the efficient contracts model rely on the fact that efficient contracts and monopoly union models have different predictions regarding which factors affect the level of union employment. Monopoly union predicts union employment level should be related to the union wage, but it should have no relationship with the competitive wage. Strongly efficient contract model predicts union employment level should be related to the competitive wage, but it should have no relationship with the union wage. oThe findings from these indirect tests yield mixed support for the efficient contracts model.

Unions and Wage Determination

10-43 Unions and Wages oUnions can increase the wages of their members by: Increasing the demand for union labor Restricting the supply of labor Bargaining for an above equilibrium wage

10-44 Increasing Labor Demand Quantity of Labor Hours Wage rate To the extent that unions can increase the demand for union labor from (D 0 to D 1 ), they can gain both higher wages and employment. S D0D0 Q0Q0 W0W0 D1D1 Q1Q1 W1W1

10-45 Methods to Increase Union Labor Demand oIncreasing product demand Lobbying for tariffs on foreign goods oEnhancing productivity Participation in labor-management committees on productivity oInfluencing the prices of related inputs Lobbying for minimum wage hikes as they raise the price of substitutable less-skilled, nonunion labor Davis-Bacon Act, which requires federal contractors pay the “prevailing” union wage scale oIncreasing the number of employers Attempts to pass requirements for domestic content for autos sold in the U.S.

10-46 Changes in Labor Supply Quantity of Labor Hours Wage rate If a union decreases the supply of available labor from S 0 to S 1, the equilibrium wage rate will rise to W 1 but the equilibrium quantity will fall to Q 1. S0S0 D0D0 Q0Q0 W0W0 S1S1 Q1Q1 W1W1

10-47 Methods to Decrease Labor Supply oReducing the number of qualified suppliers of labor Lobby for laws that reduce immigration, child labor, and length of the workweek Limit entry into occupation through long apprenticeships Occupational licensing which are laws that require practitioners to meet certain requirements oRaising nonwage income Lobby to increase nonwage income sources such as Social Security in order to decrease labor supply

10-48 Craft vs. Industrial Unions oCraft unions are more successful in limiting labor supply oIndustrial unions have a difficult time limiting labor supply Must “monopolize” the supply of labor by organizing all firms Must make labor demand inelastic to preserve labor income when increasing wages ∞Prohibit subcontracting, mandatory severance, require advance layoff notice

10-49 Bargaining for an Above- Equilibrium Wage By organizing all workers and having a union shop (requiring all new hires to join the union), the union may achieve a wage W U that is above the competitive wage W C. The effect is to make the labor supply curve perfectly elastic at W U until point d. The employment level will fall from Q C to Q U. QCQC QUQU WCWC WUWU Quantity of Labor Hours Wage rate SLSL DLDL MWC An efficiency loss of abc will also result. The more elastic is D L, the larger is the employment loss. As result unions try to reduce the elasticity of D L. d b c a

10-50 Questions for Thought 1. Explain how each one of the following contract provisions might affect the elasticity of labor demand during the period of the labor contract: (a) Layoff and severance pay (b) Prevention of subcontracting (c) The limiting of plant shutdown or relocation 2. Under what elasticity of labor demand conditions could a union restrict the supply of labor—that is, shift the supply curve leftward— and thereby increase the collective wage income (wage bill) of those workers still employed?

Strikes and the Bargaining Process Why do strikes occur? Accident Model Assymetric Information Model

10-52 Accident Model Expected Strike Length Wage 0 The employer concession curve EC shows the maximum wage that the firm would be willing to pay to avoid a strike of a given length. EC UR W*W* The union resistance curve UR shows the minimum wage that the union would be willing to accept to avoid a strike of a given length. If both the union and the firm are well informed about the other party’s concession curve, then the wage settlement will occur at W* where the UR and EC curves intersect and no strike will occur. If either party misperceives the other party’s concession curve, then a strike will occur.

10-53 Accident Model Implications oStrikes occur because either mgmt or union misperceive where the other’s concession curve is oStrikes more likely if: ∞There’s more uncertainty about each other ∞Employer demand is more elastic, i.e., elastic customers, substitute inputs & big labor costs ∞Employee strike costs are low, i.e., strong labor market, U.I. & strike benefits oStrikes end over time as costs rise for each side

10-54 Asymmetric Information Models oTwo types of strike models based on asymmetric information have been developed. The first focuses on the information gap between the union leadership and rank and file union members. ∞Union leaders have better information about bargaining possibilities. ∞Union members have unrealistic demands but leaders want to remain in office. ∞Union leaders call strike to moderate demands, making settlement possible.

10-55 Asymmetric Information Models The second asymmetric info model emphasizes the information differences between the union and the firm. ∞Firm has more information about the profitability of the firm than the union. ∞The firm has an incentive to understate its profitability since it can reduce wage offer. ∞ Unions make high wage demands to measure hidden profits ~If firm has big profits, it’ll pay to avoid strike ~If it doesn’t, strike happens which will lower union wage demands

10-56 Is Money the Issue? oMany participants in industrial relations believe collective bargaining is more about justice than economics Union thinking ∞Pattern bargaining despite ability to pay ∞“Just” wage demands Mgmt thinking ∞Firm reputation ∞Mgmt reputation in their communities

10-57 Questions for Thought 1. Assume that a union’s utility only depends on the wage rate and not the level of employment. In this case, what will be outcome under the efficient contracts model? 2. What role does information differences play in causing strikes?