Chapter 29 Unions and Labor Market Monopoly Power

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.

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 ... 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.

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

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

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

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

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

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

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

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

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

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

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

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

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

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.

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

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

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

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.

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.

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.

Figure 29-2 Unions Must Ration Jobs

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

Figure 29-3 What Do Unions Maximize?

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

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.

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

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

Figure 29-4 Restricting Supply over Time

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

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?

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

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

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

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

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.

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.

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

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

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

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

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

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

Figure 29-6 Wage and Employment Determination for a Monopsonist

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

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.

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

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

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

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

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

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

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.

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.

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

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.

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

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

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

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

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

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