1. Labor Unions
Chapter 31

2. Introduction
This chapter focuses on how power in the labor market affects wages, employment, and other economic outcomes:
How do large and powerful employers affect market wages?
How do labor unions alter wages and employment?
What outcomes are possible from collective bargaining between management and unions?

3. The Labor Market
Labor supply consists of the number of individuals who are willing to work at various wage rates.

4. The Labor Market
Labor supply is the willingness and ability to work specific amounts of time at alternative wage rates in a given time period, ceteris paribus.

5. The Labor Market
The number of workers each firm is willing and able to hire at each wage rate gives us the market demand for labor.

6. The Labor Market
The demand for labor is the quantities of labor employers are willing and able to hire at alternative wage rates in a given time period, ceteris paribus.

7. Competitive Equilibrium
The equilibrium wage is the wage rate at which the quantity of labor supplied in a given time period equals the quantity of labor demanded.
The intersection of labor-supply and labor-demand reveals the equilibrium wage.

8. Competitive Equilibrium in the Labor Market
Quantity of Labor (hours per week)
Wage Rate (dollars per hour)
Labor demand C we
Competitive equilibrium
Labor supply qe

9. Local Labor Markets Looking at a national labor market is useful.
It is more appropriate to think in terms of localized labor markets.

10. Local Labor Markets
The largest U.S. employer (Wal-Mart) employs less than 0.8 percent of the labor force.
All unions together represent only one-seventh of the labor force.

11. Local Labor Markets
This does not mean that a particular employer or union has no influence on our economic welfare.

12. Local Labor Markets
Power in labor markets is likely to be more effective in specific areas, occupations, and industries.

13. Labor Unions
The immediate objective of labor unions is to alter the equilibrium wage and employment conditions in specific labor markets.

14. Labor Unions
To be successful, unions must be able to exert control over the market supply curve.

15. Types of Unions
Workers have organized themselves along either industry or occupational craft lines.
Industrial unions include workers in a particular industry.
Craft unions represent workers with a particular skill.

16. Types of Unions
The purpose of labor unions is to create a monopoly in its labor market.
They do so by coordinating the actions of thousands of individual workers to control market supply.

17. Union Objectives
A primary objective of unions is to raise the wages of union members.
Union objectives also include improved working conditions, job security, and other non-wage forms of compensations.

18. The Potential Use of Power
A union evaluates job offers on the basis of the collective interests of its members.
It must consider the effects of increased employment on the wage rate paid to all of its members.

19. The Marginal Wage
Like all monopolists, unions have to worry about the downward slope of the demand curve.
It must consider how hiring one more worker will affect the wages of all workers.

20. Total Wages Paid
A union must distinguish the marginal wage from the market wage.

21. Total Wages Paid
The marginal wage is the change in total wages paid associated with a one-unit increase in the quantity of labor employed.

22. The Marginal Wage

23. The Marginal Wage 1 $6 5 4 3 2 –1 –2 6
Quantity of Labor (workers per hour)
Wage Rate (dollars per hour) T U V u W
Labor demand v X w
Marginal wage

24. The Union Wage Goal
The union will seek the level of employment that equates the marginal wage with the supply preferences of union members.

25. The Union Wage Goal
The intersection of the marginal wage curve with the labor-supply curve identifies the desired level of employment for the union.

26. The Union Wage Objective
Wage Rate (dollars per hour)
Quantity of Labor (workers per hour) $6 5 4 3 2 1 –1 –2 6
Labor supply U N C u
Labor demand
Marginal wage

27. Exclusion
To maintain a noncompetitive wage, the union must be able to exercise some control over the labor-supply decisions of individual workers.

28. Exclusion
Unions attempt to solidify their control of the labor supply by establishing union shops.

29. Exclusion
Union shop is an employment setting in which all workers must join the union within thirty days after being employed.

30. Replacement Workers
Unions are subject to potential competition from substitute labor.
Employers try to find replacement workers when their unionized workers go on strike.

31. The Extent of Union Power
Although the first labor unions in America were organized in the 1780s, union power was not a significant force in labor markets until the 1900s.

32. Early Growth Unions grew in power between 1916 and 1920.
Job losses caused by the Great Depression led to union membership dropping to the 1915 level.

33. Early Growth
The Wagner Act helped union membership double from
World War II helped continue the growth of unions.

34. Union Power Today
The unionization ratio has been in steady decline for over forty years.
Unionization ratio is the percentage of the labor force belonging to a union.

35. Changing Unionization Rates45 40 35 30 25 20 15 10 5
1930
1940
1950
1960
1970
1980
1990
2000

36. Private vs. Public-Sector Trends
The decline in the national unionization rate conceals two very different trends.

37. Private vs. Public-Sector Trends
In the last ten years, the unionization rate in the private sector has fallen from 11.5% to only 9.5%.

38. Private vs. Public-Sector Trends
At the same time, union membership has increased sharply among teachers, government workers, and nonprofit employees.

39. Private vs. Public-Sector Trends
The old industrial unions are being supplanted by unions of service workers, especially those employed in the public sector.

40. Private vs. Public-Sector Trends
Although industrial unions have been in general decline, they still possess significant pockets of market power.
These include the Teamsters, UAW, United Mine Workers, Union of Needletrades and Textile Employees.

41. The AFL-CIO
The AFL-CIO is the American Federation of Labor - Congress of Industrial Organizations
It is not a separate union but a representational body of 120 national unions that focuses on issues of general labor interest.

42. Employer Power
Power may also exist on the demand side of the labor market.
Power on the demand side of a market belongs to a buyer who is able to influence the market price of a good.

43. Monopsony
In the labor market a single employer can alter the market wage rate.
Monopsony is a market in which there is only one buyer.

44. The Potential Use of Power
A monopsonist can hire additional workers only if he offers a higher wage rate.

45. Marginal Factor Cost
A distinction between marginal cost and price must be made any time the price of a resource (or product) change as a result of a firm’s purchases.

46. Marginal Factor Cost
Marginal factor cost (MFC) is the change in total costs that results from a one-unit increase in the quantity of a factor employed.

47. Marginal Factor Cost
The marginal factor cost exceeds the wage rate because additional workers can be hired only if the wage rate for all workers in increased.

48. Marginal Factor Cost

49. Marginal Factor Cost $9 Marginal factor cost 8 Labor supply 7 J 6 I 5
WAGE RATE (dollars per hour) H 4 3 G 2 F 1 1 2 3 4 5 6
QUANTITY OF LABOR (workers per hour)

50. The Monopsony Firm's Goal
The labor-demand curve is a reflection of labor’s marginal revenue product.
Marginal revenue product (MRP) – The change in total revenue associated with one additional unit of input.

51. The Monopsony Firm's Goal
The monopsonistic employer will seek to hire the amount of labor at which the marginal revenue product of labor equals its marginal factor cost.

52. The Monopsony Firm's Goal$9
Marginal factor
cost 8
Labor supply 7 J 6 I 5
WAGE RATE (dollars per hour) U H 4 C 3 G 2
Labor demand F 1 1 2 3 4 5 6
QUANTITY OF LABOR (workers per hour)

53. Collective Bargaining
The potential for conflict between a powerful employer and a labor union should be evident.

54. Collective Bargaining
The objective of a labor union is to establish a wage rate that is higher than the competitive wage.

55. Collective Bargaining
A monopsonistic employer seeks to establish a wage rate that is lower than competitive standards.

56. Collective Bargaining
The confrontation of power on both sides of the labor market is a situation referred to as bilateral monopoly.
A bilateral monopoly is a market with only one buyer (a monopsonist) and one seller (a monopolist).

57. Collective Bargaining
In a bilateral monopoly, wages and employment are not determined simply by supply and demand.
Economic outcomes must be determined by collective bargaining.

58. Collective Bargaining
Collective bargaining is direct negotiations between employers and unions to determine labor-market outcomes.

59. Possible Agreements
A negotiated final equilibrium will be somewhere between each sides’ natural asking/offering price on the labor supply and labor demand curves.

60. Possible Agreements
Ultimately, the outcome depends on the relative patience, tactics, and resources of the two parties.

61. Possible Agreements
The fundamental source of negotiating power for either side is its ability to withhold labor or jobs.

62. Boundaries of Collective Bargaining
Wage Rate (dollars per hour)
Quantity of Labor (workers per hour) $7 6 5 4 3 2 1
Labor demand
Labor supply U C G

63. The Pressure to Settle
Labor and management both suffer from a strike or lockout – no matter who initiates the work stoppage.

64. The Pressure to Settle
Because potential income losses are usually high, both labor and management try to avoid a strike or lockout if they can.

65. The Pressure to Settle
Over 90 percent of all collective bargaining agreements are concluded without a strike, and often without even the explicit threat of one.

66. The Final Settlement
The relative pressures on each side will help determine where the final settlement point is.
The final settlement almost always necessitates hard choices on both sides.

67. The Final Settlement
The union usually has to choose between an increase in job security or higher pay.
The employer has to worry whether productivity will suffer if workers are dissatisfied with their pay package.

68. The Impact of Unions
Labor unions have impacted broader economic outcomes.

69. Relative Wages
One measure of union impact is relative wages – the difference in wages between union and nonunion workers.

70. Relative Wages
There is a general consensus that unions have been able to increase their relative wages from 15 to 20 percent.

71. Effect of Unions on Relative Wages
(b) Nonunionized labor market
(a) Unionized labor market
Employment (workers per hour)
Wage (dollars per hour)
Initial supply
Market supply
Excluded
workers wu
Later supply we wn
Demand l2 n1 l1 l3 n2

72. Labor’s Share of Total Income
The labor share of total income is the proportion of income received by all workers.
Capital share, in contrast, is the share of income received by owners of capital.

73. Labor’s Share of Total Income
Most of the rise in labor’s share of total income is due to changes in the structure of the economy rather than to unionization.

74. Prices
Firms can try to protect their profits in the face of rising union wages by attempting to raise prices.
Their ability to do so depends on the structure of product markets.

75. Productivity
Unions also affect prices indirectly, via changes in productivity.
Productivity – Output per unit of input, such as output per labor hour.

76. Productivity
Unions bargain not only for wages but also for work rules that specify how goods should be produced.

77. Productivity Work rules may reduce productivity.
Limit the pace of production.
Restrict the type of jobs a particular individual can perform.
Require a minimum number of workers to accomplish a certain task.

78. Political Impact
Unions are a major political force in the United States.
Unions have provided electoral and financial support for selected political candidates.

79. Political Impact
They have also fought hard for legislation important to their members – minimum wage laws, work and safety laws, and retirement benefits.

80. Merging to Survive
Unions have been in retreat for nearly a generation.
The decline in unionization is explained by three phenomena.

81. Merging to Survive
The relative decline in manufacturing, coupled with rapid growth in high-tech service industries.

82. Merging to Survive
The downsizing of major corporations and the relatively faster growth of smaller companies.
Increased global competition.

83. Merging to Survive
By merging, unions hope to increase representation, gain financial strength, and enhance their political influence.

84. Labor Unions
End of Chapter 31