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Unions A labor union strives to consolidate market power on the supply side of the labor market. In the past few decades union power in the private sector.

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Presentation on theme: "Unions A labor union strives to consolidate market power on the supply side of the labor market. In the past few decades union power in the private sector."— Presentation transcript:


2 Unions A labor union strives to consolidate market power on the supply side of the labor market. In the past few decades union power in the private sector has waned, but in the public sector it has grown. This reflects, in some ways, the transition of America from a goods-based economy toward a services-based economy.

3 Learning Objectives 31-01. Know how unions secure high wages.
Know the factors that affect collective bargaining outcomes. Know how unions affect nonunion wages. We will use these objectives to review the chapter.

4 The Labor Market The market labor supply includes all individuals willing and able to work at alternative wage rates. The market labor demand includes all the workers the firms are willing and able to hire at alternative wage rates. Together they determine the equilibrium wage rate, where the quantity of labor supplied equals the quantity of labor demanded. You could make the obvious analogy to the product market, pointing out that the worker (and the union) is the supplier and the firm is the demander.

5 The Labor Market In reality, there are several labor markets, separated by many factors. Each skill has its own market. Markets are also separated by geography. Any particular labor market includes just a tiny portion of the nation’s workers. Thus market power in labor markets is likely to be more effective in specific areas, occupations, and industries. The media tend to talk about the labor market as a monolithic entity. In reality, there are several. You could ask your students whether, if they had a skill as a carpenter, they would apply for a vacant nursing position.

6 Labor Unions To be successful, a union must be able to exert control over the labor market supply curve. A union wants to be a monopoly provider of workers. A union will concentrate on a specific part of the labor market: Industrial unions concentrate on a particular industry. Craft unions represent workers with a particular skill. United Mine Workers and United Auto Workers – industrial unions. International Typesetters Union – craft union.

7 Union Objectives The main union goal we will focus on is to raise the wages of their members. Other objectives may include Improved working conditions. Job security. Retirement (pension) funds. Vacation time. Health insurance and other benefits. All of these objectives come up in labor discussions, but raising the wages of members is paramount.

8 Use of Union Power One worker would make an individual labor versus leisure decision concerning a job. A union, on the other hand, evaluates job offers on the basis of the collective interests of its members. These motives may conflict if, in order to acquire higher wages for members, the union must agree to reduce the number employed.

9 Use of Union Power Since unions act as a monopolist, they face a downward-sloping labor demand curve. The marginal wage curve slopes downward, too. Marginal wage: the change in total wages paid associated with a one-unit increase in the number employed. The analogy with downward-sloping demand and downward-sloping MR in an imperfect product market can be put to good use here.

10 Use of Union Power Because the labor demand curve slopes downward, if more workers are to be hired, wage rates must fall. Marginal wage falls also. Marginal wage can go negative. No union will accept a negative marginal wage. To find out what level of (positive) marginal wage a union will accept, we must add the labor supply curve. MR curve can go negative, too. Firms do not operate where MR is negative.

11 Use of Union Power The intersection of the marginal wage curve and the labor supply curve sets the union’s desired number to be employed (point u). The wage for this number is shown by point U. This is analogous to the P=MC point in market structure.

12 Use of Union Power At the wage rate of $4, more people want to work (point N) than there are jobs (point U). Thus unions must be able to exclude some workers from the market. Here lies the need for the union to reduce the number of job applicants.

13 Exclusion The union must exclude workers to keep wages high.
Union members must not compete against each other. They must agree to withhold labor (strike) if called upon to do so. A union shop can be established, requiring all workers in a plant to be union members. Shift supply left and the price goes up.

14 The Extent of Union Power
Union power grew in the private sector of manufacturing but peaked in the 1950s, as the United States transitioned into service industries. Unionization rates have declined in the private sector but have risen in the service-oriented public sector. The success of unions in the metal-bending old industries raised costs of operation that accelerated the U.S. trend from manufacturing toward service industries. A lot of manufacturing was transferred to locations where labor costs were lower.

15 Employer Power On the demand side of a labor market, there is power also, if one firm dominates the hiring in a particular industry or area. Monopsony: a market in which there is only one buyer. A monopsonist must face the entire market supply curve. It can hire additional workers only if it offers a higher wage. Just as the union wants to be a monopoly provider of workers, the firm can become a monopoly buyer of labor.

16 Employer Power Marginal factor cost (MFC): the change in total costs that results in a one-unit increase in the quantity of a factor (in this case, labor) employed. The MFC will exceed the wage rate because additional workers can be hired only if the wage rate for all workers is raised. The MFC curve lies above the labor supply curve. MFC is the supply curve equivalent to MRP for the demand curve. The law of supply states that suppliers will bring more to the market if the price increases.

17 Employer Power Point U indicates the quantity of labor a monopsonist will want to hire. Point G shows the wage that must be paid to get that many workers. If the market were competitive, point C would show the wage and number hired. Note that market power will come to a result that is less efficient than if there is competition.

18 Employer Power Recall that the demand curve for labor is the firm’s marginal revenue product (MRP) curve. A monopsonist is a profit-maximizing firm. The profit-maximizing level of input (labor) use exists where marginal revenue product (MRP) equals marginal factor cost (MFC). Point U determines how many to hire. Note that this quantity is less than the quantity to be hired in a competitive market.

19 Collective Bargaining
Here is the conflict: The union wants a wage rate that is higher than the competitive wage. The monopsonist wants a wage rate that is lower than the competitive wage. The market, therefore, is a bilateral monopoly, where there is only one buyer and only one seller. Two giants will disagree and must come to some compromise.

20 Collective Bargaining
In a bilateral monopoly, wages and the number employed are not determined by supply and demand. They are determined by collective bargaining – direct negotiations between the employer and the union. The negotiations are called collective bargaining.

21 Collective Bargaining
The union wants point U and the monopsonist wants point G. Point C is competitive equilibrium. Collective bargaining will find a compromise in the shaded triangle. Where in the shaded triangle the agreement occurs depends upon the relative bargaining strengths and abilities of the two sides.

22 Collective Bargaining
Negotiating power comes from the ability to withhold labor (the union’s power) or jobs (the monoposonist’s power). There is pressure to settle. Both sides lose if there is a strike or a lockout. Most collective bargaining events conclude without a strike or a lockout. Because work stoppages (for either reason) have an adverse influence on the nation’s economy, the government may step in as a mediator in the bargaining to speed up a successful agreement.

23 The Impact of Unions Wages of union members are higher than wages of nonunion workers. Much of this difference is due to the negotiating power and the restrictive membership of unions. If unions restrict the number of workers, union labor supply shifts left and union wages rise. Displaced nonunion workers migrate into nonunion locations. Labor supply shifts right and nonunion wages fall. You can work this out on the board by creating two markets, one union and one nonunion. Start with identical wages in each market. Restrict supply in one and expand supply in the other. Note what happens to the wage differential. This same exercise can be used to discuss wage discrimination due to race, sex, and age discrimination in hiring practices.

24 The Impact of Unions Productivity can also be affected by unions.
Unions bargain about working conditions, which may affect how goods will be produced. Union rules may inhibit productivity, which would increase costs and possibly lead to price increases. Politics: unions contribute heavily to the campaigns of politicians who support their cause. Their success is seen in minimum wage laws, work and safety rules, and retirement benefits. How could productivity be influenced? Unions sometimes forbid the implementation of new technology if it will eliminate jobs. Unions require a structured method of laying off workers, say, based on lack of seniority and not on lack of merit. Politics? A major concern about public sector unions is that they contribute funds to election campaigns, effectively “buying” their employer.

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