30-2 Copyright © 2011 Pearson Education, Inc. All rights

Copyright ©2011 by Pearson Education, Inc.All rights reserved.

Chapter 30

Unions and Labor Market Monopoly Power

30-2Copyright © 2011 Pearson Education, Inc. All rights reserved.

Introduction

Since the 1930s, Chrysler had employed thousands of workers at its plant in New Castle, Indiana, and the union wages it paid them fueled the town’s economy—until Chrysler closed its plant in 2003.

The experience of this town is indicative of a sea of change taking place in relations between U.S. auto companies and their unionized workers.

To understand the transformation under way in the U.S. auto industry, you must first learn about the economic role of unions, which is a key topic of this chapter.


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...

• The average civilian employee of the federal government receives two times the annual earnings and benefits earned by the average private worker?

• One factor helping to boost wages earned by employees of the federal government is that an increasing percentage of them belong to labor unions.


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 (cont'd)

• 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



• 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



• 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



• 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.



• Industrial Unions

– Labor unions that consist of workers from a particular industry, such as automobile manufacturing or steel manufacturing



• 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




– 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





• Prohibited jurisdictional disputes

– Disputes involving two or more unions over which should have control of a particular jurisdiction





• Prohibited sympathy strikes

– A strike by a union in sympathy with another union’s strike or cause





• Prohibited secondary boycotts

– A boycott of companies or products sold by companies that are dealing with a company being struck





• 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.



• To understand the current status of labor unions, we consider

– Worldwide trends in unionization

– U.S. unionization trends


Figure 30-1 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 30-1 The Ten Largest Unions in the United States



• 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


International Example: No Pay Raise, No Data!

• A recent strike by workers at the Brazilian central bank shut down many of the institution’s operations for more than a month.

• The banks’ regulatory and data-processing departments experienced significant slowdowns.

• When workers settled for a 10% pay increase spread over two years instead of the 15% pay raise they had been demanding, financial and economic data began to flow once more.



• 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 30-2.


Figure 30-2 Unions Must Ration Jobs



• Rationing can be done by

–Using the seniority system

–Lengthening the apprenticeship period

– Instituting other rationing methods



• Union wage and employment strategies include:

– Employing all union members

– Maximizing member income

– Maximizing wage rates for certain workers


Figure 30-3 What Do Unions Maximize?



• Union strategies to raise wages indirectly include:

– Limiting entry over time

– Altering the demand for union labor



• 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 30-4 Restricting Supply over Time

If union membership limited to Q1, wages increase to 21 instead of 20 and employment is reduced



• Altering the demand for union labor

– The demand for union labor can be increased by:

1. Increasing worker productivity

2. Increasing the demand for union-made goods

3. 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.



• 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.



• Featherbedding

– Any practice that forces employers to use more labor than they would otherwise or to use existing labor in an inefficient manner



• Economic benefits and costs of labor unions—two opposing views

1. Unions are monopolies whose main effect is to raise the wage rate of high seniority members.

2. Unions increase labor productivity by promoting generally better work environments.


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 30-5 Derivation of a Marginal Factor Cost Curve, Panel (a)


Figure 30-5 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.

– Figure 30-6 displays how a monopsonist finds its profit-maximizing quantity of labor demanded at A, where the marginal revenue product is just equal to the marginal factor cost.


Figure 30-6 Wage and Employment Determination for a Monopsonist

Hire Qm where MFC = MRP and pay Wm

MRP > W



• 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 30-7 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.


Figure 30-7 A Monopsony’s Response to a Minimum Wage


Policy Example: Can Minimum Wage Laws Ever Boost Employment? (cont’d)

• Thus, establishing a minimum wage can generate a rise in employment at a monopsony firm.

• If a government establishes a minimum wage law covering all firms within its jurisdiction, including firms operating in both perfectly competitive and monopolistic labor markets, will overall employment necessarily increase?



• Bilateral Monopoly–A market structure consisting of a

monopolist and a monopsonist


Figure 30-8 Pricing and Employment Under Various Market Conditions, Panel (a)

Firm operating in perfectcompetition in both input and output markets


Figure 30-8 Pricing and Employment Under Various Market Conditions, Panel (b)

Firm operating in perfect competition in the input market but a monopoly in the output market

Why are fewer workers hired in this market compared to perfect competition in both markets?


Figure 30-8 Pricing and Employment Under Various Market Conditions, Panel (c)

Firm operating asmonopsonist in the input market and a perfect competitor in the output market

• Hire where MFC = MRPC

• W = WC

• WC < MRP


Figure 30-8 Pricing and Employment Under Various Market Conditions, Panel (d)

Firm operating asa bilateral monopoly

• Hire where MFC = MRPm


Issues and Applications: Can the U.S. Auto Industry and the United Auto Workers Union Remain Viable Enterprises?

• For the past several years, U.S. automakers have struggled to remain profitable. By the mid-2000s, it was clear to all in the auto industry, including the United Auto Workers (UAW), that significant changes would be necessary if U.S. automakers were to survive.

• By the mid-2000s, following several years of meager or negative profitability in the U.S., General Motors, Ford and Chrysler were all experiencing severe financial difficulties.


Issues and Applications: Can the U.S. Auto Industry and the United Auto Workers Union Remain Viable Enterprises? (cont’d)

• Faced with a dwindling demand for its membership, the UAW had to plot new strategies in light of its two-part goal to retain current working members while protecting the benefits of retired members.

• In the end, the UAW showed that it valued job retention more highly than wages.

• The UAW agreed to nearly 50% wage reductions for newly hired workers in exchange for maintaining the wage levels of senior employees.


Issues and Applications: Can the U.S. Auto Industry and the United Auto Workers Union Remain Viable Enterprises? (cont’d)

• The most significant aspect of the new UAW contracts, was an agreement by U.S. automakers to transmit lump sums amounting to tens of billions of dollars to health care trusts.

• These trusts, managed by the UAW, will use interest earnings from all the funds set aside by automakers to provide health care benefits to retired workers. Thus, the UAW saved jobs for current workers—albeit at lower wages in the future—and protected the benefits of its retired members.

• At the same time, U.S. automakers accepted higher costs in the present in exchange for lower costs in the future that they hopewill enable them to better compete with foreign firms.

• To U.S. automakers, are costs of retiree benefits variable costs or fixed costs?


Summary Discussion of Learning Objectives

• Labor unions

– Types of unions• Craft unions

• Industrial unions

– 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



• 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



• 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.



• 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



• Comparing a monopsonist’s wage and employment decisions with choices by firms in industries with other market structures

– Compared to a perfectly competitive firm in both the labor and output market

• A monopolist in the output market employs fewer workers

– Pays the same wage if faced with perfect competition in the labor market

– Pays a lower wage if also a monopsonist

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30-2 Copyright © 2011 Pearson Education, Inc. All rights