Chapter 11 · Chapter 11 Corporations and Labor Unions . ... 11-2 Corporations and Market Failure • Corporations are seen in two ways: 1. The backbone to our economy, creating jobs,

Copyright © 2011 Pearson Addison-Wesley. All rights reserved.

Chapter 11 Corporations and Labor Unions

Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 11-2

Corporations and Market Failure

•  Corporations are seen in two ways: 1.  The backbone to our economy, creating jobs, paying taxes,

producing goods, inventing new products and technologies, generating economic growth

2.  Institutions that act in their own self-interest, but not always in the public interest

•  3 market failures associated with large corporations: 1.  Unsafe products 2.  Exploitation of Laborers 3.  Lack of Competition


Corporations in the U.S. have been criticized for their pursuit of short-term profits

•  Mergers and financial gimmicks instead of investing in long term productivity

•  US firms today have become very lean (and mean) by using computers to cut staffing, make operations more streamlines – While this enhances the bottom line, it doesn’t

necessarily help the economy as a whole (Keynes)


Unsafe products

•  FDA, lawsuits designed to keep companies from producing unsafe products

•  Labeling and advertising laws protect consumers, try and correct the problem that consumers don’t always have accurate information about product safety. – Consumer advocates: these laws are inadequate – Corporations: these laws are intrusive and overly

costly (especially lawsuits)


Mistreatment of Labor

•  National Labor Relations Board was created, we legalized unions, passed minimum wage and worker safety laws

•  Labor union pressure has resulted in most of our protections of workers: workers’ comp., minimum wage, 8 hour day, overtime, right to unionize, safe working conditions (OSHA)

•  Key is creation of COUNTERVAILING POWER –  Market system works well when all major groups,

corporations, laborers and government, have relatively equal power


Labor Unions

•  Emerged as a response to lack of power that individual workers have in a capitalist economy –  Workers were unable to set wages, working conditions, or

hours before unions •  Labor unions in the US tend to be much less political

in the US than elsewhere •  Unions had little power until the WAGNER ACT of

1935 was passed, giving unions the right to organize & bargain collectively, establishing NLRB to mediate disputes –  Taft-Harley Act of 1947 significantly curtailed union

power by pre preventing union shops


•  Union membership has declined since the 1950s – As labor has lost power in our economy – Desperation makes workers unlikely to join unions

for fear of getting fired – Correspondingly wages of working people in the

US have declined

Union membership


FIGURE 11.2 The Decline in Non-farm Unionization, 1948–2008


•  Unions do tend to increase wages, – Higher wages are often matched by higher

productivity •  Historically, labor union pressure has resulted

in most of our protections of workers: – workers’ comp., minimum wage, 8 hour day,

overtime, right to unionize, safe working conditions (OSHA)

The Union Advantage


FIGURE 11.5 Union Compensation Advantage 2009


Regulation of Corporations also has 2 sides:

•  It hinders corporate behavior and often increases costs

•  But govt. also subsidizes corps. – Provides infrastructure, protects them from foreign

competition, opens up new markets. •  So it is not correct to say that government

always “regulates” corporate behavior – it also facilitates corporate behavior.


Economist William Baumol on why markets with large firms are innovative

•  Firms must innovate or die •  Innovation is disseminated because it is profitable to do so

–  Licensing is often more profitable than keeping the innovation to yourself

–  Sony Betamax and Apple MacIntosh are proof of this •  People are rewarded for innovation

–  (more often than they are rewarded for corruption or monopolization or other unproductive activity)

•  To foster innovation, we need strong patent and copyright laws

–  But not so strong as to prevent dissemination of innovations –  Economists have been critical of efforts to extend patents and

intellectual property rights


What’s good about Oligopolies (and huge corporations)

•  Oligopolies foster innovation best because they have institutionalized research – They have the revenues needed for research labs – They have a strong incentive to invent a

differentiated product to steal business from rivals •  So Oligopolies have the ability to generate

excellent outcomes, but they also have the power and motive to behave in destructive ways


FIGURE 11.1 Number and Sales of Each Type of Firm, 2005


TABLE 11.1 Sales, Profits, Assets, and Market Value of the Largest U.S. Corporations, 2008


FIGURE 11.3 The Effect of Unions on Wages and Unemployment


FIGURE 11.4 Average Real Hourly Earnings, 1964-2008 (in 2008 dollars)


TABLE 11.2 Average Hourly Compensation of Manufacturing Employees, 2007


TABLE 11.3 Average Annual Hours Worked per Employed Person, 2007


FIGURE 11.6 Total U.S. Corporate Profits, 1980-2008

Documents

Chapter 11 · Chapter 11 Corporations and Labor Unions . ... 11-2 Corporations and Market Failure • Corporations are seen in two ways: 1. The backbone to our economy, creating jobs,