Chapter 31:Labor Unions

Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

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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 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.

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Learning Objectives

• 31-01. Know how unions secure high wages.• 31-02. Know the factors that affect

collective bargaining outcomes.• 31-03. Know how unions affect nonunion

wages.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.