chapter 30

Chapter 30

Unions and Labor Market Monopoly Power

2

Introduction

Workers and managers at Verizon Communications continued negotiations for a new contract long past the official

strike deadline.

Why are marathon contract talks now so common in labor disputes?

3

Learning Objectives

Outline the essential history of the American Labor Union movement

Discuss the current status of labor unions in the United States

Describe the basic economic goals and strategies of labor unions

4

Learning Objectives

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

5

Chapter Outline

Industrialization and Labor Unions

Union Goals and Strategies

Economic Effects of Labor Unions

Monopsony: A Buyer’s Monopoly

6

Did You Know That...

Half of U.S. labor union members are in only six states?

Once a union represents all the workers who supply a particular type of labor, an element of monopoly power replaces the competitive outcome?

7

Craft Unions

– Labor unions composed of workers who engage in a particular trade or skill

Knights of Labor

American Federation of Labor


8

Early labor issues

– 8-hour workday

– Equal pay for men and women


9

Collective Bargaining

– Bargaining between the management of a company or of a group of companies and the management of a union or a group of unions for the purpose of setting a mutually agreeable contract on wages, fringe benefits, and working conditions for all employees in all the unions involved


10

The Congress of Industrial Organization (CIO) was formed in 1938.

It was composed mainly of industrial unions.

Industrial unions consist of workers in a particular industry, regardless of the skills they use on the job.


11


Congressional control over labor unions

– The Wagner Act (1935)• Gave unions the right to organize workers and

to engage in collective bargaining

12


– Taft-Hartley Act of 1947• Allow right-to-work laws

– Laws that make it illegal to require union membership as a condition of continuing employment in a particular firm


13


– Taft-Hartley Act of 1947• 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


14


– Taft-Hartley Act of 1947• Prohibited jurisdictional disputes

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


15


– Taft-Hartley Act of 1947• Prohibited sympathy strikes

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


16


– Taft-Hartley Act of 1947• Prohibited secondary boycotts

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


17


– Taft-Hartley Act of 1947• 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.


18

Decline in U.S. Union Membership

Figure 30-2

19

Explaining the fall in union membership

– Deregulation

– Immigration

– Shift from manufacturing to services


20

Policy Example:Who Needs Unions?

Some of the labor protections first secured by unions have become legislated rights for all workers.

For example, many workers now are guaranteed overtime pay by U.S. Department of Labor regulations.

21


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.

22


Strikebreakers can reduce the bargaining power of the strike

• Temporary or permanent workers hired by a company to replace union members who are striking

23


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 unionized industries.

24

Unions Must Ration Jobs

Figure 30-3

S

D

WUB

QS

We E

Qe

A

QD

Quantity of Labor per Time Period

Wa

ge R

ate

pe

r H

our

25


Unions must ration the available jobs by:

– Seniority

– Apprenticeship

26


Unions are monopoly sellers of a service

Three wage and employment strategies– Employ all union members

– Maximize member income

– Maximize wages for certain workers

27


Figure 30-4

D

W1

Q1

W2

Q2

W3

Q30

Maximum total unionmember income earned

MR

Quantity of Labor per Time Period

Wa

ge R

ate

pe

r H

our

28


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.

29

Restricting Supply Over Time

Figure 30-5

If union membership limitedto Q1, wages increase to 21instead of 20 and employmentis reduced

30


Altering the demand for union labor

– Increasing worker productivity

– Increasing the demand for union-made goods

– Decreasing the demand for non-union-made goods

31


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.

But annual earnings for union workers are not necessarily higher, because they work somewhat fewer hours.

32

Example: Union Wages in the Automotive Industry

Up until the 1970’s, the only cars manufactured in the U.S. were made by one of four companies, all of whom were highly unionized.

As foreign-based companies such as Toyota and Honda have built plants in the U.S., they have hired nonunion workers.

33

Example: Union Wages in the Automotive Industry

This gave the foreign-based companies a wage advantage, allowing them to expand their U.S. presence.

The U.S. manufacturers (GM, Ford, Chrysler) has closed many plants and implemented labor-saving technology.

34


How do unions affect labor productivity?

– There is some evidence that featherbedding creates inefficiency in the unionized industries.

– Some economists argue that unions actually enhance productivity by reducing labor turnover.

35


Assumptions– 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

– The firm is the only buyer of a particular input

The buyer of labor is called a monopsonist, the single buyer.

36


The monopsonist faces an upward-sloping supply curve of labor.

Consequently, 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.

37

Derivation of a Marginal Factor Cost Curve

Figure 30-7, Panel (a)

38

Derivation of a Marginal Factor Cost Curve

Figure 30-7, Panel (b)

39


Monopsonistic Exploitation

– Exploitation due to monopsony power: It leads to a price for the variable input that is less than its marginal revenue product. Monopsonistic exploitation is the difference between marginal revenue product and the wage rate.

Bilateral Monopoly

– A market structure consisting of a monopolist and a monopsonist

40

Wage and Employment Determinationfor a Monopsonist

Hire Qm whereMFC = MRP andpay Wm

MRP > W

Figure 30-8

Wm

S

MRP

MFC

We

Qe

A

Qm

Labor Input (worker-weeks)

MFC

, M

RP,

and W

age R

ate

per

Work

er-

Week

($)

41

Firm operating in perfectcompetition in both input and output markets

Pricing and EmploymentUnder Various Market Conditions

Figure 30-9, Panel (a)

Panel (a)

Quantity of Labor perTime Period

Qe

We

Labor supply

MRPc

Wag

e R

ate

and

Mar

gina

lR

even

ue P

rodu

ct p

er H

our(

$)

42

Firm operating in perfectcompetition in the inputmarket but a monopoly inthe output market


Figure 30-9, Panel (b)

Panel (b)


Qm

We

Labor supply

MRPmWhy are fewer workershired in this market compared to perfectcompetition in both markets?

Wag

e R

ate

and

Mar

gina

lR

even

ue P

rodu

ct p

er H

our(

$)

43

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

• Hire where MFC = MRPc

• W = WC

• WC < MRP

Figure 30-9, Panel (c)


Panel (c)


Q 1

Wc

S

cMRP

MFC

Wag

e R

ate,

Mar

gina

l Fac

tor

Cos

t, an

dM

argi

nal R

even

ue P

rodu

ct p

er H

our

($)

44

Firm operating asa bilateral monopoly

• Hire where MFC = MRPm

• Why is wage indeterminate?


Figure 30-9, Panel (d)

Panel (d)


Q 2

Wm

S

MRPm

MFCW

age

Rat

e, M

argi

nal F

acto

r C

ost,

and

Mar

gina

l Rev

enue

Pro

duct

per

Hou

r ($

)

45

Issues and Applications:A Tale of Two Wage Differentials

Union members will often continue working long past a strike deadline if it means increasing the possibility of a settlement that will avoid plant closings.

Increasingly, union members are concerned with job security and health benefits, not just wage levels.

46

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

47


The current status of U.S. labor unions

– In the U.S., 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.

48


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

49


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.

50


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

51


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 a perfect competition in the

labor market– Pays a lower wage if also a monopsonist

End of Chapter 30Unions and Labor Market Monopoly Power

chapter 30

Documents

labor union members

labor unionstafthartley

particular type of labor

labor unionsunion goals

current status of labor

labor unionsthe wagner

industrial unions

group of unions