Copyright © 2012 Pearson Addison-Wesley. All rights reserved. Chapter 29 Unions and Labor Market Monopoly Power

Copyright © 2012 Pearson Addison-Wesley. All rights reserved Introduction Today, nearly 40 percent of U.S. government employees are members of unions, as compared to fewer than 8 percent of all U.S. workers employed by private firms. In this chapter, you will learn about the goals of unions and about their place in the U.S. economy.

Copyright © 2012 Pearson Addison-Wesley. All rights reserved 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

Copyright © 2012 Pearson Addison-Wesley. All rights reserved 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

Copyright © 2012 Pearson Addison-Wesley. All rights reserved Chapter Outline Industrialization and Labor Unions Union Goals and Strategies Economic Effects of Labor Unions Monopsony: A Buyer’s Monopoly

Copyright © 2012 Pearson Addison-Wesley. All rights reserved Did You Know That... The average employee of U.S. state and local governments receives 45 percent more in wages and benefits than the average U.S. private worker? One explanation for the higher earnings of state and local government workers is that an increasing percentage of them belong to labor unions.

Copyright © 2012 Pearson Addison-Wesley. All rights reserved 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

Copyright © 2012 Pearson Addison-Wesley. All rights reserved Industrialization and Labor Unions 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

Copyright © 2012 Pearson Addison-Wesley. All rights reserved Industrialization and Labor Unions (cont'd) 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

Copyright © 2012 Pearson Addison-Wesley. All rights reserved Industrialization and Labor Unions (cont'd) 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

Copyright © 2012 Pearson Addison-Wesley. All rights reserved Industrialization and Labor Unions (cont'd) 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

Copyright © 2012 Pearson Addison-Wesley. All rights reserved Industrialization and Labor Unions (cont'd) Industrial Unions –Labor unions that consist of workers from a particular industry, such as automobile manufacturing or steel manufacturing

Copyright © 2012 Pearson Addison-Wesley. All rights reserved Industrialization and Labor Unions (cont'd) 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

Copyright © 2012 Pearson Addison-Wesley. All rights reserved Industrialization and Labor Unions (cont'd) Congressional control over labor unions –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

Copyright © 2012 Pearson Addison-Wesley. All rights reserved International Example: The Chinese Union Monopoly Expands to Include Employees of Foreign Firms Chinese firms have operated within a closed shop environment, in which All-China Federation of Trade Unions (ACFTU) has been the only single union in China. Recently, the ACFTU has sought to expand its membership by requiring employees of foreign firms, including Wal-Mart, McDonald’s and FedEx, to join this union when they accept their positions.

Copyright © 2012 Pearson Addison-Wesley. All rights reserved Industrialization and Labor Unions (cont'd) Congressional control over labor unions –Taft-Hartley Act of 1947 (cont’d) Prohibited jurisdictional disputes –Disputes involving two or more unions over which should have control of a particular jurisdiction

Copyright © 2012 Pearson Addison-Wesley. All rights reserved Industrialization and Labor Unions (cont'd) Congressional control over labor unions –Taft-Hartley Act of 1947 (cont’d) Prohibited sympathy strikes –A strike by a union in sympathy with another union’s strike or cause

Copyright © 2012 Pearson Addison-Wesley. All rights reserved Industrialization and Labor Unions (cont'd) Congressional control over labor unions –Taft-Hartley Act of 1947 (cont’d) Prohibited secondary boycotts –A boycott of companies or products sold by companies that are dealing with a company being struck

Copyright © 2012 Pearson Addison-Wesley. All rights reserved Industrialization and Labor Unions (cont'd) Congressional control over labor unions –Taft-Hartley Act of 1947 (cont’d) 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

Copyright © 2012 Pearson Addison-Wesley. All rights reserved Industrialization and Labor Unions (cont'd) To understand the current status of labor unions, we consider –Worldwide trends in unionization –U.S. unionization trends

Copyright © 2012 Pearson Addison-Wesley. All rights reserved Figure 29-1 Decline in Union Membership

Copyright © 2012 Pearson Addison-Wesley. All rights reserved Table 29-1 The Ten Largest Unions in the United States

Copyright © 2012 Pearson Addison-Wesley. All rights reserved Industrialization and Labor Unions (cont'd) Explaining the fall in union membership –Deregulation –Immigration –Shift from manufacturing to services

Copyright © 2012 Pearson Addison-Wesley. All rights reserved 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.

Copyright © 2012 Pearson Addison-Wesley. All rights reserved 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

Copyright © 2012 Pearson Addison-Wesley. All rights reserved Union Goals and Strategies (cont'd) 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 29-2.

Copyright © 2012 Pearson Addison-Wesley. All rights reserved Figure 29-2 Unions Must Ration Jobs

Copyright © 2012 Pearson Addison-Wesley. All rights reserved Union Goals and Strategies (cont'd) Rationing can be done by –Using the seniority system –Lengthening the apprenticeship period –Instituting other rationing methods

Copyright © 2012 Pearson Addison-Wesley. All rights reserved Union Goals and Strategies (cont'd) Union wage and employment strategies include: –Employing all union members –Maximizing member income –Maximizing wage rates for certain workers

Copyright © 2012 Pearson Addison-Wesley. All rights reserved Figure 29-3 What Do Unions Maximize?

Copyright © 2012 Pearson Addison-Wesley. All rights reserved Union Goals and Strategies (cont'd) Union strategies to raise wages indirectly include: –Limiting entry over time –Altering the demand for union labor

Copyright © 2012 Pearson Addison-Wesley. All rights reserved Union Goals and Strategies (cont'd) 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

Copyright © 2012 Pearson Addison-Wesley. All rights reserved Figure 29-4 Restricting Supply over Time When union membership is limited to Q 1, wages increase and employment decreases

Copyright © 2012 Pearson Addison-Wesley. All rights reserved Union Goals and Strategies (cont'd) 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

Copyright © 2012 Pearson Addison-Wesley. All rights reserved 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?

Copyright © 2012 Pearson Addison-Wesley. All rights reserved 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

Copyright © 2012 Pearson Addison-Wesley. All rights reserved Why Not … require firms to pay union wages to nonunionized workers? Requiring employers to pay the average nonunionized U.S. worker about $2.25 per hour more would induced firms to cut back on the quantity of labor demanded. Also, more people would desire to supply additional labor. The result would be excess quantities of labor supplied, and more people would be unemployed.

Copyright © 2012 Pearson Addison-Wesley. All rights reserved Economic Effects of Labor Unions (cont'd) 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

Copyright © 2012 Pearson Addison-Wesley. All rights reserved Economic Effects of Labor Unions (cont'd) Featherbedding –Any practice that forces employers to use more labor than they would otherwise or to use existing labor in an inefficient manner

Copyright © 2012 Pearson Addison-Wesley. All rights reserved Economic Effects of Labor Unions (cont'd) 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

Copyright © 2012 Pearson Addison-Wesley. All rights reserved 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

Copyright © 2012 Pearson Addison-Wesley. All rights reserved 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

Copyright © 2012 Pearson Addison-Wesley. All rights reserved Figure 29-5 Derivation of a Marginal Factor Cost Curve, Panel (a)

Copyright © 2012 Pearson Addison-Wesley. All rights reserved Figure 29-5 Derivation of a Marginal Factor Cost Curve, Panel (b)

Copyright © 2012 Pearson Addison-Wesley. All rights reserved 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

Copyright © 2012 Pearson Addison-Wesley. All rights reserved Monopsony: A Buyer’s Monopoly (cont’d) Figure 29-6 displays how a monopsonist finds its profit-maximizing quantity of labor demanded at A, where MRP = MFC

Copyright © 2012 Pearson Addison-Wesley. All rights reserved Figure 29-6 Wage and Employment Determination for a Monopsonist Hire Q m where MFC = MRP and pay W m MRP > W

Copyright © 2012 Pearson Addison-Wesley. All rights reserved Monopsony: A Buyer’s Monopoly (cont'd) 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

Copyright © 2012 Pearson Addison-Wesley. All rights reserved Policy Example: Can Minimum Wage Laws Ever Boost Employment? Figure 29-7 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

Copyright © 2012 Pearson Addison-Wesley. All rights reserved Figure 29-7 A Monopsony’s Response to a Minimum Wage

Copyright © 2012 Pearson Addison-Wesley. All rights reserved 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?

Copyright © 2012 Pearson Addison-Wesley. All rights reserved Monopsony: A Buyer’s Monopoly (cont'd) Bilateral Monopoly –A market structure consisting of a monopolist and a monopsonist

Copyright © 2012 Pearson Addison-Wesley. All rights reserved Figure 29-8 Pricing and Employment Under Various Market Conditions, Panel (a) Firm operating in perfect competition in both input and output markets

Copyright © 2012 Pearson Addison-Wesley. All rights reserved Figure 29-8 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?

Copyright © 2012 Pearson Addison-Wesley. All rights reserved Figure 29-8 Pricing and Employment Under Various Market Conditions, Panel (c) Firm operating as monopsonist in the input market and a perfect competitor in the output market Hire where MFC = MRP C W = W C W C < MRP

Copyright © 2012 Pearson Addison-Wesley. All rights reserved Figure 29-8 Pricing and Employment Under Various Market Conditions, Panel (d) Firm operating as a bilateral monopoly Hire where MFC = MRP m

Copyright © 2012 Pearson Addison-Wesley. All rights reserved You Are There: Caught Up in an Unusual Jurisdictional Dispute in Michigan Recently, the state of Michigan required its 34,000 home-based day-care providers to join the union of Child Care Providers Together Michigan (CCPTM), even though some of those day-care providers did not wish to join the union. The CCPTM has used union dues to help cover expense of lobbying for higher payments to day- care operators.

Copyright © 2012 Pearson Addison-Wesley. All rights reserved Issues & Applications: Tax Dollars Increasingly Pay Union Wages Figure 29-9, panel (a) shows that unionization rates of private-sector workers have dropped steadily since the early 1970s. By contrast, the public-sector unionization rate has trended slightly upward since the early 1980s. Figure 29-9, panel (b) shows that, because of the rising number of government workers, the total percentage of all unionized workers in the public sector now exceeds the percentage employed in the private sector.

Copyright © 2012 Pearson Addison-Wesley. All rights reserved Figure 29-9 Private- versus Public-Sector Unionization Rates Source: Bureau of Labor Statistics.

Copyright © 2012 Pearson Addison-Wesley. All rights reserved 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

Copyright © 2012 Pearson Addison-Wesley. All rights reserved 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

Copyright © 2012 Pearson Addison-Wesley. All rights reserved Summary Discussion of Learning Objectives (cont'd) 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

Copyright © 2012 Pearson Addison-Wesley. All rights reserved Summary Discussion of Learning Objectives (cont'd) 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

Copyright © 2012 Pearson Addison-Wesley. All rights reserved Summary Discussion of Learning Objectives (cont'd) 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

Copyright © 2012 Pearson Addison-Wesley. All rights reserved Summary Discussion of Learning Objectives (cont'd) 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