Labor Unions and Collective Bargaining Chapter 10 Labor Unions and Collective Bargaining McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

6/4/2018 1. Why Unions? 10-2

6/4/2018 Why Unions? Workers prior to industrial revolution were self-employed (i.e., worked for themselves). Industrialization separated the functions of management and labor. Workers became dependent on owners for employment and income. Workers formed unions to protect their interests and bargain collectively with employers. 10-3

2. Labor Unionism: Facts and Figures 6/4/2018 2. Labor Unionism: Facts and Figures 10-4

Union Membership by Industry, 2011 6/4/2018 Union Membership by Industry, 2011 Unionization tends to be higher in the goods producing industries such as manufacturing and construction. Unionization tends to be lower in service industries such trade and finance, real estate, and insurance. Unionization is high in transportation, communications, and utilities due to low labor demand elasticities. 10-5

Union Membership by Occupation, 2011 6/4/2018 Union Membership by Occupation, 2011 White-collar workers such as managers and sales workers tend to have low unionization rates. The low white-collar worker unionization rates are because they have higher wages and some managers are exempt from unionization. 10-6

Union Membership by Public Sector Status, 2011 6/4/2018 Union Membership by Public Sector Status, 2011 Public sector workers have a much higher unionization rate than private-sector workers. The unionization rate of public sector workers rose rapidly in the 1960s and 1970s when laws allowing public-sector workers to unionize were passed and public sector managers did not aggressively fight the unionization of their workers. 10-7

Union Membership by Demographic Group, 2011 6/4/2018 Union Membership by Demographic Group, 2011 10-8

High Unionization States, 2011 6/4/2018 High Unionization States, 2011 10-9

Low Unionization States, 2011 6/4/2018 Low Unionization States, 2011 10-10

6/4/2018 3. Unionism’s Decline 10-11

6/4/2018 Union Membership The unionized sector is a minority component of the labor force. Unionism is on the decline in the U.S. The number of union members peaked at 20 million in 1980 and has fallen to slightly more than 14 million now. The percent of labor force that is unionized fell from 30% in 1950 to 11% now. 10-12

Causes of Decline in Unionism 6/4/2018 Causes of Decline in Unionism Structural changes The structural-change hypothesis is the labor force and economy has changed in ways that are unfavorable to unions. Employment growth has been greater in traditionally nonunion sectors such white-collar jobs, services, women, small firms, part-time, and Southern states. 10-13

Causes of Decline in Unionism 6/4/2018 Causes of Decline in Unionism The union wage differential increased in the 1970s. Unionized firms switched to nonunion methods of production where possible. Nonunion firms expanded output and employment due to their lower costs. Criticisms Other countries have had similar structural changes and their unionism has not decreased. Unions have been able to unionize traditionally nonunion workers in the past. 10-14

Causes of Decline in Unionism 6/4/2018 Causes of Decline in Unionism Managerial-opposition hypothesis The managerial-opposition hypothesis argues that the increased union wage advantage in the 1970s caused firms to fight unions more aggressively. Firms may hire permanent strike breakers, illegally fire pro-union workers, hire consultants, etc. The number of illegal anti-union has increased. 10-15

Causes of Decline in Unionism 6/4/2018 Causes of Decline in Unionism The substitution hypothesis The substitution hypothesis argues that the government and employers now provide services that were previously provided by unions. The government now provides services such as workers’ compensation and health and safety laws that unions used to provide. Some firms try to prevent unionization by using grievance procedures and providing worker-management communication methods. 10-16

Causes of Decline in Unionism 6/4/2018 Causes of Decline in Unionism Other factors Unions have decreased their organizing efforts. The National Labor Relations Board, which oversees unionization efforts, became less pro-union under Reagan-Bush. 10-17

Causes of Decline in Unionism 6/4/2018 Causes of Decline in Unionism Relative importance Freeman concludes that the total decline in unionization is due to: Structural changes (40%) Increased managerial-opposition (40%) Decreased union organizing (20%) Krueger argues nearly all of the recent decline in unionization is due to decreased demand for unions among nonunion workers. 10-18

Union Responses to Decline 6/4/2018 Union Responses to Decline Increased mergers among unions Example: NEA and AFT Changes in strategies Unions have increased organizing efforts and targeted white-collar workers. Unions have tried to avoid strikes and used work slowdowns in their place. 10-19

Questions for Thought 1. Critically evaluate each of these statements: 6/4/2018 Questions for Thought 1. Critically evaluate each of these statements: (a) “The relative decline of the American labor movement can be explained by the shift from goods- producing to service-producing industries and the closely related shifts from blue-collar to white-collar occupations and from male to female employees. (b) “The success of unions in raising their wages relative to nonunion workers has contributed to the decline in unionism. (c) “Unionized firms have tended to be less profitable, and therefore, employers are more resistant to unionization. 10-20

6/4/2018 4. What Do Unions Want? 10-21

6/4/2018 Monopoly Union Model Economists usually assume that the goal of a union is to increase both the wages and employment of its members. Economists construct union indifference curves that show the combinations of wage and employment where the union is indifferent. Characteristics of indifference curves Negatively sloped Convex 10-22

6/4/2018 Monopoly Union Model The monopoly union model assumes that the union sets the wage rate and the firm sets the level of union employment based on this wage rate. The firm maximizes profits and thus chooses an employment level based on its labor demand curve. The available wage and employment combinations for the union are on the labor demand curve. 10-23

Monopoly Union Model Wage 6/4/2018 Monopoly Union Model Wage In the monopoly union model, the utility maximizing wage and employment for the union is point u, where union indifference curve I3 is just tangent to the labor demand curve DL. u The union raises the wage rate from Wc to Wu, the firm decreases employment from Qc to Qu, and the union increases total utility from I1 to I3. Wu I4 I3 Wc I1 c DL Qu Qc Employ 10-24

Efficient Contracts Model 6/4/2018 Efficient Contracts Model The outcome of the monopoly union model is point u. This combination is not efficient for the two parties since at least one of them could be made better off by moving off the labor demand curve. Wage I3 I4 For example, at point y, the union has achieved a higher utility level than at point u by being on a higher indifference curve and the firm is no worse off because it stays on the same isoprofit curve. u y Wu Wy P1 DL The combinations of wage and employment where at least one party is better off without the other party worse off are called efficient contracts. Qu Qy Employ 10-25

Efficient Contracts Model 6/4/2018 Efficient Contracts Model The contract curve is composed of the set of efficient contracts (tangencies of union indifference curves and isoprofit curves). The slope of the contract curve depends on the shapes of the firm’s isoprofit curves and the union’s indifference curves. A vertical contract curve at the competitive employment level is called a strongly efficient contract curve. 10-26

Efficient Contracts Model 6/4/2018 Efficient Contracts Model In general, the efficient contract outcome will result in lower wage and more employment than the monopoly union outcome. Economists have suggested this helps explain the requirements for excess labor in union contracts. These stipulations or “feather bedding” take the form of work rules specifying minimum work crew sizes or narrow job descriptions. 10-27

6/4/2018 Empirical Evidence A direct test of the efficient contracts model is whether unions bargain over employment as well as wages. Contrary to the efficient contracts model, union contracts almost always allow firms to unilaterally set the employment level. Some researchers have suggested they may indirectly affect employment by bargaining over capital-labor ratios. 10-28

6/4/2018 Empirical Evidence Indirect tests of the efficient contracts model rely on the fact that efficient contracts and monopoly union models have different predictions regarding which factors affect the level of union employment. Monopoly union predicts union employment level should be related to the union wage, but it should have no relationship with the competitive wage. Strongly efficient contract model predicts union employment level should be related to the competitive wage, but it should have no relationship with the union wage. The findings from these indirect tests yield mixed support for the efficient contracts model. 10-29

5. Unions and Wage Determination 6/4/2018 5. Unions and Wage Determination 10-30

Unions and Wages Unions can increase the wages of their members by: 6/4/2018 Unions and Wages Unions can increase the wages of their members by: Increasing the demand for union labor Restricting the supply of labor Bargaining for an above equilibrium wage 10-31

Increasing Labor Demand 6/4/2018 Increasing Labor Demand Wage rate To the extent that unions can increase the demand for union labor from (D0 to D1), they can gain both higher wages and employment. S W1 W0 D1 D0 Q0 Q1 Quantity of Labor Hours 10-32

Methods to Increase Union Labor Demand 6/4/2018 Methods to Increase Union Labor Demand Increasing product demand Lobbying for tariffs on foreign goods Enhancing productivity Participation in labor-management committees on productivity Influencing the prices of related inputs Lobbying for minimum wage hikes as they raise the price of substitutable less-skilled, nonunion labor Davis-Bacon Act, which requires federal contractors pay the “prevailing” union wage scale Increasing the number of employers Attempts to pass requirements for domestic content for autos sold in the U.S. 10-33

Changes in Labor Supply 6/4/2018 Changes in Labor Supply S1 Wage rate If a union decreases the supply of available labor from S0 to S1, the equilibrium wage rate will rise to W1 but the equilibrium quantity will fall to Q1. S0 W1 W0 D0 Q1 Q0 Quantity of Labor Hours 10-34

Methods to Decrease Labor Supply 6/4/2018 Methods to Decrease Labor Supply Reducing the number of qualified suppliers of labor Lobby for laws that reduce immigration, child labor, and length of the workweek Limit entry into occupation through long apprenticeships Occupational licensing which are laws that require practitioners to meet certain requirements Raising nonwage income Lobby to increase nonwage income sources such as Social Security in order to decrease labor supply 10-35

Bargaining for an Above-Equilibrium Wage 6/4/2018 Bargaining for an Above-Equilibrium Wage By organizing all workers and having a union shop (requiring all new hires to join the union), the union may achieve a wage WU that is above the competitive wage WC. WC WU Quantity of Labor Hours Wage rate SL DL MWC b c a d QC QU The effect is to make the labor supply curve perfectly elastic at WU until point d. The employment level will fall from QC to QU. An efficiency loss of abc will also result. The more elastic is DL, the larger is the employment loss. As result unions try to reduce the elasticity of DL. 10-36

6/4/2018 Questions for Thought 1. Explain how each one of the following contract provisions might affect the elasticity of labor demand during the period of the labor contract: (a) Layoff and severance pay (b) Prevention of subcontracting (c) The limiting of plant shutdown or relocation 2. Under what elasticity of labor demand conditions could a union restrict the supply of labor—that is, shift the supply curve leftward—and thereby increase the collective wage income (wage bill) of those workers still employed? 10-37

6. Strikes and the Bargaining Process 6/4/2018 6. Strikes and the Bargaining Process 10-38

Accident Model Wage EC W* UR 6/4/2018 The employer concession curve EC shows the maximum wage that the firm would be willing to pay to avoid a strike of a given length. Wage The union resistance curve UR shows the minimum wage that the union would be willing to accept to avoid a strike of a given length. EC W* If both the union and the firm are well informed about the other party’s concession curve, then the wage settlement will occur at W* where the UR and EC curves intersect and no strike will occur. UR Expected Strike Length If either party misperceives the other party’s concession curve, then a strike will occur. 10-39

Asymmetric Information Models 6/4/2018 Asymmetric Information Models Two types of strike models based on asymmetric information have been developed. The first model focuses on the information gap between the union leadership and rank and file union members. Union leaders have better information about bargaining possibilities. Union members have unrealistic demands. Union leaders call strike to moderate demands. 10-40

Asymmetric Information Models 6/4/2018 Asymmetric Information Models The second type of strike model emphasizes the information differences between the union and the firm. Firm has more information about the current and future profitability of the firm than the union. The firm has an incentive to understate the profitability of firm since it can reduce the wage settlement by doing so. 10-41

6/4/2018 Questions for Thought 1. Assume that a union’s utility only depends on the wage rate and not the level of employment. In this case, what will be outcome under the efficient contracts model? 2. What role does information differences play in causing strikes? 10-42