Unions in the United States Unions attempt to maximize the well-being of their members Unions can flourish only when firms earn above-normal profits Unions influence practically all aspects of the employment contract Percent of civilian workforce unionized rose between 1930 and 1960 and then began a steady decline % of public sector unionized

Unions in the United States Unionization in the US has declined more rapidly than in other nations Differences in unionization across countries arise from variations in the degree of political effectiveness of unions Men have higher unionization rates than women (part-timers, flexible work hours) Blacks have higher unionization rates (trade w are similar for same seniority) Unionization highest in Construction, MFG and Trans since fewer product substitutes → elastic product demand → inelastic labor demand → unions offer high w w/out an excessive loss in E

A Brief History of Unions Prior to the Great Depression the public did not favor unions Employers frequently used “yellow dog contracts” Under the New Deal in the 1930s, the legal environment treating unions and employers changed Four major public laws: The Norris-LaGuardia Act of 1932 The National Labor Relations Act of 1935 The Labor-Management Relations Act of 1947 The Labor-Management Reporting and Disclosure Act of 1959 The structure of the labor market has been changing since the 1960s Blue collar work is less prevalent Job locations have shifted to “right to work” states There has been a marked increase in labor force participation rates of women Workers’ demand for union jobs has declined Firms have become more resistant to unions

An Inconvenient History of Unions

An Inconvenient History of Unions Circa 1880

An Inconvenient History of Unions The Cigar Makers’ Union entered the fray, demanding that factories fire Chinese workers as of January 1, 1886,

An Inconvenient History of Unions A business card found in the walls of a log cabin in the woods of British Columbia

An Inconvenient History of Unions This ridicules Chinese labor Circa 1870

An Inconvenient History of Unions “This is to Certify, that the holder of this Certificate has pledged himself to the “Trades Union Mutual Alliance,” neither to buy nor sell Chinese Made Cigars.”

An Inconvenient History of Unions History of the Davis-Bacon Act David Bernstein www.cato.org/pubs/briefs/bp-017.html “Enacted in 1931 with the intent of favoring white workers who belonged to white-only unions over non-unionized black workers” Most major unions in America representing skilled construction workers excluded blacks "You will not think that a southern man is more than human if he smiles over the fact of your reaction to that real problem you are confronted with in any community with a superabundance … of negro labor." Congressman Upshaw Congressmen viewed the bill as protection for unionized white workers in fierce Depression-era labor markets. Davis-Bacon meant that almost all federal construction jobs in the public works program went to whites Because unions complained it did not go far enough, Congress amended it in 1935 to give it more teeth (Thereafter, it remained largely unchanged until 1983.) In 1940, 19% of US unskilled construction laborers were black (45% in the South) Unions rarely let blacks into apprenticeship programs, resulting in the near exclusion of unskilled black workers on public works projects In 1941 the federal government extended Davis-Bacon to cover military construction contracts

The Structure of American Unions AFL-CIO at the top of a “pyramid” Local union or craft union Each tier plays different role in collective bargaining Political lobbying Organizational structure varies across unions Union dues on members average about 1 percent of each worker’s annual income A worker joins a union if the union offers him a wage-employment package that provides more utility than the wage-employment package offered by a nonunion employer Wage increases increase firm costs, so there could be employment cutbacks If a firm’s demand curve for labor is inelastic the employment reduction is small (and vice versa)

The Decision to Join a Union Dollars U1 U1 U0 L T Hours of Leisure 80 42 35 22 17 Nonunion laborers work 42 hours per week at w = $14.52/hour ($609.84/week) Unions promise workers a better wage at w = $22.57/hour Employees know there is no “free lunch” – higher w means less work If workers believe employer will cut back hours of work to 17, workers won’t unionize If workers believe employer will cut back hours to work to 22, workers are indifferent If workers believe employer will cut back hours of work to 35, workers unionize

The Decision to Join a Union The demand for union jobs is dependent on the size of the wage increase, the amount of employment loss, and the costs of union membership The supply of union jobs depends on the ability to organize a workforce, the legal environment affecting union activities, the resistance of management, and whether a firm is making excess rents Monopoly Unions A union that is a sole seller of labor The model suggests some workers lose their jobs Unions are better off when the labor demand curve is less elastic

The Labor Demand Curve of a Monopolist Dollars w = 2 + 3E LS VMP = 25 – 3E w = 25 – 3E RU = (w)(E) RU = (25 – 3E)(E) wM RU = 25E – 3E2 w* MRP = 25E1-1 – 3E2-1(2) MRPM MRP = 25E0 – 6E1 MRP = 25 – 6E MRP VMP EM E* Since the union has a pretty good idea how much firms value laborers, it can estimate the VMP of the firms. Since the labor union “sells” laborers to firms, total earnings of its members can be thought of as the union’s revenue (RU) The monopolist (union) restricts the numbers of laborers it allows to become members so that it can negotiate up the wage up to VMP.

The Labor Demand Curve of a Monopolist Dollars w = 2 + 3E MRP = 25 – 6E LS 17.33 wM 2 + 9E = 25 w* 9E = 23 MRPM E = 2.556 MRP VMP 2.556 EM E* w = 25 – 3(E) w = 25 – 3(2.556) w = 25 – 7.667 w = 17.33

The Labor Demand Curve of a Monopolist Dollars LS w = 2 + 3E VMP = 15 – 0.1E w = 15 – 0.1E RU = (w)(E) wM VMP RU = (15 – 0.1E)(E) MRPM RU = 15E – 0.1E2 MRP MRP = 15E1-1 –0.1E2-1(2) MRP = 15E0 – 0.2E1 MRP = 15 –0.26E EM

The Labor Demand Curve of a Monopolist Dollars LS w = 2 + 3E MRP = 15 – 0.2E 14.59 wM 2 + 3.2E = 15 MRPM 3.2E = 13 E = 4.0625 4.0625 EM w = 15 – 0.1(E) w = 15 – 0.1(4.0625) Unions are more successful when labor demand curve is less elastic. w = 15 – 0.40625 w = 14.59

Unions and Market Efficiency Sector 1 Sector 2 (1000s $) (1000s $) 35 35 D1 D2 75 75 (Millions of workers) (Millions of workers) In the absence of unions, the total employment equals 75 + 75 = 150 (million workers) the competitive wage is $35,000 per year and National income is given by the sum of the pink areas.

Unions and Market Efficiency Sector 1 Sector 2 (1000s $) (1000s $) LS1 LS2 45 35 35 25 D1 D2 MRU 45 75 75 115 (Millions of workers) (Millions of workers) Unions increase the wage in sector 1 to w = $50,000 per year. The 30 million displaced workers move to sector 2, lowering the nonunion wage to 25. National income, given by the area of the pink trapezoids, is smaller by the black triangle (dead weight loss or misallocation of labor) One estimate of the loss in national income is approximately .11%, a relatively small cost

Efficient Contracts The firm and the union could make a deal that makes at least one of them better off without making the other worse off The efficient contract curve lies to the right of the labor demand curve Efficient contracts imply that unions and employers bargain over wages and employment Featherbedding occurs when labor contracts require overstaffing practices are negotiated to “make work” for the extra staff Strongly efficient contract a deal struck between the union and the firm resulting in the hiring of the “right” amount of labor (i.e., the competitive level of employment) Under such a situation, the union captures some of the firm’s rents Empirical studies: Wage-employment outcomes in unionized firms do NOT lie on the labor demand curve There is disagreement over whether the contract curve is vertical

Efficient Contracts and the Contract Curve Dollars wM p0 = 0 wC C U2 p1 U1 Maximum possible profit w* p2 U0 p* LD E* EC Employment Recall that along the firm’s labor demand equation profits are maximized at various w. At the competitive wage w*, the employer hires E* workers to maximize profit. A monopoly union demands wage wM because Union utility is higher their than at the competitive equilibrium. The contract moves both off the demand curve to point C where the union is better off and the firm is indifferent (between wM and wC)

Strongly Efficient Contracts: A Vertical Contract Curve Dollars w3 U3 wM p0 = -3 million U2 U1 p2 = -2 million w* U0 p3 = -1 million p*= 0 LD E3 EM E* Employment If the contract curve is vertical, the firm hires the same number of workers that it would have hired in the absence of a union. At w* and E*, the employer keeps all the rents because firm profit is equal to p* At wM and EM, the employer gets only 33% of p*, while the union gets the rest. At w3 and E3, the union gets all the rents because firm profit is equal to p0 = 0. A contract on a vertical contract curve is called a strongly efficient contract.

Strikes A strike occurs when neither party is willing to give in when negotiating Because strikes are costly, they shrink the rents over which the parties are negotiating If parties have good info about costs and likely outcomes of strikes, it is irrational to strike The fact that irrational strikes occur is known as the Hicks Paradox Strikes and Asymmetric Information Strikes occur because workers are not well informed on firm’s financial status Unions experience losses during strikes. It’s demands weaken as duration rises Firms know unions moderate their demands over time Firms incur costs during strikes and choose duration to maxPVprofits Empirical estimates: Strikes are more likely to occur and last longer the higher the wage demand The fraction of work time lost due to strike activity was only .02% in 1996 Unions tend not to make high w demands during periods of high u Strikes are more frequent when real w are growing slowly or during inflation Strikes are more likely when a firm has a more volatile stock value On average, strikes reduce the value of shareholder’s wealth by about 3%

Hicks Paradox (strikes are not Pareto Optimal) 100 RU 75 Union's Rents (% of p*) R* 50 S 40 RF 25 25 40 50 75 100 Firm's Rents (% of p*) The firm makes the offer at point RF, keeping $75 and giving the union $25. The union wants point RU, getting $75 for its members and giving the firm $25. The parties do not come to an agreement and a strike occurs. The strike is costly (p* falls 80%), and the poststrike settlement occurs at point S where each party keeps 50% of post-strike firm (.8)(p*). If the parties could have agreed upon a prestrike settlement of splitting p* fifty-fifty (point R*), then both parties would have been better off.

Strikes Optimal Duration Dollars 26 23 21 20 15 25 40 75 1 2 3 12 1 2 3 12 Duration of Strike From their initial wage offer of w0, unions will moderate their wage demands the longer the strike lasts, generating a downward-sloping union resistance curve. The employer chooses the point on the union resistance curve that puts him on the lowest isoprofit curve (thus maximizing profits). The strike lasts 3 months and the poststrike settlement wage is w3

Strikes US 1967-2004

Union Wages We cannot easily calculate the effect on wages, since we often do not know what a worker would earn outside the union We tend to rely on a calculation of a union wage gap, a percent difference between union and nonunion wages Estimates of the wage gap indicate it is wide at some times and narrow at other times The union wage gap overestimates the union wage gain, because a typical worker in a union job will be more productive than workers in a nonunion job

Union Wages The existence of a union sector has two side effects on the nonunion sector Threat effects involve nonunion firms offering higher wages to reduce incentives of workers to unionize Spillover effects result when workers unemployed in the union sector enter the nonunion sector, thus increasing the supply of labor and decreasing wages. Unions flatten the age-earnings profile Unionized firms offer a lower payoff to education than nonunionized firms The dispersion of wages in the unionized sector is 25 percent less than the dispersion of wages in the nonunionized sector The fringe benefits package received by union workers is generally worth more than the package received by nonunion workers The “union compensation gap” may be 2 or 3 percentage points higher than the union wage gap

The Exit-Voice Hypothesis Unions give workers an option of voicing problems through a formal grievance procedure, instead of exiting the firm when they are unhappy This implies that worker turnover should be lower in unionized firms As labor turnover declines, worker productivity increases Profits rise, but not enough to cover the increased labor costs