Chapter 30: Union and Labor Market Monopoly Power ECON 152 – PRINCIPLES OF MICROECONOMICS Chapter 30: Union and Labor Market Monopoly Power Materials include content from Pearson Addison-Wesley which has been modified by the instructor and displayed with permission of the publisher. All rights reserved.

Industrialization and Labor Unions Craft Unions Labor unions composed of workers who engage in a particular trade or skill Knights of Labor American Federation of Labor

Industrialization and Labor Unions 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

Industrialization and Labor Unions 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.

Industrialization and Labor Unions Congressional control over labor unions The Wagner Act (1935) Gave unions the right to organize workers and to engage in collective bargaining 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 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

Agency Shop Closed Shop An enterprise in which employees must belong to the union before they can be hired and must remain in the union after they are hired Union Shop An enterprise in which employees must belong to the union after they are hired and complete a probationary period of employment Agency Shop An enterprise in which employees must pay the equivalent of union dues whether they choose to, or not to, belong to the union after they are hired and complete a probationary period of employment Open Shop An enterprise in which employees are never required to join a union or pay the equivalent of union dues if they choose not to belong to the union

Industrialization and Labor Unions Congressional control over labor unions Taft-Hartley Act of 1947 (..continued) Prohibited jurisdictional disputes Disputes involving two or more unions over which should have control of a particular jurisdiction Prohibited sympathy strikes A strike by a union in sympathy with another union’s strike or cause Prohibited secondary boycotts A boycott of companies or products sold by companies that are dealing with a company being struck

Industrialization and Labor Unions Congressional control over labor unions 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.

Decline in U.S. Union Membership Figure 30-2

Industrialization and Labor Unions Explaining the fall in union membership Deregulation Immigration Shift from manufacturing to services Labor legislation Foreign competition

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.

Union Goals and Strategies Strikebreakers can reduce the bargaining power of the strike Temporary or permanent workers hired by a company to replace union members who are striking

Union Goals and Strategies 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.

Unions Must Ration Jobs D W U B Q S A Q D W e E Q Wage Rate per Hour Quantity of Labor per Time Period Figure 30-3

Union Goals and Strategies Unions must ration the available jobs by: Seniority Apprenticeship

Union Goals and Strategies Unions are monopoly sellers of a service Three wage and employment strategies Employ all union members Maximize member income Maximize wages for certain workers

Union Goals and Strategies MR Maximum total union member income earned W 3 Q Wage Rate per Hour W 2 Q W 1 Q Quantity of Labor per Time Period Figure 30-4

Union Goals and Strategies 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.

Restricting Supply Over Time If union membership limited to Q1, wages increase to 21 instead of 20 and employment is reduced Figure 30-5

Union Goals and Strategies Altering the demand for union labor Increasing worker productivity Increasing the demand for union-made goods Decreasing the demand for non-union-made goods

Economic Effects of Labor Unions 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.

Economic Effects of Labor Unions 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.

Monopsony: A Buyer’s Monopoly 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.

Monopsony: A Buyer’s Monopoly 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.

Derivation of a Marginal Factor Cost Curve Figure 30-7, Panel (a)

Derivation of a Marginal Factor Cost Curve Figure 30-7, Panel (b)

Monopsony: A Buyer’s Monopoly 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

Wage and Employment Determination for a Monopsonist MFC MRP MRP > W S A Q m MFC, MRP, and Wage Rate per Worker-Week ($) W e Q Hire Qm where MFC = MRP and pay Wm W m Labor Input (worker-weeks) Figure 30-8

Pricing and Employment Under Various Market Conditions Panel (a) MRP c Firm operating in perfect competition in both input and output markets W e Labor supply Revenue Product per Hour($) Wage Rate and Marginal Q e Competitive Input, Competitive Output Quantity of Labor per Time Period Figure 30-9, Panel (a)

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 MRP m Revenue Product per Hour($) Wage Rate and Marginal W e Labor supply Q m Competitive Input, Monopoly Output Why are fewer workers hired in this market compared to perfect competition in both markets? Quantity of Labor per Time Period Figure 30-9, Panel (b)

Pricing and Employment Under Various Market Conditions MRP Panel (c) Firm operating as monopsonist in the input market and a perfect competitor in the output market MFC S Q 1 Wage Rate, Marginal Factor Cost, and Marginal Revenue Product per Hour ($) • Hire where MFC = MRPc • W = WC • WC < MRP W c Monopsony Input, Competitive Output Quantity of Labor per Time Period Figure 30-9, Panel (c)

Pricing and Employment Under Various Market Conditions Panel (d) MFC MRP m Firm operating as a bilateral monopoly S Q 2 Wage Rate, Marginal Factor Cost, and Marginal Revenue Product per Hour ($) • Hire where MFC = MRPm W m Monopsony Input, Monopoly Output Quantity of Labor per Figure 30-9, Panel (d) Time Period

Repeated on one page… Pricing and Employment Under Various Market Conditions Competitive Input, Competitive Output Competitive Input, Monopoly Output Monopsony Input, Competitive Output Monopsony Input, Monopoly Output

Chapter 30: Union and Labor Market Monopoly Power ECON 152 – PRINCIPLES OF MICROECONOMICS Chapter 30: Union and Labor Market Monopoly Power Materials include content from Pearson Addison-Wesley which has been modified by the instructor and displayed with permission of the publisher. All rights reserved.