Economics Today Chapter 28 Unions and Labor Market Monopoly Power Roger LeRoy Miller Economics Today Chapter 28 Unions and Labor Market Monopoly Power

Why has union membership declined? Introduction In the early 1960s, one out of every four American workers was a union member. Today only about one in ten belongs to a union. Why has union membership declined?

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

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

Chapter Outline The American Labor Movement Unions and Collective Bargaining Contracts Union Goals Have Unions Raised Wages?

Chapter Outline Can Unions Increase Productivity? The Benefits of Labor Unions Monopsony: A Buyer’s Monopoly

Did You Know That... In 1971, some 2.5 million workers were involved in strikes, but in the past few years, fewer than 250,000 have been involved? More than 12 times the number of workdays were lost to strikes in the 1950s than are lost to them today?

The American Labor Movement Labor Unions Worker organizations that seek to secure economic improvements for their members They also seek to improve the safety, health, and other benefits of the their members.

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

The American Labor Movement Early labor issues 8-hour workday Equal pay for men and women Replacement of free enterprise with socialist system

The American Labor Movement Government policy and unions Initially government supported business by using police force to break strikes until World War I National Industrial Recovery Act (1933) gave labor the right to bargain collectively Declared unconstitutional

The American Labor Movement Government policy and unions National Labor Relations Act (1935) (Wagner Act) Guaranteed the right to start unions and engage in collective bargaining

The American Labor Movement 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

International Example: European Merchant Guilds, the Original Craft Unions Began in the 11th century when merchant caravans organized themselves to seek exclusive trade rights

The American Labor Movement Industrial Unions Labor unions that consist of workers from a particular industry

The American Labor Movement Industrial unions Congress of Industrial Organizations (CIO) (1938) AFL & CIO merged (1955) United Auto Workers, United Steelworkers of America, and Industrial Association of Machinists announced they would merge

The American Labor Movement Congressional control over labor unions 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

The American Labor Movement Congressional control over labor unions 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

The American Labor Movement Congressional control over labor unions Taft-Hartley Act of 1947 Prohibited jurisdictional disputes Disputes involving two or more unions over which should have control of a particular jurisdiction

The American Labor Movement Congressional control over labor unions Taft-Hartley Act of 1947 Prohibited sympathy strikes A strike by a union in sympathy with another union’s strike or cause

The American Labor Movement Congressional control over labor unions 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

The American Labor Movement Congressional control over labor unions Taft-Hartley Act of 1947 Established the 80-day-cooling-off period

Decline in Union Membership Figure 28-1

The American Labor Movement Explaining the fall in union membership Shift from manufacturing to services 1948 Goods producing, transportation, and utilities accumulated to 51.2% of wage and salary employment Today 25%

The American Labor Movement Explaining the fall in union membership Persistent illegal immigration Deregulation Increase in female labor force participation Increase in global competition

International Example: Europe’s Management-Labor Councils Unionization rate in the European Union is 48% Management-labor councils Management and labor must reach decisions jointly and unanimously

Unions and Collective Bargaining Contracts Collective bargaining sets a minimum wage Contract (2 to 3 years) establishes: Fringe benefits Maximum work days Working conditions

Unions and Collective Bargaining Contracts Strikes: the ultimate bargaining tool First strike—1786 Purpose Impose costs and reduce profits of the employer

Unions and Collective Bargaining Contracts Strikes: the ultimate bargaining tool Strikebreakers can reduce the bargaining power of the strike Temporary or permanent workers hired by a company to replace union members who are striking

Taking on the Teamsters— The “Big” UPS Strike In 1997 the Teamsters struck United Parcel Service (UPS). The strike hurt thousand of firms that depended on UPS for shipments to their customers. The higher shipping costs resulting from the new contract affected employment in other industries.

The Declining Number of Labor Strikes Figure 28-2 Source: U.S. Bureau of Labor Statistics

Union Goals 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 Figure 28-3

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

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

What Do Unions Maximize? Figure 28-4

Union Goals Limiting entry over time One way to raise wage rates without specifically setting wages is for the unions to limit the size of their membership to the size of their employed workforce when the union was first organized.

Restricting Supply Over Time If union membership limited to Q1, wages increase to 16 instead of 15 and employment is reduced Figure 28-5

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

Union Goals Question Why would the strategy of increasing the demand for union labor be preferred over the limiting-entry strategy?

Have Unions Raised Wages? Research findings In selected industries (airlines and construction) union wage differential is high as 50% Higher differentials during recessions On average, the differential is 10 to 20%

Can Unions Increase Productivity? Evidence that unions reduce productivity Featherbedding Any practice that forces employers to use more labor than they would otherwise or use existing labor in an inefficient manner

Can Unions Increase Productivity? Evidence that unions reduce productivity Resistance to new technology Painters and paint sprayers Plumber and PVC pipe Strikes

Can Unions Increase Productivity? Evidence that unions increase productivity By providing a collective voice, unions: Improve worker morale Reduce turnover

The Benefits of Labor Unions Unionism probably raises social efficiency. Unions appear to reduce wage inequality. Unions seem to reduce profits.

The Benefits of Labor Unions Internally, unions provide a political voice for all workers, and unions have been effective in promoting general social legislation. Unions tend to increase the stability of the workforce.

The Benefits of Labor Unions What do you think? Are unions really just monopolies that create member benefits by establishing a barrier to entry?

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 Buyers Monopoly Monopsony in college sports The NCAA operates as a monopsony (and monopoly) power in four ways: It regulates the number of recruits It fixes the prices universities can charge for sporting events. It sets wages and conditions under which the athletes can be recruited. Enforcement done with sanctions and penalties.

Monopsony: A Buyers Monopoly Question Which schools have the greatest incentive to cheat under this system?

Monopsony: A Buyers 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 28-6, Panel (a)

Monopsony: A Buyers 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

Derivation of a Marginal Factor Cost Curve Figure 28-6, Panel (b)

Marginal Factor Cost Curve for a Monopsonist MRP > W Hire Qm where MFC = MRP and pay Wm Figure 28-7

Summary of Pricing and Employment Under Various Market Conditions Firm operating in perfect competition in both input and output markets Figure 28-8, Panel (a)

Summary of Pricing and Employment Under Various Market Conditions 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? Figure 28-8, Panel (b)

Summary of Pricing and Employment Under Various Market Conditions Firm operating as monopsonist in the input market and a perfect competitor in the output market • Hire where MFC = MRPc • W = WC • WC < MRP Figure 28-8, Panel (c)

Summary of Pricing and Employment Under Various Market Conditions Firm operating as a bilateral monopoly • Hire where MFC = MRPm • Why is wage indeterminate? Figure 28-8, Panel (d)

Will Internet Job-Hunting Services Finally Make Monopsony an Irrelevant Economic Concept? The elimination of most “company towns” brought about by the age of the auto and commuting significantly reduced the power of local monopsonists. Today the Internet provides job search sites that provide job listings nationwide and often worldwide.

Will Internet Job-Hunting Services Finally Make Monopsony an Irrelevant Economic Concept The Internet is making it harder for any firm to exercise much monopsony power.

Issues and Applications: Is Profit Sharing Making Unions Obsolete? Proponents of profit sharing argue that it can stabilize employment. Effects of profit sharing Where it is mandated by law, as in France, strikes and labor troubles are unaffected. In the United States the growth of profit-sharing in the 1980s coincided with a decline in union membership.

Profit-Sharing Arrangements Source: Organization for Economic Cooperation and Development; John Duca, “The New Labor Paradigm: More Market-Responsive Rules of Work and Pay,” Federal Reserve Bank of Dallas Southwest Economy, May–June 1998; and author’s estimates. Figure 28-9, Panel (a)

Profit-Sharing Arrangements Source: Organization for Economic Cooperation and Development; John Duca, “The New Labor Paradigm: More Market-Responsive Rules of Work and Pay,” Federal Reserve Bank of Dallas Southwest Economy, May–June 1998; and author’s estimates. Figure 28-9, Panel (b)

Web Links The following Web link appears in the margin of this chapter in the textbook: http://socrates.berkeley.edu:3333/.labor/ .files/.archive/.labor.law.html

Summary Discussion of Learning Objectives The American labor-union movement 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

Summary Discussion of Learning Objectives The current status of U.S. labor unions Union membership has declined from one-fourth of American workers to one-tenth since the 1950s.

Summary Discussion of Learning Objectives 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

Summary Discussion of Learning Objectives Effects of labor unions on wages and productivity Union members wages are 10 to 20 percent higher Evidence on productivity is unclear

Summary Discussion of Learning Objectives 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

Summary Discussion of Learning Objectives 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 Chapter 28 Unions and Labor Market Monopoly Power