McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Chapter 42 Unions

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Chapter Outline WHY UNIONS EXIST A UNION AS A MONOPOLIST THE HISTORY OF LABOR UNIONS WHERE UNIONS GO FROM HERE

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Background Currently unions represent less than 15% of the total workforce and less than 10% of the private workforce. In the late 1800s-early 1900s unions’ actions were considered a violation of the Sherman Anti-Trust Act provisions against restraint of trade. Laws giving union members rights to collective bargaining were passed in the early 1900s but declared unconstitutional. It was not until the 1930s when union protections were created and affirmed by the courts.

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Why Unions Exist The labor market is not perfectly competitive –If there is one buyer of labor, the wages and the number of workers hired will be lower than the economically efficient level. Unions can enhance the value of labor to firms with training and apprenticeships.

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. A Perfectly Competitive Labor Market Labor W Demand Supply A W* B C 0 L* Value to the firms: 0ACL* Firms pay workers: OW*CL* The opportunity cost to workers: OBCL* Surplus to firms: W*AC Surplus to workers: BW*C

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. The Monopsony Problem Monopsony: the market has only one buyer (e.g. a company town.) When there is a monopsony the wage is less than the Marginal Revenue Product of Labor (the additional revenue generated from hiring an additional worker). This is because the supply curve of labor is not the Marginal Resource Cost (the increase in total labor costs to the firm of buying increasing amounts of labor) curve for labor as it is under perfect competition.

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Modeling Monopsony Labor W Demand Supply A W* B C 0 L* Marginal Resource Cost W CT W value L CT E F Deadweight loss is EFC

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Unions: Restricting Competition and Improving Quality With licensing unions can –reduce supply by limiting the number of people who are eligible for a job. –reduce supply by imposing increased training costs (either explicit training costs or opportunity costs in the form of lost wages) –increase demand by improving the quality of the labor.

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. The Impact of Licensing C Labor W D Supply A W* B 0 L* D’ W’ L’ S’

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Information Issues A Chapter 6 requirement for a perfectly competitive market is that buyers and sellers have complete information. A labor market may not be perfectly competitive because workers may not know their alternatives, while bosses may.

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. A Union as a Monopolist Labor W Demand Supply A W* B C 0 L* W union L union MR

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. A Monopsonist Company vs. A Monopolist Union A negotiation will take place between a union and the company. If the company is the only employer in town of a particular skill and the union is the only seller of that skill then the outcome is uncertain. The wage will be no lower than if there had been no union and will be no higher than if there had been many employers.

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Modeling the Negotiation Labor W Demand Supply A W* B C 0 L* Marginal Resource Cost W CT W value L CT Labor W Demand Supply A W* B C 0 L* W union L union MR The lowest wages can be after a negotiation. The highest wages can be after a negotiation.

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. History of Labor Unions: Part I In the US the shoemakers were the first trade union in the 1700s. In the late 1800s unions that attempted to form and collectively bargain with employers were opposed by the government on the grounds that these actions were a restraint of trade outlawed in the Sherman Anti-Trust Act. There were many violent disputes between union members and government agents. The first attempt at giving union members rights to collective bargaining were in 1914 with the Clayton Act.

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. History of Labor Unions: Part II The depression of the 1930s gave Democrats control of Congress and the courts. The Norris-LaGuardia Act and the Wagner Act were passed and upheld by the courts. These laws gave unions rights to collective bargaining. Unions became very powerful during and shortly after WWII.

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. History of Labor Unions Part III The Taft-Hartley Act limited union power. The Act gave –power to the President to order a cooling- off period during which workers could not strike. –states the power to allow workers the right to not join a union. President Kennedy gave federal workers the right to collectively bargain.

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. History of Labor Unions Part IV The PATCO strike of 1981 had President Reagan fire all of the nation’s air-traffic controllers. Most strikes/lockouts in the 1980s and 1990s were won by management.

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Measures of Union Power Membership –The higher the percentage of workers represented by unions the greater their power. Work Stoppages –More prevalent strikes is a sign of more powerful unions as unions are less likely to strike from a position of weakness.

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved.

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. The Union Numbers Union membership in the private sector has fallen below 10% Union membership in the public sector has grown to above 35%. Overall union membership has fallen below 15%.

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved.