1. 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

2. 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

3. 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

4. An Inconvenient History of Unions

5. An Inconvenient History of Unions
Circa 1880

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

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

8. An Inconvenient History of Unions
This ridicules Chinese labor
Circa 1870

9. 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.”

10. An Inconvenient History of Unions
History of the Davis-Bacon Act
David Bernstein
“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

11. 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)

12. 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

13. 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

14. 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.

15. 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

16. 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

17. The Labor Demand Curve of a Monopolist
Dollars LS
w =
2 + 3E
MRP
= 15 – 0.2E
14.59 wM
E = 15
MRPM
3.2E = 13
E =
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 –
w = 14.59

18. 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 = 150 (million workers)
the competitive wage is $35,000 per year
and National income is given by the sum of the pink areas.

19. 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

20. 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

21. 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)

22. 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.

23. 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%

24. 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.

25. Strikes Optimal Duration Dollars 26 23 21 20 15 25 40 75 1 2 3 121 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

26. Strikes US

27. 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

28. 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

29. 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