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

2. 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?

3. 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

4. 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

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

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

7. 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?

8. 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.

9. 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

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

11. 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

12. 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

13. 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

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

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

16. 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

17. 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

18. 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

19. 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

20. 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

21. 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

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

23. Decline in Union Membership
Figure 28-1

24. 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%

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

26. 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

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

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

29. 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

30. 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.

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

32. 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.

33. Unions Must Ration Jobs
Figure 28-3

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

35. 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

36. What Do Unions Maximize?
Figure 28-4

37. 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.

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

39. 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

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

41. 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%

42. 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

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

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

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

46. 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.

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

48. 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.

49. 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.

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

51. 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.

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

53. 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

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

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

56. 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)

57. 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)

58. 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)

59. 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)

60. 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.

61. 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.

62. 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.

63. 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)

64. 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)

65. Web Links
The following Web link appears in the margin of this chapter in the textbook:
.files/.archive/.labor.law.html

66. 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

67. 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.

68. 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

69. 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

70. 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

71. 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

72. End of Chapter
Chapter 28
Unions and Labor Market Monopoly Power