1. Chapter 30 Unions and Labor Market Monopoly Power

2. Slide 30-2 Introduction Workers and managers at Verizon Communications continued negotiations for a new contract long past the official strike deadline. Why are marathon contract talks now so common in labor disputes?

3. Slide 30-3 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. Slide 30-4 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. Slide 30-5 Chapter Outline Industrialization and Labor Unions Industrialization and Labor Unions Union Goals and Strategies Union Goals and Strategies Economic Effects of Labor Unions Monopsony: A Buyer’s Monopoly

6. Slide 30-6 Did You Know That... Half of U.S. labor union members are in only six states? Once a union represents all the workers who supply a particular type of labor, an element of monopoly power replaces the competitive outcome?

7. Slide 30-7 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

8. Slide 30-8 Early labor issues –8-hour workday –Equal pay for men and women Industrialization and Labor Unions

9. Slide 30-9 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

10. Slide 30-10 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

11. Slide 30-11 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

12. Slide 30-12 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 Industrialization and Labor Unions

13. Slide 30-13 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 Industrialization and Labor Unions

14. Slide 30-14 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 Industrialization and Labor Unions

15. Slide 30-15 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 Industrialization and Labor Unions

16. Slide 30-16 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 Industrialization and Labor Unions

17. Slide 30-17 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. Industrialization and Labor Unions

18. Slide 30-18 Decline in U.S. Union Membership Figure 30-2

19. Slide 30-19 Explaining the fall in union membership –Deregulation –Immigration –Shift from manufacturing to services Industrialization and Labor Unions

20. Slide 30-20 Policy Example: Who Needs Unions? Some of the labor protections first secured by unions have become legislated rights for all workers. For example, many workers now are guaranteed overtime pay by U.S. Department of Labor regulations.

21. Slide 30-21 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.

22. Slide 30-22 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

23. Slide 30-23 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.

24. Slide 30-24 Unions Must Ration Jobs Figure 30-3 S D W U B Q S W e E Q e A Q D Quantity of Labor per Time Period Wage Rate per Hour

25. Slide 30-25 Union Goals and Strategies Unions must ration the available jobs by: –Seniority –Apprenticeship

26. Slide 30-26 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

27. Slide 30-27 Union Goals and Strategies Figure 30-4 D W 1 Q 1 W 2 Q 2 W 3 Q 3 0 Maximum total union member income earned MR Quantity of Labor per Time Period Wage Rate per Hour

28. Slide 30-28 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.

29. Slide 30-29 Restricting Supply Over Time Figure 30-5 If union membership limited to Q 1, wages increase to 21 instead of 20 and employment is reduced

30. Slide 30-30 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

31. Slide 30-31 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.

32. Slide 30-32 Example: Union Wages in the Automotive Industry Up until the 1970’s, the only cars manufactured in the U.S. were made by one of four companies, all of whom were highly unionized. As foreign-based companies such as Toyota and Honda have built plants in the U.S., they have hired nonunion workers.

33. Slide 30-33 Example: Union Wages in the Automotive Industry This gave the foreign-based companies a wage advantage, allowing them to expand their U.S. presence. The U.S. manufacturers (GM, Ford, Chrysler) has closed many plants and implemented labor-saving technology.

34. Slide 30-34 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.

35. Slide 30-35 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.

36. Slide 30-36 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.

37. Slide 30-37 Derivation of a Marginal Factor Cost Curve Figure 30-7, Panel (a)

38. Slide 30-38 Derivation of a Marginal Factor Cost Curve Figure 30-7, Panel (b)

39. Slide 30-39 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

40. Slide 30-40 Wage and Employment Determination for a Monopsonist Hire Q m where MFC = MRP and pay W m MRP > W Figure 30-8 W m S MRP MFC W e Q e A Q m Labor Input (worker-weeks) MFC, MRP, and Wage Rate per Worker-Week ($)

41. Slide 30-41 Firm operating in perfect competition in both input and output markets Pricing and Employment Under Various Market Conditions Figure 30-9, Panel (a) Panel (a) Quantity of Labor per Time Period Q e W e Labor supply MRP c Wage Rate and Marginal Revenue Product per Hour($)

42. Slide 30-42 Firm operating in perfect competition in the input market but a monopoly in the output market Pricing and Employment Under Various Market Conditions Figure 30-9, Panel (b) Panel (b) Quantity of Labor per Time Period Q m W e Labor supply MRP m Why are fewer workers hired in this market compared to perfect competition in both markets? Wage Rate and Marginal Revenue Product per Hour($)

43. Slide 30-43 Firm operating as monopsonist in the input market and a perfect competitor in the output market Hire where MFC = MRP c W = W C W C < MRP Figure 30-9, Panel (c) Pricing and Employment Under Various Market Conditions Panel (c) Quantity of Labor per Time Period Q 1 W c S c MRP MFC Wage Rate, Marginal Factor Cost, and Marginal Revenue Product per Hour ($)

44. Slide 30-44 Firm operating as a bilateral monopoly Hire where MFC = MRP m Why is wage indeterminate? Pricing and Employment Under Various Market Conditions Figure 30-9, Panel (d) Panel (d) Quantity of Labor per Time Period Q 2 W m S MRP m MFC Wage Rate, Marginal Factor Cost, and Marginal Revenue Product per Hour ($)

45. Slide 30-45 Issues and Applications: A Tale of Two Wage Differentials Union members will often continue working long past a strike deadline if it means increasing the possibility of a settlement that will avoid plant closings. Increasingly, union members are concerned with job security and health benefits, not just wage levels.

46. Slide 30-46 Summary Discussion of Learning Objectives Labor Unions –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

47. Slide 30-47 Summary Discussion of Learning Objectives The current status of U.S. labor unions –In the U.S., about one in eight workers is a union member. –The percentage of the labor force that is unionized has declined due to immigration, global competition, and a shift away from manufacturing employment.

48. Slide 30-48 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

49. Slide 30-49 Summary Discussion of Learning Objectives Effects of labor unions on wages and productivity –Union members hourly wages are higher –Annual earnings may not be higher –Unions may reduce productivity due to job rules, or may enhance it due to reduced labor turnover.

50. Slide 30-50 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

51. Slide 30-51 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

52. End of Chapter 30 Unions and Labor Market Monopoly Power