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Chapter 42

Unions

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Chapter Outline

• WHY UNIONS EXIST

• A UNION AS A MONOPOLIST

• THE HISTORY OF LABOR UNIONS

• WHERE UNIONS GO FROM HERE

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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.

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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.

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A Perfectly Competitive Labor Market

Labor

W

Demand

SupplyA

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

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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.

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Modeling Monopsony

Labor

W

Demand

SupplyA

W*

B

C

0 L*

Marginal Resource Cost

WCT

Wvalue

LCT

E

F

Deadweight loss is EFC

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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.

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The Impact of Licensing

C

Labor

W

D

SupplyA

W*

B

0 L*

D’

W’

L’

S’

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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.

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A Union as a Monopolist

Labor

W

Demand

SupplyA

W*

B

C

0 L*

Wunion

Lunion

MR

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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.

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Modeling the Negotiation

Labor

W

Demand

SupplyA

W*

B

C

0 L*

Marginal Resource Cost

WCT

Wvalue

LCTLabor

W

Demand

SupplyA

W*

B

C

0 L*

Wunion

Lunion

MR

The lowest wages can be after a negotiation.

The highest wages can be after a negotiation.

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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.

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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.

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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.

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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.

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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.

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5 10 15 20 25 30 35 40

Percentage

1960 1965 1970 1975 1980 1985 1990 1995 2000 Year

Private

Public

Total

UnionizationPublic, Private and Total Employees

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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%.

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0

0.05

0.1

0.15

0.2

0.25

0.3

Lost T

ime

1960 1970 1980 1990 2000 Year

Work StoppagesPercentage of Work Time Lost