Chapter 29
Unions and Labor
Market Monopoly
Power
Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
Introduction
Today, nearly 40 percent of U.S. government employees
are members of unions, as compared to fewer than 8
percent of all U.S. workers employed by private firms.
In this chapter, you will learn about the goals of unions
and about their place in the U.S. economy.
Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
29-2
Learning Objectives
• Outline the essential history of the labor
union movement
• Discuss the current status of labor unions
• Describe the basic economic goals and
strategies of labor unions
Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
29-3
Learning Objectives (cont'd)
• 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
Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
29-4
Chapter Outline
•
•
•
•
Industrialization and Labor Unions
Union Goals and Strategies
Economic Effects of Labor Unions
Monopsony: A Buyer’s Monopoly
Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
29-5
Did You Know That ...
• The average employee of U.S. state and local
governments receives 45 percent more in wages
and benefits than the average U.S. private
worker?
• One explanation for the higher earnings of state
and local government workers is that an
increasing percentage of them belong to labor
unions.
Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
29-6
Did You Know That … (cont’d)
• Labor Unions
– Worker organizations that seek to secure
economic improvements for their members
– These organizations also seek to improve
safety, health, and other benefits (such as job
security) of their members
Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
29-7
Industrialization and Labor Unions
• Craft Unions
– Labor unions composed of workers who engage
in a particular trade or skill
• Collective Bargaining
– Negotiation between the management of a
company or of a group of companies and the
management of a union or group of unions for
the purpose of reaching a mutually agreeable
contract that sets wages, fringe benefits, and
working conditions for all employees in all
unions
Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
29-8
Industrialization and Labor Unions
(cont'd)
• Unions in the U.S.
– Knights of Labor
– American Federation of Labor
• Samuel Gompers
• Early labor issues
– 8-hour workday
– Equal pay for men and women
Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
29-9
Industrialization and Labor Unions
(cont'd)
• The formation of industrial unions
– National Industrial Recovery Act of 1933
– National Labor Relations Act 1935, otherwise
known as the Wagner Act
• Gave unions the right to organize workers and to
engage in collective bargaining
Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
29-10
Industrialization and Labor Unions
(cont'd)
• The Congress of Industrial Organizations
(CIO) was formed in 1938
– It was composed mainly of industrial unions
– Prior to the formation of the CIO, most labor
organizations were craft unions
Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
29-11
Industrialization and Labor Unions
(cont'd)
• Industrial Unions
– Labor unions that consist of workers from a
particular industry, such as automobile
manufacturing or steel manufacturing
Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
29-12
Industrialization and Labor Unions
(cont'd)
• Congressional control over labor unions
– Taft-Hartley Act of 1947
• Allowed right-to-work laws
– Laws that make it illegal to require union membership
as a condition of continuing employment in a particular
firm
Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
29-13
Industrialization and Labor Unions
(cont'd)
• Congressional control over labor unions
– Taft-Hartley Act of 1947 (cont’d)
• 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
• A union shop however, is legal
– Non-union members join later
Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
29-14
International Example: The Chinese Union
Monopoly Expands to Include Employees of
Foreign Firms
• Chinese firms have operated within a closed shop
environment, in which All-China Federation of
Trade Unions (ACFTU) has been the only single
union in China.
• Recently, the ACFTU has sought to expand its
membership by requiring employees of foreign
firms, including Wal-Mart, McDonald’s and FedEx,
to join this union when they accept their
positions.
Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
29-15
Industrialization and Labor Unions
(cont'd)
• Congressional control over labor unions
– Taft-Hartley Act of 1947 (cont’d)
• Prohibited jurisdictional disputes
– Disputes involving two or more unions over which
should have control of a particular jurisdiction
Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
29-16
Industrialization and Labor Unions
(cont'd)
• Congressional control over labor unions
– Taft-Hartley Act of 1947 (cont’d)
• Prohibited sympathy strikes
– A strike by a union in sympathy with another union’s
strike or cause
Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
29-17
Industrialization and Labor Unions
(cont'd)
• Congressional control over labor unions
– Taft-Hartley Act of 1947 (cont’d)
• Prohibited secondary boycotts
– A boycott of companies or products sold by companies
that are dealing with a company being struck
Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
29-18
Industrialization and Labor Unions
(cont'd)
• Congressional control over labor unions
– Taft-Hartley Act of 1947 (cont’d)
• 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
Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
29-19
Industrialization and Labor Unions
(cont'd)
• To understand the current status of labor
unions, we consider
– Worldwide trends in unionization
– U.S. unionization trends
Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
29-20
Figure 29-1 Decline in Union
Membership
Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
29-21
Table 29-1 The Ten Largest Unions in
the United States
Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
29-22
Industrialization and Labor Unions
(cont'd)
• Explaining the fall in union membership
– Deregulation
– Immigration
– Shift from manufacturing to services
Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
29-23
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.
Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
29-24
Union Goals and Strategies (cont'd)
• Strikebreakers can reduce the bargaining
power of the strike
• Temporary or permanent workers hired by a company
to replace union members who are striking
Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
29-25
Union Goals and Strategies (cont'd)
• Union goals with direct wage setting
– 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 the unionized industry
– The effects of setting a wage rate higher than a
competitive market clearing wage rate can be
seen in Figure 29-2.
Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
29-26
Figure 29-2 Unions Must Ration Jobs
Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
29-27
Union Goals and Strategies (cont'd)
• Rationing can be done by
– Using the seniority system
– Lengthening the apprenticeship period
– Instituting other rationing methods
Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
29-28
Union Goals and Strategies (cont'd)
• Union wage and employment strategies
include:
– Employing all union members
– Maximizing member income
– Maximizing wage rates for certain workers
Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
29-29
Figure 29-3 What Do Unions
Maximize?
Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
29-30
Union Goals and Strategies (cont'd)
• Union strategies to raise wages indirectly
include:
– Limiting entry over time
– Altering the demand for union labor
Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
29-31
Union Goals and Strategies (cont'd)
• 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
Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
29-32
Figure 29-4 Restricting Supply over
Time
When union membership is limited
to Q1, wages increase and
employment decreases
Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
29-33
Union Goals and Strategies (cont'd)
• Demand for union labor can be increased
by
1. Increasing worker productivity
2. Increasing the demand for union-made goods
3. Decreasing the demand for non-union-made
goods
Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
29-34
Economic Effects of Labor Unions
• Do union members earn higher wages?
• Are they more or less productive than
nonunionized workers?
• What are the broader economic effects of
unionization?
Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
29-35
Economic Effects of Labor Unions
(cont'd)
• 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
• Yet annual earnings for union workers are
not necessarily higher, because they may
work somewhat fewer hours
Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
29-36
Why Not … require firms to pay union wages to
nonunionized workers?
• Requiring employers to pay the average
nonunionized U.S. worker about $2.25 per hour
more would induced firms to cut back on the
quantity of labor demanded.
• Also, more people would desire to supply
additional labor.
• The result would be excess quantities of labor
supplied, and more people would be unemployed.
Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
29-37
Economic Effects of Labor Unions
(cont'd)
• Question
– How do unions affect labor productivity?
• Answers
– There is some evidence that featherbedding
creates inefficiency in the unionized industries
– But some economists argue that unions
actually enhance productivity by reducing labor
turnover
Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
29-38
Economic Effects of Labor Unions
(cont'd)
• Featherbedding
– Any practice that forces employers to use more
labor than they would otherwise or to use
existing labor in an inefficient manner
Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
29-39
Economic Effects of Labor Unions
(cont'd)
• Economic benefits and costs of labor
unions—two opposing views
1. Unions are monopolies whose main effect is to
raise the wage rate of high seniority members
2. Unions increase labor productivity by
promoting generally better work environments
Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
29-40
Monopsony: A Buyer’s Monopoly
• Assumptions
– The 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
– One factory not only hires the workers but also
owns all the businesses in the town. This buyer
of labor is called a monopsonist, the only buyer
in market
Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
29-41
Monopsony: A Buyer’s Monopoly
(cont'd)
• The monopsonist faces an upward-sloping
supply curve of labor
• We call the additional cost to the
monopsonist of hiring one more worker
the marginal factor cost (MFC)
• 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
Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
29-42
Figure 29-5 Derivation of a Marginal Factor
Cost Curve, Panel (a)
Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
29-43
Figure 29-5 Derivation of a Marginal Factor
Cost Curve, Panel (b)
Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
29-44
Monopsony: A Buyer’s Monopoly (cont’d)
• Employment and wages under monopsony
– To determine the number of workers that a
monopsonist desires to hire, compare the
marginal benefit to the marginal cost of each
hiring decision
– The marginal cost is the marginal factor cost
(MFC) curve, and the marginal benefit is the
marginal revenue product (MRP) curve
Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
29-45
Monopsony: A Buyer’s Monopoly (cont’d)
• Figure 29-6 displays how a monopsonist
finds its profit-maximizing quantity of labor
demanded at A, where MRP = MFC
Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
29-46
Figure 29-6 Wage and Employment
Determination for a Monopsonist
MRP > W
Hire Qm where
MFC = MRP
and pay Wm
Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
29-47
Monopsony: A Buyer’s Monopoly
(cont'd)
• Monopsonistic Exploitation
– Paying a price for the variable input that
is less than the marginal revenue
product
– The difference between marginal
revenue product and the wage rate
Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
29-48
Policy Example: Can Minimum Wage Laws Ever
Boost Employment?
• Figure 29-7 demonstrates how a monopsony
responds to a minimum wage law that sets a
wage floor above the wage rate it would
otherwise pay its workers
• To maximize its economic profits under the
minimum wage, the monopsony equalizes the
minimum wage rate with marginal revenue
product
Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
29-49
Figure 29-7 A Monopsony’s Response to a
Minimum Wage
Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
29-50
Policy Example: Can Minimum Wage Laws Ever
Boost Employment? (cont’d)
• Thus, establishing a minimum wage can generate
a rise in employment at a monopsony firm
• If a government establishes a minimum wage law
covering all firms within its jurisdiction, including
firms operating in both perfectly competitive and
monopolistic labor markets, will overall
employment necessarily increase?
Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
29-51
Monopsony: A Buyer’s Monopoly (cont'd)
• Bilateral Monopoly
– A market structure consisting of a
monopolist and a monopsonist
Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
29-52
Figure 29-8 Pricing and Employment
Under Various Market Conditions, Panel (a)
Firm operating in perfect
competition in both
input and output markets
Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
29-53
Figure 29-8 Pricing and Employment
Under Various Market Conditions, Panel (b)
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?
Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
29-54
Figure 29-8 Pricing and Employment
Under Various Market Conditions, Panel (c)
Firm operating as
monopsonist in the
input market and a
perfect competitor
in the output market
• Hire where MFC = MRPC
• W = WC
• WC < MRP
Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
29-55
Figure 29-8 Pricing and Employment
Under Various Market Conditions, Panel (d)
Firm operating as
a bilateral monopoly
• Hire where MFC = MRPm
Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
29-56
You Are There: Caught Up in an Unusual
Jurisdictional Dispute in Michigan
• Recently, the state of Michigan required its 34,000
home-based day-care providers to join the union
of Child Care Providers Together Michigan
(CCPTM), even though some of those day-care
providers did not wish to join the union.
• The CCPTM has used union dues to help cover
expense of lobbying for higher payments to daycare operators.
Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
29-57
Issues & Applications: Tax Dollars Increasingly
Pay Union Wages
• Figure 29-9, panel (a) shows that unionization
rates of private-sector workers have dropped
steadily since the early 1970s.
• By contrast, the public-sector unionization rate
has trended slightly upward since the early
1980s.
• Figure 29-9, panel (b) shows that, because of the
rising number of government workers, the total
percentage of all unionized workers in the public
sector now exceeds the percentage employed in
the private sector.
Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
29-58
Figure 29-9 Private- versus Public-Sector
Unionization Rates
Source: Bureau of Labor Statistics.
Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
29-59
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
Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
29-60
Summary Discussion of Learning
Objectives (cont'd)
• The current status of U.S. labor unions
– In the United States, 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
Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
29-61
Summary Discussion of Learning
Objectives (cont'd)
• 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
Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
29-62
Summary Discussion of Learning
Objectives (cont'd)
• 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
Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
29-63
Summary Discussion of Learning
Objectives (cont'd)
• 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
Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
29-64
Summary Discussion of Learning
Objectives (cont'd)
• 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 faced with perfect competition in
the labor market
– Pays a lower wage if also a monopsonist
Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
29-65