Labor Unions
Chapter 31
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Introduction

This chapter focuses on how power in the
labor market affects wages, employment,
and other economic outcomes:
 How
do large and powerful employers affect
market wages?
 How do labor unions alter wages and
employment?
 What outcomes are possible from collective
bargaining between management and unions?
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The Labor Market

Labor supply consists of the number of
individuals who are willing to work at
various wage rates.
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The Labor Market

Labor supply is the willingness and ability
to work specific amounts of time at
alternative wage rates in a given time
period, ceteris paribus.
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The Labor Market

The number of workers each firm is willing
and able to hire at each wage rate gives us
the market demand for labor.
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The Labor Market

The demand for labor is the quantities of
labor employers are willing and able to hire
at alternative wage rates in a given time
period, ceteris paribus.
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Competitive Equilibrium
The equilibrium wage is the wage rate at
which the quantity of labor supplied in a
given time period equals the quantity of
labor demanded.
 The intersection of labor-supply and labordemand reveals the equilibrium wage.

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Wage Rate (dollars per hour)
Competitive Equilibrium in the
Labor Market
Labor demand
C
we
Competitive equilibrium
Labor supply
0
McGraw-Hill/Irwin
qe
Quantity of Labor (hours per week)
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Local Labor Markets
Looking at a national labor market is
useful.
 It is more appropriate to think in terms of
localized labor markets.

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Local Labor Markets
The largest U.S. employer (Wal-Mart)
employs less than 0.8 percent of the labor
force.
 All unions together represent only oneseventh of the labor force.

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Local Labor Markets

This does not mean that a particular
employer or union has no influence on our
economic welfare.
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Local Labor Markets

Power in labor markets is likely to be more
effective in specific areas, occupations,
and industries.
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Labor Unions

The immediate objective of labor unions is
to alter the equilibrium wage and
employment conditions in specific labor
markets.
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Labor Unions

To be successful, unions must be able to
exert control over the market supply curve.
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Types of Unions

Workers have organized themselves along
either industry or occupational craft lines.
 Industrial
unions include workers in a
particular industry.
 Craft unions represent workers with a
particular skill.
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Types of Unions
The purpose of labor unions is to create a
monopoly in its labor market.
 They do so by coordinating the actions of
thousands of individual workers to control
market supply.

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Union Objectives
A primary objective of unions is to raise the
wages of union members.
 Union objectives also include improved
working conditions, job security, and other
non-wage forms of compensations.

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The Potential Use of Power
A union evaluates job offers on the basis of
the collective interests of its members.
 It must consider the effects of increased
employment on the wage rate paid to all of
its members.

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The Marginal Wage
Like all monopolists, unions have to worry
about the downward slope of the demand
curve.
 It must consider how hiring one more
worker will affect the wages of all workers.

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Total Wages Paid

A union must distinguish the marginal
wage from the market wage.
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Total Wages Paid

The marginal wage is the change in total
wages paid associated with a one-unit
increase in the quantity of labor employed.
Marginal
Change in total wages paid
=
wage
Change in quantity of labor employed
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The Marginal Wage
Wage
Rate (per
hour)
X
Number of
Workers
Demanded
(per hour)
=
Total Wages
Paid
(per hour)
Marginal Wage
(per labor hour)
S
$6
0
$0
T
5
1
5
$5
U
4
2
8
3
V
3
3
9
1
W
2
4
8
–1
X
1
5
5
–3
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The Marginal Wage
Wage Rate (dollars per hour)
$6
5
T
U
4
u
3
V
W
2
v
1
Labor demand
X
0
w
–1
Marginal wage
–2
1
McGraw-Hill/Irwin
2
3
4
5
Quantity of Labor (workers per hour)
6
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The Union Wage Goal

The union will seek the level of
employment that equates the marginal
wage with the supply preferences of union
members.
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The Union Wage Goal

The intersection of the marginal wage
curve with the labor-supply curve identifies
the desired level of employment for the
union.
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The Union Wage Objective
Wage Rate (dollars per hour)
$6
5
U
4
C
N
Labor supply
u
3
2
Labor demand
1
0
–1
Marginal wage
–2
1
McGraw-Hill/Irwin
2
3
4
Quantity of Labor (workers per hour)
5
6
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Exclusion

To maintain a noncompetitive wage, the
union must be able to exercise some
control over the labor-supply decisions of
individual workers.
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Exclusion

Unions attempt to solidify their control of
the labor supply by establishing union
shops.
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Exclusion

Union shop is an employment setting in
which all workers must join the union within
thirty days after being employed.
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Replacement Workers
Unions are subject to potential competition
from substitute labor.
 Employers try to find replacement workers
when their unionized workers go on strike.

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The Extent of Union Power

Although the first labor unions in America
were organized in the 1780s, union power
was not a significant force in labor markets
until the 1900s.
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Early Growth
Unions grew in power between 1916 and
1920.
 Job losses caused by the Great
Depression led to union membership
dropping to the 1915 level.

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Early Growth
The Wagner Act helped union membership
double from 1933-37.
 World War II helped continue the growth of
unions.

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Union Power Today
The unionization ratio has been in steady
decline for over forty years.
 Unionization ratio is the percentage of the
labor force belonging to a union.

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Changing Unionization Rates
45
40
35
30
25
20
15
10
5
0
1930
McGraw-Hill/Irwin
1940
1950
1960
1970
1980
1990
2000
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Private vs. Public-Sector
Trends

The decline in the national unionization
rate conceals two very different trends.
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Private vs. Public-Sector
Trends

In the last ten years, the unionization rate
in the private sector has fallen from 11.5%
to only 9.5%.
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Private vs. Public-Sector
Trends

At the same time, union membership has
increased sharply among teachers,
government workers, and nonprofit
employees.
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Private vs. Public-Sector
Trends

The old industrial unions are being
supplanted by unions of service workers,
especially those employed in the public
sector.
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Private vs. Public-Sector
Trends

Although industrial unions have been in
general decline, they still possess
significant pockets of market power.
 These
include the Teamsters, UAW, United
Mine Workers, Union of Needletrades and
Textile Employees.
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The AFL-CIO
The AFL-CIO is the American Federation of
Labor - Congress of Industrial
Organizations
 It is not a separate union but a
representational body of 120 national
unions that focuses on issues of general
labor interest.

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Employer Power
Power may also exist on the demand side
of the labor market.
 Power on the demand side of a market
belongs to a buyer who is able to influence
the market price of a good.

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Monopsony
In the labor market a single employer can
alter the market wage rate.
 Monopsony is a market in which there is
only one buyer.

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The Potential Use of Power

A monopsonist can hire additional workers
only if he offers a higher wage rate.
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Marginal Factor Cost

A distinction between marginal cost and
price must be made any time the price of a
resource (or product) change as a result of
a firm’s purchases.
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Marginal Factor Cost

Marginal factor cost (MFC) is the change
in total costs that results from a one-unit
increase in the quantity of a factor
employed.
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Marginal Factor Cost

The marginal factor cost exceeds the wage
rate because additional workers can be
hired only if the wage rate for all workers in
increased.
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Marginal Factor Cost
Wage
Rate (per
hour)
X
Quantity of
Labor
Supplied
(per hour)
=
Total Wage
Cost
(per hour)
Marginal Factor
Cost
(per labor hour)
D
$0
0
$0
E
1
1
0
$0
F
2
2
2
2
G
3
3
6
4
H
4
4
12
6
I
5
5
20
8
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Marginal Factor Cost
WAGE RATE (dollars per hour)
$9
Marginal factor
cost
Labor
supply
J
8
7
6
I
5
H
4
3
2
G
F
1
0
1
2
3
4
5
6
QUANTITY OF LABOR (workers per hour)
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The Monopsony Firm's Goal

The labor-demand curve is a reflection of
labor’s marginal revenue product.
 Marginal
revenue product (MRP) – The
change in total revenue associated with one
additional unit of input.
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The Monopsony Firm's Goal

The monopsonistic employer will seek to
hire the amount of labor at which the
marginal revenue product of labor equals
its marginal factor cost.
Marginal revenue Marginal factor
=
product of input
cost of input
MRP = MFC
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The Monopsony Firm's Goal
WAGE RATE (dollars per hour)
$9
Marginal factor
cost
Labor
supply
J
8
7
6
I
5
U
4
3
2
C
H
G
Labor demand
F
1
0
1
2
3
4
5
6
QUANTITY OF LABOR (workers per hour)
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Collective Bargaining

The potential for conflict between a
powerful employer and a labor union
should be evident.
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Collective Bargaining

The objective of a labor union is to
establish a wage rate that is higher than
the competitive wage.
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Collective Bargaining

A monopsonistic employer seeks to
establish a wage rate that is lower than
competitive standards.
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Collective Bargaining
The confrontation of power on both sides
of the labor market is a situation referred to
as bilateral monopoly.
 A bilateral monopoly is a market with only
one buyer (a monopsonist) and one seller
(a monopolist).

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Collective Bargaining
In a bilateral monopoly, wages and
employment are not determined simply by
supply and demand.
 Economic outcomes must be determined
by collective bargaining.

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Collective Bargaining

Collective bargaining is direct
negotiations between employers and
unions to determine labor-market
outcomes.
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Possible Agreements

A negotiated final equilibrium will be
somewhere between each sides’ natural
asking/offering price on the labor supply
and labor demand curves.
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Possible Agreements

Ultimately, the outcome depends on the
relative patience, tactics, and resources of
the two parties.
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Possible Agreements

The fundamental source of negotiating
power for either side is its ability to
withhold labor or jobs.
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Boundaries of Collective
Bargaining
Wage Rate (dollars per hour)
$7
Labor supply
6
5
U
4
C
3
G
2
Labor demand
1
0
McGraw-Hill/Irwin
1
2
3
4
5
Quantity of Labor (workers per hour)
6
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The Pressure to Settle

Labor and management both suffer from a
strike or lockout – no matter who initiates
the work stoppage.
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The Pressure to Settle

Because potential income losses are
usually high, both labor and management
try to avoid a strike or lockout if they can.
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The Pressure to Settle

Over 90 percent of all collective bargaining
agreements are concluded without a strike,
and often without even the explicit threat of
one.
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The Final Settlement
The relative pressures on each side will
help determine where the final settlement
point is.
 The final settlement almost always
necessitates hard choices on both sides.

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The Final Settlement
The union usually has to choose between
an increase in job security or higher pay.
 The employer has to worry whether
productivity will suffer if workers are
dissatisfied with their pay package.

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The Impact of Unions

Labor unions have impacted broader
economic outcomes.
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Relative Wages

One measure of union impact is relative
wages – the difference in wages between
union and nonunion workers.
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Relative Wages

There is a general consensus that unions
have been able to increase their relative
wages from 15 to 20 percent.
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Effect of Unions on Relative
Wages
Excluded
workers
Marke
t
supply
wu
we
Demand
0
l2 l1
l3
Employment (workers per hour)
McGraw-Hill/Irwin
(b) Nonunionized labor market
Initial
supply
Wage (dollars per hour)
Wage (dollars per hour)
(a) Unionized labor market
Later
supply
we
wn
Demand
0
n1 n2
Employment (workers per hour)
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Labor’s Share of Total Income
The labor share of total income is the
proportion of income received by all
workers.
 Capital share, in contrast, is the share of
income received by owners of capital.

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Labor’s Share of Total Income

Most of the rise in labor’s share of total
income is due to changes in the structure
of the economy rather than to unionization.
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Prices
Firms can try to protect their profits in the
face of rising union wages by attempting to
raise prices.
 Their ability to do so depends on the
structure of product markets.

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Productivity

Unions also affect prices indirectly, via
changes in productivity.
 Productivity
– Output per unit of input, such
as output per labor hour.
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Productivity

Unions bargain not only for wages but also
for work rules that specify how goods
should be produced.
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Productivity

Work rules may reduce productivity.
 Limit
the pace of production.
 Restrict the type of jobs a particular individual
can perform.
 Require a minimum number of workers to
accomplish a certain task.
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Political Impact
Unions are a major political force in the
United States.
 Unions have provided electoral and
financial support for selected political
candidates.

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Political Impact

They have also fought hard for legislation
important to their members – minimum
wage laws, work and safety laws, and
retirement benefits.
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Merging to Survive
Unions have been in retreat for nearly a
generation.
 The decline in unionization is explained by
three phenomena.

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Merging to Survive

The relative decline in manufacturing,
coupled with rapid growth in high-tech
service industries.
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Merging to Survive
The downsizing of major corporations and
the relatively faster growth of smaller
companies.
 Increased global competition.

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Merging to Survive

By merging, unions hope to increase
representation, gain financial strength, and
enhance their political influence.
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Labor Unions
End of Chapter 31
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