Introduction
Roger LeRoy Miller
Economics Today
Twelfth Edition
Union membership traditionally has
promised workers premium wages and
generous fringe benefits.
Chapter 29
Unions and Labor Market
Monopoly Power
Why are unions currently struggling to
negotiate wage increases equal to those
received in the nonunion sector?
Copyright © 2004 Pearson Addison Wesley. All rights reserved.
Slide 29-2
Learning Objectives
Learning Objectives
Outline the essential history of the American
Labor Union movement
Evaluate the potential effects of labor unions
on wages and productivity
Discuss the current status of labor unions in
the United States
Explain how a monopsonist determines how
much labor to employ and what wage rate
to pay
Describe the basic economic goals
and strategies of labor unions
Compare wage and employment decisions
by a monopsonistic firm with the choices
made by firms in industries with alternative
market structures
Slide 29-3
Slide 29-4
1
Chapter Outline
Chapter Outline
The American Labor Movement
Can Unions Increase Productivity?
Unions and Collective Bargaining
Contracts
The Benefits of Labor Unions
Monopsony: A Buyer’s Monopoly
Union Goals
Have Unions Raised Wages?
Slide 29-5
Did You Know That...
Slide 29-6
The American Labor Movement
Unionization is shrinking in the private
sector but is expanding among
government employees?
Once a union represents all the
workers who supply a particular type of
labor, an element of monopoly power
replaces the competitive outcome?
Slide 29-7
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.
Slide 29-8
2
The American Labor Movement
Craft Unions
The American Labor Movement
Early labor issues
– Labor unions composed of workers who
engage in a particular trade or skill
Knights of Labor
– 8-hour workday
– Equal pay for men and women
– Replacement of free enterprise with
socialist system
American Federation of Labor
Slide 29-9
Slide 29-10
The American Labor Movement
The American Labor Movement
Government policy and unions
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
– National Labor Relations Act (1935)
(Wagner Act)
• Guaranteed the right to start unions and
engage in collective bargaining
• Declared unconstitutional
Slide 29-11
Slide 29-12
3
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
E-Commerce Example:
Legal Protection for Workers Dampened
Unionization Efforts at Internet Firms
Initial attempts to unionize employees
of Internet retailers focused on job
security issues
Employees discovered that they
already had legal protection regarding
their concerns about layoffs and
support for the union disappeared.
Slide 29-13
Slide 29-14
The American Labor Movement
The American Labor Movement
Industrial Unions
Industrial unions
– Labor unions that consist of workers from
a particular industry
– 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
Slide 29-15
Slide 29-16
4
The American Labor Movement
The American Labor Movement
Congressional control over labor unions
Congressional control over labor unions
– Taft-Hartley Act of 1947
– 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
• 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
Slide 29-17
Slide 29-18
The American Labor Movement
The American Labor Movement
Congressional control over labor unions
Congressional control over labor unions
– Taft-Hartley Act of 1947
– Taft-Hartley Act of 1947
• Prohibited jurisdictional disputes
– Disputes involving two or more unions over
which should have control of a particular
jurisdiction
Slide 29-19
• Prohibited sympathy strikes
– A strike by a union in sympathy with another
union’s strike or cause
Slide 29-20
5
The American Labor Movement
The American Labor Movement
Congressional control over labor unions
Congressional control over labor unions
– Taft-Hartley Act of 1947
– 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
• Established the 80-day-cooling-off period
Slide 29-21
Decline in Union Membership
Slide 29-22
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 percent of
wage and salary employment
• Today
– 25 percent
Figure 29-1
Slide 29-23
Slide 29-24
6
The American Labor Movement
Explaining the fall in union membership
– Persistent illegal immigration
Unions and Collective
Bargaining Contracts
Collective bargaining sets a minimum
wage
Contract (two to three years)
establishes:
– Deregulation
– Increase in female labor force
participation
– Fringe benefits
– Maximum work days
– Increase in global competition
– Working conditions
Slide 29-25
Unions and Collective
Bargaining Contracts
Slide 29-26
Unions and Collective
Bargaining Contracts
Strikes: the ultimate bargaining tool
– First strike—1786
Strikes: the ultimate bargaining tool
– Strikebreakers can reduce the bargaining
power of the strike
– Purpose
• Temporary or permanent workers hired by a
company to replace union members who are
striking
• Impose costs and reduce profits of the
employer
Slide 29-27
Slide 29-28
7
Number of Union Strikes
on the Decline
The Declining Number
of Labor Strikes
Up until 1990, about 2.5 million
workers were involved in strikes in a
typical year.
Since then, this figure has fallen to
265,000.
Not only are fewer workers unionized,
but those unions that exist are less
likely to initiate work stoppages.
Slide 29-29
Union Goals
Figure 29-2
Slide 29-30
Source: U.S. Bureau of Labor Statistics
Unions Must Ration Jobs
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.
Wage Rate per Hour
S
WU
A
B
E
We
D
QD
Slide 29-31
Figure 29-3
Qe
QS
Quantity of Labor per Time Period
Slide 29-32
8
Union Goals
Union Goals
Unions are monopoly sellers of a
service
Unions must ration the available
jobs by:
Three wage and employment
strategies
– Seniority
– Apprenticeship
– Employ all union members
– Maximize member income
– Maximize wages for certain workers
Slide 29-33
What Do Unions Maximize?
Slide 29-34
Union Goals
Wage Rate per Hour
Limiting entry over time
W2
W1
D
MR
0
Figure 29-4
– 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.
Maximum total union
member income earned
W3
Q3
Q2
Q1
Quantity of Labor per Time Period
Slide 29-35
Slide 29-36
9
Restricting Supply Over Time
If union membership limited
to Q1, wages increase to 21
instead of 20 and employment
is reduced
Union Goals
Altering the demand for union labor
– Increasing worker productivity
– Increasing the demand for union-made
goods
– Decreasing the demand for non-unionmade goods
Figure 29-5
Slide 29-37
Union Goals
Slide 29-38
Have Unions Raised Wages?
Question
Research findings
– Why would the strategy of increasing the
demand for union labor be preferred over
the limiting-entry strategy?
– In selected industries (airlines and
construction) union wage differential
is high as 50 percent
– Higher differentials during recessions
– On average, the differential is 10 to 20
percent
Slide 29-39
Slide 29-40
10
Can Unions
Increase Productivity?
Can Unions
Increase Productivity?
Evidence that unions reduce productivity
Evidence that unions reduce productivity
– Featherbedding
– Resistance to new technology
• Any practice that forces employers to use more
labor than they would otherwise or use existing
labor in an inefficient manner
• Painters and paint sprayers
• Plumber and PVC pipe
– Strikes
Slide 29-41
Can Unions
Increase Productivity?
Slide 29-42
The Benefits of Labor Unions
Evidence that unions increase
productivity
Unionism probably raises social
efficiency.
– By providing a collective voice, unions:
• Improve worker morale
• Reduce turnover
Unions appear to reduce wage
inequality.
Unions seem to reduce profits.
Slide 29-43
Slide 29-44
11
The Benefits of Labor Unions
The Benefits of Labor Unions
Internally, unions provide a political
voice for all workers, and unions have
been effective in promoting general
social legislation.
What do you think?
– Are unions really just monopolies that
create member benefits by establishing a
barrier to entry?
Unions tend to increase the stability of
the workforce.
Slide 29-45
Monopsony:
A Buyer’s Monopoly
Slide 29-46
Monopsony:
A Buyers Monopoly
Question
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
– Which schools have the greatest incentive
to cheat under this system?
– The firm is the only buyer of a particular input
The buyer of labor is called a monopsonist,
the single buyer.
Slide 29-47
Slide 29-48
12
Monopsony:
A Buyers Monopoly
Derivation of a Marginal
Factor Cost Curve
The monopsonist faces an upwardsloping 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.
Slide 29-49
Derivation of a Marginal
Factor Cost Curve
Figure 29-6, Panel (a)
Slide 29-50
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
Slide 29-51
Slide 29-52
13
MFC
Panel (a)
MRP > W
We
Wage Rate and Marginal
Revenue Product per Hour($)
S
A
Hire Qm where
MFC = MRP and
pay Wm
Wm
Labor supply
We
MRPc
Qm
Qe
Qe
Labor Input (worker-weeks)
Slide 29-53
Summary of Pricing and
Employment
Under Various Market Conditions
Panel (b)
Wage Rate and Marginal
Revenue Product per Hour($)
Firm operating in perfect
competition in both
input and output markets
MRP
Figure 29-7
Firm operating in perfect
competition in the input
market but a monopoly in
the output market
Labor supply
We
Why are fewer workers
hired in this market
compared to perfect
competition in both markets?
Figure 29-8, Panel (b)
Summary of Pricing and
Employment
Under Various Market Conditions
MRPm
Figure 29-8, Panel (a)
Quantity of Labor per
Time Period
Slide 29-54
Summary of Pricing and
Employment
Under Various Market Conditions
Wage Rate, Marginal Factor Cost, and
Marginal Revenue Product per Hour ($)
MFC, MRP, and Wage Rate per Worker-Week ($)
Marginal Factor Cost Curve
for a Monopsonist
Panel (c)
Firm operating as
monopsonist in the
input market and a
perfect competitor
in the output market
MFC
S
• Hire where MFC = MRPc
• W = WC
• WC < MRP
Wc
Qm
MRPc
Q1
Quantity of Labor per
Time Period
Slide 29-55
Figure 29-8, Panel (c)
Quantity of Labor per
Time Period
Slide 29-56
14
Wage Rate, Marginal Factor Cost, and
Marginal Revenue Product per Hour ($)
Summary of Pricing and
Employment
Under Various Market Conditions
Panel (d)
MFC
Firm operating as
a bilateral monopoly
S
• Hire where MFC = MRPm
• Why is wage indeterminate?
Issues and Applications:
A Tale of Two Wage Differentials
Over the past 20 years, the gap between
union and nonunion wages overall has
narrowed.
But among public sector employees, the
average union wage gap is 22 percent.
Wm
This generous wage premium for unionized
government employees helps explain the
growth in public-sector union membership.
MRPm
Q2
Figure 29-8, Panel (d)
Quantity of Labor per
Time Period
Slide 29-57
Summary Discussion
of Learning Objectives
Slide 29-58
Summary Discussion
of Learning Objectives
The current status of U.S. labor unions
The American labor-union movement
– Types of unions
– Union membership has declined from
one-fourth of American workers to onetenth since the 1950s.
• 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
Slide 29-59
Slide 29-60
15
Summary Discussion
of Learning Objectives
Summary Discussion
of Learning Objectives
Basic goals and strategies of labor
unions
Effects of labor unions on wages
and productivity
– Maximize total income of members
– Restrict entry of new workers in the union
– Union members wages are 10 to 20
percent higher
– Increase worker productivity
– Evidence on productivity is unclear
– Reduce the demand for non-union labor
– Increase the demand for union labor
Slide 29-61
Summary Discussion
of Learning Objectives
Slide 29-62
Summary Discussion
of Learning Objectives
How a monopsonist determines how
much labor to employ and what wage
rate to pay
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
– Equate MRP and MFC
– Set the wage on the supply curve for labor
– Wage is less than MRP
Slide 29-63
• 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
Slide 29-64
16
End of Chapter
Chapter 29
Unions and Labor Market
Monopoly Power
Copyright © 2004 Pearson Addison Wesley. All rights reserved.
17