Chapter 29

Chapter 29
Unions and Labor
Market Monopoly
Power

Introduction
Every day, some people who might other wise be
gainfully employed chose not to work as part of a
union-coordinated work stoppage.
What is the economic purpose of a labor union strike?
More generally, what are the costs and benefits of labor
union activities?
In this chapter, you will contemplate the answers to
these questions.

Copyright ©2014 Pearson Education, Inc. 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


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


29-4

Chapter Outline
•
•
•
•

Industrialization and Labor Unions
Union Goals and Strategies
Economic Effects of Labor Unions
Monopsony: A Buyer’s Monopoly


29-5

Did You Know That ...
• In the U.S., 14.6 million workers belong to labor
unions?

• Labor Unions
– Worker organizations that seek to secure
economic improvements for their members
• Traditionally, a key rationale for forming a union
has been for members to increase their earnings
by creating a type of monopoly power.


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


29-7

• 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

29-8

(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


29-9

(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


29-10

(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


29-11

(cont'd)
• Industrial Unions
– Labor unions that consist of workers from a
particular industry, such as automobile
manufacturing or steel manufacturing


29-12

(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


29-13

(cont'd)
– 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


29-14

(cont'd)
• Prohibited jurisdictional disputes
– Disputes involving two or more unions over which should
have control of a particular jurisdiction


29-15

(cont'd)
• Prohibited sympathy strikes
– A strike by a union in sympathy with another union’s
strike or cause


29-16

(cont'd)
• Prohibited secondary boycotts
– A boycott of companies or products sold by companies
that are dealing with a company being struck


29-17

(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


29-18

(cont'd)
• To understand the current status of labor
unions, we consider
– Worldwide trends in unionization
– U.S. unionization trends


29-19

Figure 29-1 Decline in Union
Membership

Sources: L. Davis et al., American Economic Growth (New York: HarperCollins, 1972), p.
220; U.S. Department of Labor, Bureau of Labor Statistics.

29-20

Table 29-1 The Ten Largest Unions in
the United States


29-21

(cont'd)
• Explaining the fall in union membership
– Deregulation
– Immigration
– Shift from manufacturing to services


29-22

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.


29-23

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


29-24

Example: Symphony Musicians “Win”
a Lengthy Strike
• Recently, the Detroit Symphony experienced
a six-month-long strike by many of its
musicians.
• Following the strike, the new three-year
contract’s minimum threshold for a
musician’s annual pay was $79,000, a
reduction from $104,650 specified in the
previous contract.
• In addition, the number of musicians playing
in the orchestra was reduced.

29-25

Example: Symphony Musicians “Win”
a Lengthy Strike (cont’d)
• Yet, the symphony’s union declared victory,
because the strike resulted in less of a pay
cut than the symphony management had
originally proposed.


29-26

• 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.


29-27

Figure 29-2 Unions Must Ration Jobs


29-28

• Rationing can be done by
– Using the seniority system
– Lengthening the apprenticeship period
– Instituting other rationing methods


29-29

Figure 29-3 What Do Unions Maximize?


29-30

• Union wage and employment strategies
include:
– Employing all union members
– Maximizing member income
– Maximizing wage rates for certain workers


29-31

What If . . . The government required all workers
to be unionized so that they could earn higher
wages?

• If all workers had to be unionized, then
those who were employed would earn higher
wages.
– Fewer workers would be hired, however, so there
would be a higher unemployment rate.

• Also, some firms would go out of business
due to the higher labor costs.
– The result would be higher prices for consumers.


29-32

• Union strategies to raise wages indirectly
include:
– Limiting entry over time
– Altering the demand for union labor


29-33

• 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


29-34

Figure 29-4 Restricting Supply over
Time


29-35

• 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


29-36

• Do union members earn higher wages?
• Are they more or less productive than
nonunionized workers?
• What are the broader economic effects of
unionization?


29-37

(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


29-38

(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


29-39

(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


29-40

(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


29-41

International Example: The Global PublicUnion Benefits Explosion
• In the U.S., about 40 percent of workers in
the public sector are unionized. This share
is even higher in many other nations:
– In the United Kingdom, 56 percent of
government workers belong to unions, and in
Canada and Ireland, about 70 percent of
government employees do.
– In Scandinavian countries, public-sector
unionization shares exceed 80 percent.


29-42

International Example: The Global PublicUnion Benefits Explosion (cont’d)
• Benefits provided to unionized public
workforces have expanded, sometimes in
the form of early retirement.
• When benefits are included in tabulating
workers’ overall compensation packages,
unionized public workers earn at least 70
percent more than private employees.


29-43

• 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


29-44

(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


29-45

Figure 29-5 Derivation of a Marginal Factor
Cost Curve, Panel (a)


29-46

Figure 29-5 Derivation of a Marginal Factor
Cost Curve, Panel (b)


29-47

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


29-48

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


29-49

Figure 29-6 Wage and Employment
Determination for a Monopsonist


29-50

(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


29-51

Policy Example: Can Minimum Wage Laws Ever
Boost Employment?
• Figure 29-7 on the following slide 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.
• Thus, establishing a minimum wage can generate
higher employment at a monopsony firm.


29-52

Figure 29-7 A Monopsony’s Response to a
Minimum Wage


29-53

Monopsony: A Buyer’s Monopoly (cont'd)

• Bilateral Monopoly
– A market structure consisting of a
monopolist and a monopsonist


29-54

Figure 29-8 Pricing and Employment Under
Various Market Conditions, Panel (a)


29-55

Various Market Conditions, Panel (b)


29-56

Various Market Conditions, Panel (c)


29-57

Various Market Conditions, Panel (d)


29-58

You Are There: A Union Hires a Nonunion
Picketer to Protest Nonunion Hiring
• The Mid-Atlantic Regional Council of Carpenters
(MARCC) has hired workers who are not union
members to march and chant in a picket line
protesting the hiring of non-union carpenters at an
office complex in Washington, D.C.
• By hiring these picketers at the minimum wage of
$8.25 an hour, MARCC has revealed both a
strategy and an objective.
– The strategy is to attempt to raise wages by increasing
the demand for union labor.
– The objective is to maximize net incomes of all members
by hiring non-union picketers rather than their own
higher-wage union members.

29-59

Issues & Applications: Gauging Labor Hours Lost
to Union Disputes Each Year

• On a worldwide basis, more than 10 million
hours of labor are lost to union disputes
each year.
• Figure 29-9 on the next slide displays how
the hours of work lost to labor disputes are
distributed across various nations.


29-60

Figure 29-9 Working Days per Year Lost to
Union Disputes in Selected Nations

Source: International Labor Organization

29-61

Issues & Applications: Gauging Labor Hours Lost
to Union Disputes Each Year (cont’d)

• Union disputes reduce labor time at U.S.
firms by about 300,000 hours annually.
• Thus, losses of labor time caused by union
work stoppages are smaller in the United
States than in several other nations.
• Nevertheless, at the 2013 average hourly
wage rate of $24, these hours of lost labor
otherwise would have generated more than
$7 million of labor income.


29-62

Summary Discussion of Learning
Objectives
• Labor unions
– Craft and industrial unions
• In 1955, the American Federation of Labor merged
with the Congress of Industrial Organization to form
the AFL-CIO

– 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


29-63

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


29-64

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


29-65

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


29-66

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


29-67

Objectives (cont'd)
• Comparing a monopsonist’s wage and
employment decisions with choices by firms
in industries with other market structures
– Perfectly competitive firms take the wage rate as
market determined
– A monopolist in the output market employs
fewer workers
– A monopsonist pays a wage less than the
marginal revenue product of labor


29-68

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Chapter 29