Ch. 27: Wages, Unions, and Labor

Del Mar College

John Daly©2003 South-Western Publishing, A Division of Thomson Learning

Types of Unions

• Craft or Trade Union: a union whose membership is made up of individuals who practice the same craft or trade.

• Industrial Union: a union whose membership is made up of workers who work in the same firm or industry but do not all practice the same trade or craft.

• Public Employees Union: a union whose membership is made up of workers who work for local, state, or federal government.

• Employee Association: an organization whose members belong to a particular profession.

Some Objectives of Labor Unions

• Employment for all Members• Maximizing the Total Wage Bill:

Maximizing the dollar amount coming from the employer to the union members. The total wage bill is maximized where the demand for labor is unit elastic.

• Maximizing income for a limited number of union members.

Labor Union Objectives

If total membership in the union is Q1, and the union’s objective is employment for all its members, it chooses W1. If the objective is to maximize the total wage bill, it chooses W2, where the elasticity of demand for labor equals 1. If the union’s objective is to maximize the income of a limited number of union workers (represented by Q3), it chooses W3.

Elasticity of Demand for Union Labor

• Availability of Substitute Products: unions would attempt to reduce the availability of substitutes for the products they produce, through such means as import restrictions.

• Availability of Substitute Factors: Two general substitutes for Union labor: Nonunion labor and certain types of machines; unions would attempt to reduce the availability of nonunion labor and nonhuman workers by opposing relaxation of immigration laws, supporting a high minimum wage, and opposing automation substitutes for labor.

For union A, which has an inelastic demand for its labor between W1 and W2, a higher wage rate brings about a smaller cutback in the quantity of labor than for union B, which has an elastic demand for its labor between W1 and W2. We predict that union B will be less likely to push for higher wages than union A because of its wage-employment tradeoff is more pronounced.

The Demand for Union LaborLabor unions can try to meet their objectives by increasing

the demand for union labor.• Increasing Product Demand: Unions occasionally urge

the public to buy union products, or support legislation that keeps out imports or makes the imports more expensive

• Increasing Substitute Factor Prices: Unions have often lobbied for an increase in the minimum wage.

• Increasing Marginal Physical Product: unions prefer to add skilled labor to their ranks, and they sometimes undertake training programs for new entrants.

Decreasing the Supply of Labor• One method to achieve Union objectives includes

decreasing the supply of labor, which translates to higher wage rates.

• A closed shop is an organization in which an employee must belong to the union before he or she can work: Currently Prohibited by Taft-Hartley Act.

• A union shop is an organization does not require individuals to be part of a union to be hired, but does require them to join the union within a certain period of time after becoming employed.

Affecting Wages Directly

• Collective bargaining is the process whereby wage rates are determined by the union bargaining with management on behalf of all its members.

• Collective bargaining is unlikely to be successful unless a union can strike.

• A strike occurs when unionized employees refuse to work at a certain wage or under certain conditions.

Strikes

The purpose of a strike is to convince management that the supply curve is what the union says it is. This often depends on the ability of striking union employees to prevent nonstriking and nonunion employees from working for management at a lower wage rate than the union is seeking through collective bargaining.

Successful Collective Bargaining By The Union

We start at a wage rate of W1. The union’s objective is to increase the wage rate to W2. This means the union holds that the new supply curve is SS – the heavy supply curve. To convince management that the new supply curve looks as the union says it does, the union will have to either threaten a strike or call one. We assume that the union is successful at raising the wage rate to W2. As a consequence, the quantity of labor employed is less than it would have been at W1.

Q & A

• What will lower the demand for union labor?

• What is the difference between a closed shop and a union shop?

• What is the objective of a strike?

The Case of Monopsony

• A single buyer in a factor market is known as a monopsony. A monopoly is a single seller of a product; a monopsony is a single buyer of a factor.

• Marginal factor cost increases as it buys additional units of a factor, and the supply curve of the factor is different from the monpsonist’s marginal factor cost curve.

The Labor Union and the MonopsonistFor the

monopsonist, higher wage rates do not imply fewer persons working

Facing a Monopsonist?• Some persons contend that labor unions and

collective bargaining are necessary in situations where labor is being paid less than its marginal revenue product.

• Successful collective bargaining on the part of the labor union in this setting will not be subject to the wage-employment tradeoff it encounters in other settings.

• There is no wage-employment tradeoff for the labor union when it faces a monopsonist. It is possible to raise both the wage rate and the number of workers employed.

Union Effects on Wages

• Most studies show that some unions have increased their members’ wages substantially whereas other unions have not increased their members’ wages at all.

• There are theoretical and empirical reasons for believing that labor unions increase the wages of union employees and decrease the wages of nonunion employees.

• The percentage of the national income that goes to labor (Union plus nonunion) has been fairly consistent over time.

SOURCE: Statistical Abstract of the United States, 1999.

Median Weekly Earnings in the Union and Nonunion Sectors, Selected Industries, 1998

In five of the six industries shown, union workers earned a higher weekly salary in 1998 than did nonunion workers. Overall in 1998, the median weekly salary was $659 for a union worker and $499 for a nonunion worker.

The Effect of Labor Unions on

Union and Nonunion Wages

We begin at a wage rate of W1 in both unionized sector (a) and the nonunionized sector (b). Next, the union manages to increase its wage rates to W2 either through collective bargaining or by decreasing the supply of labor in the unionized sector (shown). Fewer persons now work in the unionized sector, and we assume that those persons who lose their jobs move to the nonunionized sector. The supply of labor in the nonunionized sector rises and the wage rate falls.

Unions’ Effects on Prices

• Higher union wages ill cause higher prices for the products the union labor produces.

• Lower nonunion wages mean lower costs for the firms that employ nonunion labor and thus lower prices for the products produced by nonunion labor

Unions’ Effects on Productivity & Efficiency: The Traditional View• Labor unions have a negative impact on

productivity and efficiency.• They often have unnecessary staffing

requirements and insist that only certain persons be allowed to do certain jobs.

• Strikes disrupt production and prevent the economy from realizing its productive potential.

• Labor Unions drive an artificial wedge between the wages of comparable labor in the union and nonunion sectors of the labor market.

Union’s Effects on Productivity & Efficiency: A New View

• Without a labor union, workers who are disgruntled with their jobs, who feel taken advantage of by their employers, or who feel unsafe in their work will leave their jobs and seek work elsewhere.

• The labor union makes the employees feel more confident, less intimidated, and more secure in their work. Such positive feelings usually mean happier, more productive employees. Some proponents of this view also hold that the employees are less likely to quit their jobs.

Q & A

• What is a major difference between a monopsonist and a factor price taker?

• Under what conditions will the minimum wage increase the number of people working?

• How could a collectively bargained higher wage rate in the unionized sector of the economy lead to a lower wage rate in the nonunionized sector of the economy?