Study Notes on Wages, Unions, and Labor Economics
CHAPTER 13: WAGES, UNIONS, AND LABOR ECONOMICS
Introduction
This chapter discusses the various aspects of labor unions, their functions, and their impacts on wages and employment in the economy. Presented by Roger A. Arnold with insights from Paul Schneiderman, Ph.D., Professor of Finance & Economics, Southern New Hampshire University.
In This Lecture…
Types of Unions
Objectives of a Union
Practices of a Labor Union
Monopsony
Effects of Unions
Types of Unions
Craft (Trade) Union: A union whose membership is composed of individuals who practice the same craft or trade. This type of union organizes workers based on specific skills or trades (e.g., electricians, plumbers).
Industrial Union: A union made up of workers from the same firm or industry, regardless of their specific craft or trade. For example, workers in automobile manufacturing, regardless of whether they are assembly line workers or quality inspectors.
Public Employee Union: A union that represents individuals who work for local, state, or federal government, encompassing a wide range of job functions from teachers to police officers.
Employee Association: An organization that includes members of a particular profession, often focusing on professional development and advocacy (e.g., medical associations).
Objectives of Labor Unions
Labor unions have several broad objectives, including:
To employ all their members: Unions strive to ensure employment for all their members, reflecting their commitment to job security.
To maximize the total wage bill: This involves increasing the overall wages paid to union members, benefiting from collective bargaining power.
To maximize income for a limited number of union members: For instance, in specific cases such as the interstate bakery example, the focus might shift to improving wages for select members rather than the entirety of the workforce.
Labor Union Objectives Detailed
If total membership in the union is Q1, the union might choose a wage rate of W1 with the objective of employing all available members.
If the union aims to maximize income for a selective group (Q3), it would opt for a wage rate of W3.
Maximizing the total wage bill involves selecting a wage rate of W2, where the elasticity of demand for labor equals 1.
The Wage-Employment Tradeoff
Unions can negotiate higher wages for members; however, achieving higher wages may result in a loss of jobs for some union members.
Analyzing the tradeoff involves understanding that higher wage rates can lead to decreased employment opportunities due to reduced demand for labor.
Two Cases of the Wage-Employment Tradeoff
Union A: Has inelastic demand for its labor between wage rates W1 and W2. An increase in the wage leads to a smaller reduction in the quantity of labor.
Union B: Exhibits elastic demand between the same wage rates. An increase here leads to a more significant reduction in labor quantity, indicating that Union B may be less inclined to push for higher wages due to pronounced tradeoffs.
Practices Affecting Elasticity of Demand for Labor
Unions can influence elasticity of demand through several practices:
Availability of substitute products (e.g., domestic vs. foreign automobiles affects demand elasticity).
Availability of substitute factors: Alternatives to union labor, such as nonunion labor or equipment, impact labor demand.
Labor Practices Affecting Demand for Labor
Increasing product demand: Boosting demand for the union's product positively impacts labor demand.
Increasing substitute factor prices: The rise of costs for alternative inputs leads to a higher demand for union labor.
Increasing marginal physical product (productivity): Enhanced productivity can raise demand for labor.
Labor Practices Affecting Supply of Labor
Closed Shop: Requires all employees to be union members before hiring, ensuring that only union workers are accepted.
Union Shop: Allows hiring of nonunion workers who must join the union within a specified period after employment.
Labor Practices Affecting Wages Directly
Collective Bargaining: The negotiation process through which unions discuss wage rates and other employment standards with management on behalf of union members.
Strike: A collective action where union workers refuse to work to pressure management regarding wage rates or working conditions, intending to force compliance with union demands.
Successful Collective Bargaining by the Union
The union aims to raise the wage rate to W2—indicating a new supply curve for labor represented as S'S.
To validate this new supply curve to management, the union may threaten or initiate a strike.
If successful, the wage rate rises to W2 (and quantity to Q2), reducing the quantity of labor employed compared to W1 and Q1.
Self-tests and Applications
What will lower demand for union labor? Demand is reduced by:
A decline in demand for products produced by union labor.
A decline in prices of substitute factors.
A decrease in the marginal physical product of union labor.
Difference between closed shop and union shop:
A closed shop mandates union membership before hiring, while a union shop allows employment without prior membership but requires joining within a designated timeframe.
Objective of a strike: To demonstrate to management that union members will not accept wages below what the union stipulates as acceptable.
Monopsony and the Labor Market
A monopsonist is the sole buyer in a labor market.
Marginal Factor Cost (MFC) rises when buying additional labor units. In an efficient market, workers would be paid at a wage rate where MFC equals Marginal Revenue Product (MRP); however, monopsony power allows lower wage payments.
The Labor Union and the Monopsonist
For the monopsonist, it holds that MFC > wage rate, indicating its supply curve lies beneath the MFC curve.
The monopsonist operates by hiring quantity of labor Q1 at wage W1, which remains below the true value of labor (MRP).
The Union's Role in Monopsony
If a union influences wage increase to W2 through collective bargaining, the monopsonist may then hire a greater quantity of labor (Q2 instead of Q1).
This model suggests that in monopsony cases, increasing wage rates does not necessarily mean fewer jobs.
Median Weekly Earnings in the Union and Nonunion Sectors (2004)
The following earnings data are presented:
Construction: Union - $588 | Nonunion - $654
Manufacturing: Union - $692 | Nonunion - $590
Wholesale and Retail Trade: Union - $650 | Nonunion - $521
Finance, Insurance, and Real Estate Services: Union - $884 | Nonunion - $750
Effect of Labor Unions on Union and Nonunion Wages
Initial wage rate: Both unionized (a) and non-unionized sectors (b) start at $15. When the union raises its rate to $18, it may lead to fewer workers in the unionized sector, compelling some to transition to non-union jobs, thereby increasing supply in non-union sectors and subsequent decline in wages there.
Traditional vs. New Views of Unions
Traditional View: Unions are perceived as detrimental to productivity and efficiency by:
Demanding unnecessary staffing levels.
Initiating strikes that disrupt production flow.
Creating a wage gap between union and nonunion workers.
New View: Posits:
Unions provide collective voice and representation for workers.
Improve workers' confidence and reduce intimidation from employers, fostering increased productivity and lower turnover rates.
Self-tests on Monopsony and Wage Conditions
Difference between monopsonist and factor price taker: A monopsonist must increase prices to hire additional units of labor, unlike a factor price taker, which can source labor at a constant price.
Minimum wage impact: A minimum wage increases employment only when:
The firm hiring is a monopsonist.
The minimum wage is set above the current wage yet below the MFC equal to MRP.
Effect of higher union wages on nonunion wages: If union wages increase and reduce employment in the union sector, the jobless may transition to the nonunion sector, thus increasing labor supply there and driving down nonunion wage rates.