Chapter 17: Economics of Labor Unions: Market Power, Bargaining, and Economic Impact

Learning Objectives for Labor Union Analysis

  • LO17-1: Wage Security Mechanisms: Understanding the specific economic maneuvers and market controls labor unions employ to secure higher wages for their members.

  • LO17-2: Collective Bargaining Dynamics: Identifying the various factors, pressures, and market conditions that influence the outcomes of direct negotiations between management and organized labor.

  • LO17-3: Impact on Nonunion Markets: Analyzing the spillover effects of union activities on the wages and labor supply of nonunionized sectors.

The Fundamental Nature and Structure of Labor Unions

  • Consolidation of Market Power: A labor union serves as an organization that strives to consolidate market power on the supply side of the labor market.

  • Historical Sector Shift:     - In recent decades, union power within the private sector has significantly waned.     - Conversely, union power in the public sector has experienced growth.     - This shift is a direct reflection of the United States' transition from a goods-based economy toward a services-based economy.

  • The Multiplicity of Labor Markets:     - Contrary to media portrayals of a single, monolithic "labor market," there are actually several distinct markets.     - Markets are separated by specific skills: Each individual skill set operates within its own market.     - Geography: Labor markets are geographically separated, meaning a specific market typically includes only a tiny portion of the national workforce.

  • Local Market Control: Market power is most likely to manifest in specific geographic areas, occupations, or industries.     - To achieve success, a union must exert control over the labor market supply curve.     - The ultimate strategic goal is for the union to act as a monopoly provider of workers.

Types and Objectives of Labor Organizations

  • Classification of Unions:     - Industrial Unions: These organizations focus their efforts on representing all workers within a particular industry, regardless of their specific trade or skill level.     - Craft Unions: These organizations represent workers who possess a particular, specialized skill or trade.

  • Core Functional Purpose: Both industrial and craft unions aim to coordinate the actions of thousands of individual workers to achieve collective control over the market supply.

  • Primary and Secondary Objectives:     - Wages: The central focus of labor unions is to raise the wage rates of their members.     - Working Conditions: Improving the safety and environment of the workplace.     - Job Security: Protecting members from arbitrary dismissal or economic fluctuations.     - Retirement Funds (Pensions): Securing long-term financial stability for members after their careers.     - Vacation Time: Negotiating for paid time off.     - Health Insurance and Benefits: Ensuring comprehensive coverage for medical and other auxiliary needs.

The Economic Theory of Union Wage Determination

  • Monopolist Behavior: Because unions consolidate supply, they act as a monopolist and face a downward-sloping labor demand curve.

  • The Marginal Wage Curve:     - Corresponding to the downward-sloping demand, the marginal wage curve also slopes downward.     - Definition of Marginal Wage: The change in total wages paid associated with a one-unit increase in the number of workers employed.     - Falling Rates: Because the labor demand curve slopes downward, an increase in hiring requires a decrease in wage rates, which causes the marginal wage to fall even faster than the wage rate itself.     - Negative Marginal Wage: Marginal wage can mathematically become negative; however, no union will accept a employment level where the marginal wage is negative.

  • Identifying Desired Outcomes:     - The union’s desired number of employees is determined by the intersection of the marginal wage curve and the labor supply curve (noted as point u in economic models).     - The specific wage rate sought for this number of workers is identified at point U on the demand curve.

Mechanisms of Exclusion and Supply Control

  • The Exclusion Requirement: At a high union wage (e.g., $4\$4), the number of people wanting to work (point H) exceeds the number of available jobs (point U).

  • Control Tactics:     - Unions must be able to exclude non-union workers from the market to maintain high wages.     - Union members must agree not to compete against one another by accepting lower wages.     - Members must be committed to withholding labor (initiating a strike) if called upon.

  • Union Shop: A workplace arrangement where all employees in a plant are required to be union members, allowing the union to control the labor supply decisions of individual workers.

Historical Trends in Unionization

  • The Manufacturing Peak: Union power grew substantially in the private manufacturing sector, reaching its peak in the 1950s.

  • International Context: Union membership rates in the United States are documented to be far below those of other industrialized nations.

  • Sectoral Divergence: Current trends show a steady decline in private-sector unionization contrasted with a rise in the service-oriented public sector.

Employer Market Power: The Monopsony Model

  • Monopsony Definition: A market structure characterized by only one buyer. This occurs when a single firm dominates the hiring in a specific industry or geographic area.

  • The Supply Constraint: A monopsonist faces the entire market labor supply curve. To hire additional workers, the firm must offer a higher wage to attract them.

  • Marginal Factor Cost (MFC):     - Definition: The change in total costs resulting from a one-unit increase in labor employed.     - The MFC Premium: The MFC will always exceed the wage rate because hiring an additional worker requires raising the wage rate for all existing workers as well.     - Graphing the MFC: The MFC curve lies above the labor supply curve.

  • Profit Maximization for the Monopsonist:     - A profit-maximizing firm will hire labor up to the point where Marginal Revenue Product (MRPMRP) equals Marginal Factor Cost (MFCMFC).     - MRP=MFCMRP = MFC: This equality determines the quantity of labor the monopsonist wants to hire (point U).     - The wage the monopsonist pays is the minimum required to get that number of workers, shown by point G (found on the supply curve).

  • Comparison to Competitive Markets: In a competitive labor market, the wage and employment level would be found at point C, where supply and demand intersect.

Bilateral Monopoly and Collective Bargaining

  • The Conflict of Interest:     - Unions desire a wage rate higher than the competitive equilibrium.     - Monopsonists desire a wage rate lower than the competitive equilibrium.

  • Bilateral Monopoly: A market condition where there is only one buyer (monopsonist) and only one seller (union).

  • Collective Bargaining Mechanics: In a bilateral monopoly, wages and employment levels are not set by standard supply and demand. They are determined by direct negotiations between employer and union.

  • The Bargaining Zone: Negotiations typically find a compromise within the "shaded triangle" on a graph bounded by the union's requested wage (point U), the employer's preferred wage (point G), and the competitive equilibrium (point C).

  • Negotiation Power Tools:     - Strike: The union's power to withhold labor.     - Lockout: The employer's power to withhold jobs.

  • Pressure to Settle: Both parties suffer financial losses during a work stoppage, regardless of who initiates it. Consequently, most collective bargaining concludes without a strike or lockout.

Economic Impacts and the Future of Unions

  • Relative Wages: Union members generally earn higher wages than nonunion workers due to negotiating power and restrictive membership.

  • The Displacement Effect:     - When unions restrict the number of workers to raise wages, the supply curve for union labor shifts left.     - Displaced workers who cannot find union jobs migrate to nonunion sectors.     - This creates a rightward shift in the labor supply of nonunion markets, which subsequently causes nonunion wages to fall.

  • Productivity and Costs:     - Unions bargain for work rules and conditions that can affect production methods.     - Some union rules may inhibit productivity, leading to higher production costs and potential price increases for consumers.

  • Political Influence: Unions are significant contributors to political campaigns for candidates who support favorable legislation, such as:     - Minimum wage laws.     - Work and safety regulations.     - Retirement benefits.

  • Reasons for Membership Decline:     - The relative decline of the manufacturing sector.     - Corporate downsizing and the rapid growth of smaller, nonunionized companies.     - Increased global competition.

  • Survival Strategies: To maintain influence, unions have resorted to merging to consolidate power and aggressively pursuing unionization in the public sector and service industries.