Labor Unions Chapter 11

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Labor UnionsChapter 11
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Introduction

• Unions attempt to maximize the well-being of
  their members.
• Unions can flourish only when firms earn
  above-normal profits.
• Unions provide an institutional mechanism through
  which employers share rents with workers.
• Unions influence practically all aspects of
  employment contracts.

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Unions in the United States

• Union membership rose between 1930 and 1960 and
  then began a steady decline.
• Unionization in the United States has declined
  more rapidly than in other nations.
• Differences in unionization across countries
  arise from variations in the degree of political
  effectiveness of union movements.
• For example, in many European countries unions
  are associated with different political parties.

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Union Membership in the United States, 1900-2002
Sources Barry T. Hirsch and John T. Addison, The
Economic Analysis of Unions New Approaches and
Evidence. Boston, MA Allen Unwin, 1986, pp.
46-47 and Barry T. Hirsch and David A.
Macpherson, Union Membership and Earnings Data
Book Compilations from the Current Population
Survey (2003 Edition). Washington, DC Bureau of
National Affairs, 2003.
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A Brief History of Unions

• Prior to the Great Depression the public did not
  favor unions.
• Employers frequently used yellow dog contracts.
• Stipulated that as a condition of employment, the
  worker could not join a union.
• Under the New Deal in the 1930s, the legal
  environment treating unions and employers
  changed.

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A Brief History of Unions, Continued

• Four major public laws
• The Norris-LaGuardia Act of 1932
• Made yellow dog contracts unenforceable.
• Restricted legal channels employers could use to
  hamper union organizing.
• The National Labor Relations Act of 1935 (Wagner
  Act)
• Defined unfair labor practices, including firing
  workers who join unions.
• Created the NLRB (National Labor Relations Board)
  which enforces the act and runs union
  certification elections.
• The Labor-Management Relations Act of 1947
  (Taft-Hartley Act)
• Weakened union power by allowing states to pass
  right-to-work laws that make it illegal for
  unions to require workers to become union members
  as a condition of employment in unionized firms.
• The Labor-Management Reporting and Disclosure Act
  of 1959 (Landrum-Griffin Act)
• Requires unions to disclose finances and hold
  regular elections.

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A Brief History of Unions, Continued

• Prior to the 1960s public-sector workers were
  specifically prohibited from forming unions.
• In 1962, Kennedy gives federal workers the right
  to organized through Executive Order No. 10988.
• Civil Service Reform Act of 1978, prohibits
  Federal workers from striking, but also protects
  the right of federal workers to join or not join
  unions.
• Thus, at the same time that union membership was
  falling, union membership in the public sector
  has been increasing.

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Union Membership in the Public Sector
Source Richard B. Freeman, Casey Ichniowski, and
Jeffrey Zax, "Appendix A Collective Organization
of Labor in the Public Sector," in Richard B.
Freeman and Casey Ichniowski, editors, When
Public Sector Workers Unionize. Chicago
University of Chicago Press, 1988, pp. 374-375
and Barry T. Hirsch and David A. Macpherson,
Union Membership and Earnings Data Book
Compilations from the Current Population Survey
(2003 Edition). Washington, DC Bureau of
National Affairs, 2003.
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The Structure of American Unions

• AFL-CIO at the top of a pyramid
• American Federation of Labor and Congress of
  Industrial Organization.
• A federation of unions American Federation of
  Teachers, United Mine Workers, National Air
  Traffic Controllers Association.
• Unions affiliated with the AFL-CIO make up about
  80 percent of all union membership in the United
  States.
• Goal of AFL-CIO is to provide a single, national
  voice for the diverse unions under its umbrella
  and to support sympathetic political candidates.
• National unions.
• Union members typically belong to a local which
  may represent members is a particular geographic
  area.

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The Structure of American Unions, Continued

• Each tier plays different role in collective
  bargaining
• AFL-CIO does engage in collective bargaining with
  employers.
• Most negotiation typically done by the local
  union.
• AFL-CIO and national unions engage in Political
  lobbying.
• In 1999-2000 the various PACs of the labor
  movement spent 51.6 million in direct
  contributions to candidates.
• Union dues on members average about 1 percent of
  each workers annual income.
• Unions provide range of services to members (i.e.
  low-costs credit cards and subsidized loans)

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Determinants of Union Membership

• A worker joins a union if the union offers him a
  wage-employment package that provides more
  utility than the wage-employment package offered
  by a nonunion employer.
• Wage increases increase firm costs, so there
  could be employment cutbacks.
• If a firms demand curve for labor is inelastic
  the employment reduction is small (and vice
  versa).

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The Decision to Join a Union
The budget line is given by AT, and the worker
maximizes utility at point P by working h hours.
Suppose the proposed union wage increase shifts
the budget line to BT. If the employer cuts
back hours of work to h0, the worker is worse off
(utility falls from U to U0 units). If the
employer cuts back hours to h1, the worker is
better off.
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The Demand for and Supply of Union Jobs

• The demand for union jobs is dependent on the
  size of the wage increase, the amount of
  employment loss, and the costs of union
  membership
• The supply of union jobs depends on the ability
  to organize a workforce, the legal environment
  affecting union activities, the resistance of
  management, and whether a firm is making excess
  rents.
• Workers employed in concentrated industries are
  more likely to be unionized.
• Unionization rates positively correlated with
  unemployment rate and the rate of inflation.

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Why Has Union Membership Declined?

• Manufacturing sector has declined.
• Job locations have shifted to south and west
  where there are more right-to-work states.
• There has been an increase in labor force
  participation rates of women, who have lower
  unionization rates than men.
• Workers demand for union jobs has declined.
• Unions much less likely to win certification
  elections.
• Firms have become more resistant to unions
  because of increased competition from abroad and
  deregulation.

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Monopoly Unions

• Assume, unions seek to maximize utility which is
  a function of wages and employment. So can
  imagine that there are indifference curves for
  the union.
• Assume unions deal with profit maximizing
  competitive firms, so firms cannot influence the
  price of output and each firm has a downward
  sloping labor demand curve.
• Can view the firms labor demand curve as a
  constraint on union behavior.
• Suppose that the union is the sole seller of
  labor.

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The Behavior of Monopoly Unions
A monopoly union maximizes utility by choosing
the point on the demand curve D that is tangent
to the unions indifference curve. The union
demands a wage of wM dollars and the employer
cuts back employment to EM (from the competitive
level w). If the demand curve were inelastic
(as in D? ), the union could demand a higher wage
and get more utility.
Some workers lose their jobs
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Unions and market efficiency
In the absence of unions, the competitive wage is
w and national income is given by the sum of the
areas ABCD and A?BCD?. Unions increase the wage
in sector 1 to wU. The displaced workers move to
sector 2, lowering the nonunion wage to wN.
National income is now given by the sum of areas
AEGD and A?FGD?. The misallocation of labor
reduces national income by the area of the
triangle EBF.

Dollars

Dollars

A

D


2
A'




B




w
D


1



D'

D


C

Sector 1

_

Employment

E

H

0

E'



1
1
_

Sector 2

E'

E

0

H

Employment



2
2
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Policy application unions and resource allocation

• Unions reduce the total value of labors
  contribution to national income
• One estimate of the loss in national income is
  approximately .11 percent, a relatively small cost

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Efficient Contracts

• The wage-employment solution implied by monopoly
  unionism is inefficient because unions reduce the
  value of labors contribution to national income.
• Suggests that the union and the firm could reach
  an alternative agreement that makes at least one
  of them better off without making the other worse
  off.
• This would involve reaching an agreement that is
  not on the firms demand curve.

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The Demand Curve and the Firms Isoprofit Curve
Suppose that the wage is w, then the optimal
level of employment is E. Suppose that the
firms profits are 100,000 at this point.
Dollars
P
w
P
P
p100,000
p150,000
p200,000
Employment
E
E
E
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Efficient Contracts and the Contract Curve
At the competitive wage w, the employer hires E
workers. A monopoly union moves the firm to
point M, demanding a wage of wM. Both the union
and firm are better off by moving off the demand
curve. If all bargaining opportunities between
the two parties are exhausted, the union and firm
agree to a wage-employment combination on the
contract curve PZ.
Dollars
Zero isoprofit curve
wZ
pZ
M
wM
Z
UZ
R
pM
UR
Q
UM
w
U
P
p
Min utility the union will accept
Employment
E
EZ
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Efficient Contracts, Continued

• Agreements along the contract curve are
  efficient.
• The contract curve lies to the right of the
  contract curve.
• This implies that efficient bargaining involves
  more than the unions making wage demands and the
  firm responding by moving along the demand curve.
• Rather, unions and firms bargain over both wages
  and employment.

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Featherbedding

• Featherbedding occurs when labor contracts
  require overstaffing.
• This happens whenever the contract curve is
  upward sloping.
• Featherbedding practices are negotiated to make
  work for the extra staff

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Strongly efficient contracts

• If the contract curve is vertical, the deal
  struck between the union and the firm is strongly
  efficient because the unionized firm is hiring
  the competitive level of employment
• Under such a situation, the union captures some
  of the firms rents
• The terminology does not imply allocative
  efficiency, but under strongly efficient
  contracts firms hire the right amount of labor

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Strongly Efficient Contracts A Vertical
Contract Curve
If the contract curve PZ is vertical, the firm
hires the same number of workers that it would
have hired in the absence of a union. The union
and firm are then splitting a fixed-size pie as
they move up and down the contract curve. At
point P, the employer keeps all the rents at
point Z, the union gets all the rents. A contract
on a vertical contract curve is called a strongly
efficient contract.
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Evidence on Efficient Contracts

• Empirical studies have found that wage-employment
  outcomes in unionized firms do NOT lie on the
  labor demand curve.
• There is disagreement over whether the contract
  curve is vertical or upward sloping.