Labor Unions

1
Labor Unions

• There is a strength in the union of even very
  sorry men
• Homer, The Iliad

2
Union Membership as a Percentage of All Workers,
by Sector, US 1973-2002
3
Union Membership and Bargaining Coverage,
Selected Countries, 2004
4
Supply side factors

• Prior to the Great Depression the public did not
  favor unions
• Employers frequently used yellow dog contracts
• Under the New Deal in the 1930s, the legal
  environment treating unions and employers changed
• Four major public laws
• The Norris-LaGuardia Act of 1932
• The National Labor Relations Act of 1935
• The Labor-Management Relations Act of 1947
• The Labor-Management Reporting and Disclosure Act
  of 1959
• Executive Order No. 10988 of 1962
• The Civil Service Reform Act of 1978

5
Demand side factors
The budget line is given by AT, and the worker
maximizes utility at point P by working h hours.
The proposed union wage increase (from w to wU)
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.
Wage wU
Wage w
6
Demand side factors demographic and industrial
changes
7
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.
8
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.
9
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. At point R, the union is better off, and
the firm is no worse off than at point M. At
point Q, the employer is better off, but the
union is no worse off. 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.
10
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.
11
The Hicks Paradox Strikes are not Pareto Optimal
The firm makes the offer at point RF, keeping 75
and giving the union 25. The union wants point
RU, getting 75 for its members and giving the
firm 25. The parties do not come to an agreement
and a strike occurs. The strike is costly, and
the poststrike settlement occurs at point S each
party keeps 40. Both parties could have agreed
to a prestrike settlement at point R, and both
parties would have been better off.
12
The Optimal Duration of a Strike
Unions will moderate their wage demands the
longer the strike lasts, generating a
downward-sloping union resistance curve. The
employer chooses the point on the union
resistance curve that puts him on the lowest
isoprofit curve (thus maximizing profits). This
occurs at point P the strike lasts t periods and
the poststrike settlement wage is wt.
13
Empirical research

• The above models are associated with several
  different sets of empirical research
• - Tests of the efficiency contract hypothesis
• - Studies of the gap between union and
  non-union wages
• - Studies of the decision to join a union
• - Dispute resolution studies

14
The efficient contract hypothesis

• Tests of the three different models of union
  behaviour (monopoly union, strongly efficient
  contracts and weakly efficient contracts) are
  performed with the use of the following reduced
  form equation
• Where X is a set of non-wage factors that affect
  employment, W is the union wage and Wa is the
  alternative wage
• Indicate a presence of an efficient contract

15
The efficient contract hypothesis

• Farber(1978) tests the hypothesis using data on
  United Mine Workers, while Dertouzos and Pencavel
  (1981), McCurdy and Pencavel (1986) and Brown and
  Ashenfelter (1986) test it with the use of data
  from the International Typographers Union.
• All of them reject the strongly efficient
  contract hypothesis.
• However, this is only a necessary, but not a
  sufficient condition for the presence of weakly
  efficient contracts

16
The effect of unions on wages

• Economists are concerned with two types of wage
  effects of unions
• - The effect of unionization on union wages
• - The effects of unions on the wage dispersion
  in the economy
• - The impact of unions on non-union wages is
  unclear (i) The threat effect is likely to
  increase non-union wages, while (ii) The
  spillover effect to decrease them

17
The effect of unions on wages

• The reduced form equation estimated since Lewis
  (1963) is
• Where U is a dummy variable for union membership
• The problem with this type of specification is
  that it does not account for the non-random
  selection of members into a union (see Table
  below)
• Oaxaca type decompositions have attempted to
  resolve the problem and have found an
  approximately 33 percentage point union-non-union
  wage gap

18
The effect of unions on wages
19
The decision to join a union

• Lee (1978) has contributed a lot to the
  literature that studies the decision to join a
  union.
• Let
• Be the gain of joining a union, while Ci is the
  cost.
• An individual will join a union if Vigt Ci , or

20
The decision to join a union

• We hypothesize that (see Table above)
• In other words, we expect union members to be
  negatively (self)-selected.
• At the same time, firms are likely to select
  workers from the upper parts of the skill
  distribution, leading the an overall compression
  of the union wage distribution.

21
Dispute resolution

• When bargaining fails, disputes are resolved
  through either a strike, or arbitration.
• Strikes are rare in the US and researchers have
  found some support to the asymmetric information
  model
• Arbitration can be either (i) conventional, or
  (ii) final-offer. In both cases, it has been
  found that the union is likely to win. For
  details see your book chapter.