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Chapter 30

Chapter 30. Unions and Labor Market Monopoly Power. Workers and managers at Verizon Communications continued negotiations for a new contract long past the official strike deadline. Why are marathon contract talks now so common in labor disputes?. Introduction. Learning Objectives.

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Chapter 30

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  1. Chapter 30 Unions and Labor Market Monopoly Power

  2. Workers and managers at Verizon Communications continued negotiations for a new contract long past the official strike deadline. Why are marathon contract talks now so common in labor disputes? Introduction

  3. Learning Objectives • Outline the essential history of the American Labor Union movement • Discuss the current status of labor unions in the United States • Describe the basic economic goals and strategies of labor unions

  4. Learning Objectives • Evaluate the potential effects of labor unions on wages and productivity • Explain how a monopsonist determines how much labor to employ and what wage rate to pay • Compare wage and employment decisions by a monopsonistic firm with the choices made by firms in industries with alternative market structures

  5. Chapter Outline • Industrialization and Labor Unions • Union Goals and Strategies • Economic Effects of Labor Unions • Monopsony: A Buyer’s Monopoly

  6. Did You Know That... • Half of U.S. labor union members are in only six states? • Once a union represents all the workers who supply a particular type of labor, an element of monopoly power replaces the competitive outcome?

  7. Industrialization and Labor Unions • Craft Unions • Labor unions composed of workers who engage in a particular trade or skill • Knights of Labor • American Federation of Labor

  8. Industrialization and Labor Unions • Early labor issues • 8-hour workday • Equal pay for men and women

  9. Industrialization and Labor Unions • Collective Bargaining • Bargaining between the management of a company or of a group of companies and the management of a union or a group of unions for the purpose of setting a mutually agreeable contract on wages, fringe benefits, and working conditions for all employees in all the unions involved

  10. Industrialization and Labor Unions • The Congress of Industrial Organization (CIO) was formed in 1938. • It was composed mainly of industrial unions. • Industrial unions consist of workers in a particular industry, regardless of the skills they use on the job.

  11. Industrialization and Labor Unions • Congressional control over labor unions • The Wagner Act (1935) • Gave unions the right to organize workers and to engage in collective bargaining

  12. Industrialization and Labor Unions • Congressional control over labor unions • Taft-Hartley Act of 1947 • Allow right-to-work laws • Laws that make it illegal to require union membership as a condition of continuing employment in a particular firm

  13. Industrialization and Labor Unions • Congressional control over labor unions • Taft-Hartley Act of 1947 • Made closed shops illegal • A business enterprise in which employees must belong to the union before they can be hired and must remain in the union after they are hired

  14. Industrialization and Labor Unions • Congressional control over labor unions • Taft-Hartley Act of 1947 • Prohibited jurisdictional disputes • Disputes involving two or more unions over which should have control of a particular jurisdiction

  15. Industrialization and Labor Unions • Congressional control over labor unions • Taft-Hartley Act of 1947 • Prohibited sympathy strikes • A strike by a union in sympathy with another union’s strike or cause

  16. Industrialization and Labor Unions • Congressional control over labor unions • Taft-Hartley Act of 1947 • Prohibited secondary boycotts • A boycott of companies or products sold by companies that are dealing with a company being struck

  17. Industrialization and Labor Unions • Congressional control over labor unions • Taft-Hartley Act of 1947 • Established the 80-day-cooling-off period • A court injunction can be used to delay a strike if it would imperil the nation’s safety or health.

  18. Decline in U.S. Union Membership Figure 30-2

  19. Industrialization and Labor Unions • Explaining the fall in union membership • Deregulation • Immigration • Shift from manufacturing to services

  20. Policy Example:Who Needs Unions? • Some of the labor protections first secured by unions have become legislated rights for all workers. • For example, many workers now are guaranteed overtime pay by U.S. Department of Labor regulations.

  21. Union Goals and Strategies • Strikes: the ultimate bargaining tool • Purpose is to impose costs and reduce profits of the employer • Workers do not receive wages during the time of the strike, but they may receive some compensation from the union strike fund.

  22. Union Goals and Strategies • Strikebreakers can reduce the bargaining power of the strike • Temporary or permanent workers hired by a company to replace union members who are striking

  23. Union Goals and Strategies • One of the major roles of a union that establishes a wage rate above the market clearing wage rate is to ration available jobs among the excess number of workers who wish to work in unionized industries.

  24. S A B W U E W e D Q Q Q D e S Unions Must Ration Jobs Wage Rate per Hour Quantity of Labor per Time Period Figure 30-3

  25. Union Goals and Strategies • Unions must ration the available jobs by: • Seniority • Apprenticeship

  26. Union Goals and Strategies • Unions are monopoly sellers of a service • Three wage and employment strategies • Employ all union members • Maximize member income • Maximize wages for certain workers

  27. Maximum total union member income earned W 3 W 2 W 1 D MR Q Q Q 3 2 1 Union Goals and Strategies Wage Rate per Hour 0 Quantity of Labor per Time Period Figure 30-4

  28. Union Goals and Strategies • Limiting entry over time • One way to raise wage rates without specifically setting wages is for a union to limit the size of its membership to the size of its employed workforce when the union was first organized.

  29. Restricting Supply Over Time If union membership limited to Q1, wages increase to 21 instead of 20 and employment is reduced Figure 30-5

  30. Union Goals and Strategies • Altering the demand for union labor • Increasing worker productivity • Increasing the demand for union-made goods • Decreasing the demand for non-union-made goods

  31. Economic Effects of Labor Unions • Unions are able to raise wages if they can successfully limit the supply of labor in a particular industry. • Economists estimate that the average union wage premium is $2.25 an hour. • But annual earnings for union workers are not necessarily higher, because they work somewhat fewer hours.

  32. Example: Union Wages in the Automotive Industry • Up until the 1970’s, the only cars manufactured in the U.S. were made by one of four companies, all of whom were highly unionized. • As foreign-based companies such as Toyota and Honda have built plants in the U.S., they have hired nonunion workers.

  33. Example: Union Wages in the Automotive Industry • This gave the foreign-based companies a wage advantage, allowing them to expand their U.S. presence. • The U.S. manufacturers (GM, Ford, Chrysler) has closed many plants and implemented labor-saving technology.

  34. Economic Effects of Labor Unions • How do unions affect labor productivity? • There is some evidence that featherbedding creates inefficiency in the unionized industries. • Some economists argue that unions actually enhance productivity by reducing labor turnover.

  35. Monopsony: A Buyer’s Monopoly • Assumptions • Firm is perfect competitor in the product market: it cannot alter the price of the product it sells and it faces a perfectly elastic demand curve for its product • The firm is the only buyer of a particular input • The buyer of labor is called a monopsonist, the single buyer.

  36. Monopsony: A Buyer’s Monopoly • The monopsonist faces an upward-sloping supply curve of labor. • Consequently, the marginal factor cost of increasing the labor input by one unit is greater than the wage rate. • Thus the marginal factor cost curve always lies above the supply curve.

  37. Derivation of a Marginal Factor Cost Curve Figure 30-7, Panel (a)

  38. Derivation of a Marginal Factor Cost Curve Figure 30-7, Panel (b)

  39. Monopsony: A Buyer’s Monopoly • Monopsonistic Exploitation • Exploitation due to monopsony power: It leads to a price for the variable input that is less than its marginal revenue product. Monopsonistic exploitation is the difference between marginal revenue product and the wage rate. • Bilateral Monopoly • A market structure consisting of a monopolist and a monopsonist

  40. MFC S A W e W m MRP Q Q m e Wage and Employment Determinationfor a Monopsonist MRP > W MFC, MRP, and Wage Rate per Worker-Week ($) Hire Qm where MFC = MRP and pay Wm Labor Input (worker-weeks) Figure 30-8

  41. Labor supply W e MRP c Q e Pricing and EmploymentUnder Various Market Conditions Panel (a) Firm operating in perfect competition in both input and output markets Wage Rate and Marginal Revenue Product per Hour($) Quantity of Labor per Time Period Figure 30-9, Panel (a)

  42. Labor supply W e MRP m Q m Pricing and EmploymentUnder Various Market Conditions Panel (b) Firm operating in perfect competition in the input market but a monopoly in the output market Wage Rate and Marginal Revenue Product per Hour($) Why are fewer workers hired in this market compared to perfect competition in both markets? Quantity of Labor per Time Period Figure 30-9, Panel (b)

  43. MFC S W c MRP c Q 1 Pricing and EmploymentUnder Various Market Conditions Panel (c) Firm operating as monopsonist in the input market and a perfect competitor in the output market Wage Rate, Marginal Factor Cost, and Marginal Revenue Product per Hour ($) • Hire where MFC = MRPc • W =WC • WC < MRP Quantity of Labor per Time Period Figure 30-9, Panel (c)

  44. MFC S W m MRP m Q 2 Pricing and EmploymentUnder Various Market Conditions Panel (d) Firm operating as a bilateral monopoly Wage Rate, Marginal Factor Cost, and Marginal Revenue Product per Hour ($) • Hire where MFC = MRPm • Why is wage indeterminate? Quantity of Labor per Figure 30-9, Panel (d) Time Period

  45. Issues and Applications:A Tale of Two Wage Differentials • Union members will often continue working long past a strike deadline if it means increasing the possibility of a settlement that will avoid plant closings. • Increasingly, union members are concerned with job security and health benefits, not just wage levels.

  46. Summary Discussion of Learning Objectives • Labor Unions • Types of unions • Craft unions • Industrial unions • Labor legislation • In 1935, the National Labor Relations Act (or Wagner Act) granted workers the right to form unions and bargain collectively • The Taft-Hartley Act of 1947 placed limitations on unions’ rights to organize, strike, and boycott

  47. Summary Discussion of Learning Objectives • The current status of U.S. labor unions • In the U.S., about one in eight workers is a union member. • The percentage of the labor force that is unionized has declined due to immigration, global competition, and a shift away from manufacturing employment.

  48. Summary Discussion of Learning Objectives • Basic goals and strategies of labor unions • Maximize total income of members • Restrict entry of new workers in the union • Increase worker productivity • Reduce the demand for non-union labor • Increase the demand for union labor

  49. Summary Discussion of Learning Objectives • Effects of labor unions on wages and productivity • Union members hourly wages are higher • Annual earnings may not be higher • Unions may reduce productivity due to job rules, or may enhance it due to reduced labor turnover.

  50. Summary Discussion of Learning Objectives • How a monopsonist determines how much labor to employ and what wage rate to pay • Equate MRP and MFC • Set the wage on the supply curve for labor • Wage is less than MRP

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