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Lecture 3Industrial Relations Unions provide their members with higher wages, more benefits and greater protection against job loss than workers employed in nonunionized firms. Despite these manifest benefits, the U.S. workforce has become steadily less unionized over the last half century, with the notable exception of the burgeoning public sector. After documenting these stylized facts, we analyze how and why this has happened. This leads into a discussion of how strategic behavior is used in determining work rules.
Unions • Unions are defined as a continuous associations of wage earners for the purpose of maintaining or improving their remuneration and the conditions of their working lives. • Discussions of industrial relations in personnel strategy would be incomplete without an analysis of the union movement, because unions: • play a major role in shaping certain industries and occupations. • reflect deep underlying tensions between shareholders, management and labor, regardless of whether an industry is currently unionized or not.
Industry concentration • 11% of non-farm workforce is unionized, but less than 7% in the private sector. • The highest percentage of union membership is among government, education, and protective service employees. • Transportation, communication, public utilities, construction, and manufacturing have the highest percentage in private industry. • Union membership in production jobs in metropolitan areas, and in the construction industry, has declined. • Current organizing efforts focus on health care, custodial, and hotel and restaurant workers.
Geography of unions • Within the U.S. membership is highest in the industrial belt connecting New York with Chicago though Pittsburgh and Detroit (20 – 30%), lower in upper New England and the west (10 – 20%), and lowest in the South and Southwest (10% or less). • Males are 50% more likely to be union members than females, mainly reflecting their occupational choices. • Union membership differs greatly across countries: Canada 35% France 12% Sweden 85% United Kingdom 40%
How unions promote themselves • Unions trumpet to their members and non-union brothers and sisters the benefits from unionizing: • Higher wages and benefits. • Greater job security • Promotions based on seniority • Are their claims true?
Unions and the economy • Secretary of Labor Department Perez (January 2014): "Workers' ability to form unions . . . has been a cornerstone of a strong middle class. . . . When workers . . . are better able to bargain for their fair share of the value they helped create . . . that leads to greater economic security and economic mobility for everyone.” • AFL-CIO ( American Federation of Labor and Congress of Industrial Organizations” “Unions help bring workers out of poverty and into the middle class. In fact, in states where workers don’t have union rights, workers’ incomes are lower.” • These statements suggest that more unionization would lead to greater overall prosperity.
The economics of unions:competition before unionization Marginal product of labor in nonunionized sector $ $ The tan shaded triangles show net output of firms. The red rectangle shows total payments to labor competitive wage labor in sector to be unionized labor in nonunionized sector
The economics of unions:effects of unionization Labor contracts in the union sector but expands in the nonunion sector. union wage nonunion wage The purple shows the net output of the unionized sector, the tan the net output of the nonunionized sector, the blue wages payments to union workers , the red wages to nonunion workers and the green net loss to the economy.
How unions achieve their gains • Unions negotiate on behalf of all their workers, to prevent employers from making agreements with some of their workers and replacing the others. • Collective bargaining and final offer arbitration over pay and conditions includes : • Conditions for dismissal: “at will” versus “just cause plus grievance procedures”. • Wages and promotion: seniority versus merit. • Other benefits (retirement pensions with defined benefit versus defined contribution) • Note the union would prefer an efficient allocation of labor resources within the firm if they can extract the gains from such an arrangement.
Where unions are likely to be most successful • Unions are more likely to be successful in organizations with: • homogeneous labor (automotive) . . . Since individuals workers are easy to replace there are gains from banding together with a common objective. • costly plants with rigid schedules (airlines) . . . Threating to close a plant or disrupting a schedule is relatively straightforward. • regulated industries (mining) . . . Weighed down with laws, the firm cannot easily counter labor’s proposals. • nonprofit organizations (museums) . . . Firm income net of wages has no residual claimant.
How their composition has changed • Hidden within these gross trends are three composition effects worth mentioning: • Employment in the government sector increased from 5% in the early part of the 20th century to 15% in the 1980s, and then stabilized. Union membership in this sector jumped from about 10% to about 40% between 1960 and 1975. • Employment in agriculture declined from 20% to 3% in the same period. This sector was not unionized at the turn of the 20th century. • Unionization in the nonagricultural private sector has reflected the aggregate trend, declining to about 10% of the workforce down from 35%.
Decomposing the decline Decline is worldwide, in 17 of 20 major nations. There has been attrition of existing union members. Non-union workers are less interested. Global competition in the product market, and the mobility of capital, has diluted the potential gains from unionization. Unions have not been successful organizing workers in new high technology industries. Many new economy employers classify their workers as temporary or independent contractors.
Foreign-owned Southern Auto Plants In 1965 United Automobile Workers (UAW) produced 95% if cars and trucks built in the US. The percentage had fallen to 86 by 1999 and 54 in 2013 . Following Honda’s entry in 1982 (Ohio), foreign-owned auto plants have been built by Toyota (Kentucky, Indiana, West Virginia), BMW (South Carolina), Nissan (Tennessee), Mercedes-Benz (Alabama) and Volkswagen (Tennessee). None are unionized. Last month the AWU failed in an organizing drive at Volkswagen’s new plant in Chattanooga. (President Obama responded that local politicians were more interested in German shareholders than American workers.)
Industrial breakdown and strikes • Strikes are dramatic and newsworthy, but they are also quite rare: Less than 5% of union members go on strike within a typical work year. Less than 1% of potential working hours of union members are lost from strikes, before accounting for compensating overtime. About 90% of all collective agreements are renewed without a strike, but the threat of a strike affects more than 10%.
Labor history of Copperweld(132 W Main St, Shelby Ohio) • Historical background: • 1853, Shelby is incorporated. • 1890, Seamless tube industry begins (in Shelby). • 1915, Copperweld’s name comes from a company started in Rankin (about 5 miles from here next to the Monongahela). • 1988, $90 million invested in Shelby plant upgrade. • 2010, Shelby’s population stands at 9,000. • About 400 employees work at the Copperweld plant. • The plant is unionized.
Recent ownership history of Copperweld • Takeover history: • 1975, Imétal S.A. acquires controlling interest. • 1999, LTV Steel acquires Copperweld Corporation from Imétal for $650m. • 2000, LTV files for Bankruptcy. • 2002, Dofasco acquires most of LTV Copperweld assets. • 2006, Copperweld resold to a private investor. • 2011, acquired by Fushi International for $22.5m. • 2012, Private investor group headed by Chairman Fu Li delists company from Nasdaq.
Scheduling production at Copperweld • Copperweld swaps dyes on a welding machine to make steel tubing of different diameters. • It takes several hours of labor to replace a dye. • Once the dye is changed, there is less work because the welding machine requires little supervision. • Copperweld processes orders for different types of steel tubing when they receive them. • This implies a trade-off between: • how much inventory of completed tubing stands on the floor waiting for an order to be shipped. • how often the dye is changed. • The employees, not the plant manager, decide when to change a dye (subject to the plant remaining viable).
Southwest in the cold midwest In the first week of 2014, Southwest cancels 40% of its flights at Midway and delays another 40%. Ramp workers at Midway call in sick more than 450 times, for about 22% of their scheduled shifts. Southwest begins requiring doctor's notes for sick leave. The union sues the carrier for breach of contract. Southwest alleges the sick calls are "widely perceived to be a coordinated job action to protest the slow progress" of contract negotiations. (Southwest workers are now paid very generously and its price increases reflect that.) The union says no: A spike in illnesses was fueled by mandatory overtime that exhausted workers. The judge dismisses the case, and suggests the union file a grievance instead.
Leadership described • This previous slides on Copperweld and Southwest suggest that what might look like a logistic problem (scheduling or inclement weather) is actually a personnel problem, indicating there might be a role for leadership. • A good leader is someone who persuades other people to follow his or her suggestions when they would have behaved differently otherwise, even the the advice giver has no power of coercion. A poor leader is ignored. • Managers are routinely called upon to be leaders, directing activity without having the power to enforce their suggestions. • They compete with unions on how to organize and schedule work activities.
Work rules • In the absence of a strong chain of command, work rules should be self enforcing. Otherwise they run the risk of being disregarded. • In other words, it should be in the interests of each worker to follow the instructions given to him or her, if every other worker is following the instructions given to them. • Formally this is saying that given the incentive structure in place work rules form a Nash equilibrium. • The goal of the personnel manager is to design work rules that have this property.
Cleanup crew To illustrate this concept, we now consider a firm who employs two cleaners. Suppose Tom and Jerry are cleaners hired to take away trash, vacuum the floors and clean bathrooms each night after work . The players choose between shirking on the job or working diligently.
Overtime possibilities If they both work diligently, cleaning is completed without any overtime. If one shirks and the other is diligent, then the diligent worker is paid an extra 6 hours of overtime, while the shirker is paid just 1 extra hour. If they both shirk, they each collect 4 hours of overtime pay.
Net benefits to the crew We assume that each player’s benefits are proportional to the amount of overtime received.
Multiplicity and mixing There are two pure strategy Nash equilibrium, yielding (6,1) and (1,6) respectively. There is also a mixed strategy Nash equilibrium. In fact one can prove that if a game has more than one pure strategy Nash equilibrium, then it also has at least one mixed strategy Nash equilibrium. We shall call the mixed strategy Nash equilibrium an uncoordinated solution.
Solving the mixed strategy solution • Let p denote the probability that Tom shirks rather than working diligently. • Jerry is indifferent between the choices if: 4p + (1 – p) = 6p => p = 1/3 • Similarly let q denote the probability that Gerry shirks rather than works diligently. • By symmetry, setting q = 1/3 makes Tom indifferent between the two choices. • Therefore the mixed strategy equilibrium solution is to set p = q = 1/3 , yielding an expected payoff to both employees of: 4*1/9 + 1*2/9 + 6*2/9 +0*4/9 = 2
Achieving coordination with repetition • Now suppose the cleaning contract lasts for N nights. • Some coordinated solution outcomes might be: (6,1), (6, 1) . . . for the N nights. (1,6), (1,6) . . . for the N nights. (6,1), (1,6) . . . for the N nights. (4,4), . . ., (4,4), (1,6), (6,1) N - 2 rounds of (4,4) followed by (1,6), (6,1).
Feasible average payoffs This area shows what average payoffs in a finitely repeated game are feasible given the firms’ strategy spaces. (1,6) Jerry’s average payoffs (4,4) (6,1) (0, 0) Tom’s average payoffs
Individual rationality Jerry’s average payoffs (1,6) The area, bounded below by the dotted lines, gives each player an average payoff of at least 1. It is guaranteed by individual rationality. Individual rationality coordinate pair (1,1) (6,1) (1,1) (0, 0) Tom’s average payoffs
Average payoffs in equilibrium Jerry’s average payoffs The theorem in the next slide states that every pair in the enclosed area represents average payoffs obtained in a solution to the finitely repeated game. (1,6) (4,4) (6,1) (1,1) (0, 0) Tom’s average payoffs
Folk theorem Let w1 be the worst payoff that Player 1 receives in a solution to the one period kernel game, let w2 be the worst payoff that Player 2 receives in a solution to the one period kernel game, and define w = (w1, w2) In our example w = (1,1) Folk theorem for two players: Any point in the feasible set that has payoffs of at least w can be attained as an average payoff to the solution of a repeated game with a finite number of rounds.
Selecting a solution • More generally, the maximum punishment for deviating from a prescribed contract path is the payoff guaranteed by the individual rationality constraint that comes from repeatedly playing the unfavorable kernel equilibrium until the end of the game. • This penalty supports any contact with payoffs that average more than the value given by individual rationality over the remaining rounds of the repeated game. • A union leader selects the contract that maximizes his utility, which might be positively related to the sum of the worker’s wages, subject to the constraint that the individual rationality is satisfied by each player.
A union sets the work rules The outcome {(4,4), (1,6), (6,1)} comes from Tom and Jerry playing: (shirkT1, shirkJ1) (workT2, shirkJ2) (shirkT3, workJ3). Is this history the outcome of a solution strategy profile to the 3 period repeated game?
Strategy for Tom Round 1: shirkT1 Round 2: shirkT1 workT2 workT1 shirkT2 Round 3: workJ1 workT3 shirkJ1 shirkT3 Tom should shirk on the first night. If Tom does shirk on the first night, then he should work on the second night. If however Tom worked on the first night, Tom should shirk on the second. Tom should work on the third night if Jerry worked on the first, but otherwise he should shirk.
Strategy for Jerry Round 1: shirkJ1 Round 2: shirkT1 shirkJ2 workT2 workJ2 Round 3: shirkJ1 workJ3 workJ1 shirkJ3 Jerry should shirk on the first night. If Tom does too, then Jerry should shirk on the second. However if Tom worked on the first night, then Jerry should work on the second. If Jerry shirked on the first night, then Jerry should work on the third, but otherwise he should shirk.
Do these union work rulesform a (Nash) solution? Note that the last two periods of play, taken by themselves, are solutions to the kernel game, and therefore strategic form solutions for all sub-games starting in period 2. To check whether shirking is a best response for Tom if Jerry obeys union rules (shirking in the first period), we compare the value of Tom also following union rules versus deviating by being a goody-goody on the first night.
Checking for deviations by Tom on the first night Compare (shirkT1, shirkJ1) 4 (workT2, shirkJ2) 6 (shirkT3, workJ3) 1 --- 11 with (workT1, shirkJ1) 6 (shirkT2, workJ2) 1 (shirkT3, workJ3) 1 --- 8 Since 11 > 8 Tom does not increase his wages overall from deviating on the first night. A similar result holds for Jerry. Therefore, by symmetry, the strategy profile is a coordinated solution.
Will the plant manager coordinate the crew? The goal of the plant manager is to minimize the cost of cleaning the workplace. If the plant manager can prevent coordinated shirking, then the mixed strategy equilibrium for the crew cost 4 units per period. But if the crew coordinates then they can achieve a summed payoff of at least 7 each period.
Cost minimizing contracts • A plant manager may not be able to set pay but can suggest rules that the employees should follow. • What is the lowest sum of payoffs in a 3 period repeated game that can be supported by a coordinated solution? • Consider the outcome of receiving (0,0) in the first period (both diligent), followed by (1,6), (6,1), in the final 2 periods. (Tom shirks and then Jerry.) • It is induced by playing (workT1, workJ1) followed by (shirkT2,workJ2) and (workT3, shirkJ3). • Can this outcome be supported by a coordinated solution?
Strategy for Tom Night 1: workT1 Night 2: workJ1 shirkT2 shirkJ1 workT2 Night 3: workT1 workT3 shirkT1 shirkT3 Tom should work on the first night. If Jerry shirks on the first night, then Tom should work on the second night too. If Jerry works diligently on the first night, Tom should shirk on the second. Tom should work on the third night, unless he shirked on the first night. A strategy for Jerry is constructed in a similar way.
Confirming the solution strategy • Strategy for Tom: If Jerry plays deviates from the profile prescribed in previous slide, work diligently for all the remaining nights. Otherwise follow prescription. Similarly for Jerry. • Note that on the last two nights, Tom and Jerry are playing a Nash equilibrium for that particular night, regardless of what has happened previously. • As in the “union rules” case we can confirm the best response is to work on the first night, given the repercussions from deviating.
Should the plant manager intervene? • The overtime hours cost for cleaning is: (0 + 0) + (6 + 1) + (6 + 1) = 14 • The expected cost from leaving Tom and Jerry to play an uncoordinated game is: (2 + 2) + (2 + 2) + (2 + 2) = 12 • Therefore the manager should not intervene unless Tom and Jerry are coordinating. • This result shows that a decentralized contract, leaving the workers to play a period by period game with each other, may be more profitable to the employer than direct intervention.
Longer term contract employment • Now suppose the contract lasts 4 nights. • The expected cost of an uncoordinated piece rate contract is 16 overtime hours, computed from 2 (crew)*2 (overtime hours per round)*4 (nights). • The individual rationality constraint guarantees each crew member an average of at least 1 unit of overtime. So consider the following contract of 14 overtime hours: (0,0) for the first 2 nights and then (1,6), (6,1), to conclude the final 2, yielding each worker 1.75. • This coordinated solution is supported by a penalty system that awards 1 hour overtime for the remaining nights to the first player that deviates from the contract.
The loss from unionizing work rules • In a 3 period contract we deduct from the total payments under unionization (22) the amount management would pay if the crew are uncoordinated and play a mixed strategy (12) to obtain a loss of 10 or 3.33 per period. • However as the contract length, or number of nights extends indefinitely, the loss to management from unionization increases to 8 per period. • This arises because leaders (plant manager, or union) can benefit from longer periods of coordination, and more credibly threaten bigger punishments to deviations from their orders when contracts are longer.
Summary Workers in the unionized sector, and to some extent managers and shareholders in the nonunionized sector, benefit at the expense of workers in the nonunionized sector and managers and shareholders in the unionized sector. These benefits come in the form of higher pay, better benefits and (for the most part) greater job security. Leadership combines the talent of recognizing the set of self enforcing contracts, selecting a strategy profile from the set, and persuading everyone else to play their part. Devising and enforcing work rules is one arena where plant and scheduling managers battle with union bosses for the upper hand. Collective bargaining is another.
