Chapter 10

Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

Chapter 10

Labor Unions

and Collective Bargaining

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1. Why Unions?

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Why Unions?o Workers prior to industrial revolution

were self-employed (i.e., worked for themselves).

o Industrialization separated the functions of management and labor.

o Workers became dependent on owners for employment and income.

o Workers formed unions to protect their interests and bargain collectively with employers.

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US Union Historyo Prior to Great Depression, social attitudes

and the political climate were anti-union• Sherman Antitrust used to outlaw strikes and product

boycotts because they reduced the flow of goods in interstate commerce

• Employees had to sign “yellow-dog” contracts to get jobs, agreeing not to join a union.

• Unions who organized these workers were found guilty of inducing a breach of contract.

• Firms used lockouts to keep unions from forming and blacklists to keep organizers out of work.

• Strikebreakers

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Depression & Later Reformso 1932 Norris LaGuardia Act first federal law

to regulate union-employer relationship.• Restricted employer’s use of courts to prevent

organizing and made yellow-dog contracts unenforceable in federal courts.

o 1935 National Labor Relations Act (Wagner Act) listed unfair labor practices• Workers can organize as units and firm can’t

discriminate against pro-union employees• NLRB can investigate & certifies unions

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Depression & Later Reformso 1947 Taft –Hartley Act curbed union

power.• Allows right-to-work states (22 in US now).

Can’t require union membership to get job.• Allows decertification votes of unions• Disallows most secondary boycotts by unions

o 1959 Landrum-Griffin Act limits union corruption• Unions must disclose finances• Unions must have regular elections

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Depression & Later Reforms

o 1962 JFK Executive Order allows federal employees to organize

o 1978 Civil Service Reform Act prohibits federal employees from striking & allows federal workers to either join or not join unions

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2. Labor Unionism: Facts and Figures

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Table 13.1 Union Membership and Bargaining Coverage, Selected Countries, 2004

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Union Membership by Industry, 2008

• Unionization tends to be higher in the goods producing industries such as manufacturing and construction.

• Unionization tends to be lower in service industries such trade and finance, real estate, and insurance.

• Unionization is high in transportation, communications, and utilities due to low labor demand elasticities.

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Union Membership by Occupation, 2008

• White-collar workers such as managers and sales workers tend to have low unionization rates.

• The low white-collar worker unionization rates are because they have higher wages and some managers are exempt from unionization.

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Figure 13.1 Union Membership as a Percentage of All Workers, by Sector, United States, 1973–2008

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Union Membership by Public Sector Status, 2008

• Public sector workers have a much higher unionization rate than private-sector workers.

• The unionization rate of public sector workers rose rapidly in the 1960s and 1970s when laws allowing public-sector workers to unionize were passed and public sector managers did not aggressively fight the unionization of their workers.

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Union Membership by Demographic Group, 2008

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High Unionization States, 2008

0.0 5.0 10.0 15.0 20.0 25.0

Percent Union Membership

New York

Hawaii

Alaska

Washington

Michigan

California

New Jersey

Connecticut

Nevada

Oregon

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Low Unionization States, 2008

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Structure of Organized Labor

Federations

National Unions

Local Unions

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Structure of Organized Laboro At top of pyramid are the federations of

national unions• AFL-CIO has 56 national unions & 8 million

workers. Purpose is not to organize new workers but to push labor interests like minimum wage, trade, political lobbying, etc.

• Change to Win (started in 2005 in break from AFL-CIO) has 7 national unions with 6 million workers, including Service Employees Intl. and Teamsters. Key agenda: organize new workers, particularly immigrants

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Structure of Organized Laboro National Unions are federations of local

unions organized by industry (autos, steel) or craft (carpenters, electricians).• They organize the unorganized in industry or

craft• They negotiate collective bargaining

agreements with employers where product markets are national or regional

∞Want standardized wages (no substitution of low wage for high wage

∞Collective bargaining complex and costly

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Structure of Organized Labor

• National Education Association (3 million), a national union, is not associated with either AFL-CIO or Change to Win

• Local Unions are usually subservient branches of national unions (while nationals are not subservient to federations)

• Locals need national permission to strike• Can be disbanded by national• Police agreement and resolve grievances

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Collective Bargainingo When an industry contains few employers

(e.g., autos), union will engage in pattern bargaining, obtaining a contract first with 1 firm then applying it to others

o When there are numerous local employers, unions will broker a citywide deal with an employers’ association• Lower bargaining costs for union• Employers have more power as group vs. solo• Standardized wages limit individual firm risk

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3. Unionism’s Decline• The proportion unionized has been declining since 1950s• Why the decline?

• Structural Changes in the Economy• Increased Management Opposition• Substitution by Government• Changing Political Balance

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Union Membership• The unionized sector is a minority component of the labor force.

• Unionism is on the decline in the U.S.

• The number of union members peaked at 20 million in 1980 and has fallen to slightly more than 15 million now.

• The percent of labor force that is unionized fell from 30% in 1950 to 11% now.

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Comparison to Trading Partners

o Union membership has not declined drastically in our trading partners

o US is far lower (11%) than Japan (20%), Germany (23%), Canada (28%), UK (29%), Italy (34%) or Sweden (78%).

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Causes of Decline in Unionism

o Structural changes• The structural-change hypothesis is the

labor force and economy has changed in ways that are unfavorable to unions.

∞Demand has shifted from blue-collar manufacturing to white-collar services

∞Growing import competition in manufacturing∞Small firms growing at expense of large∞Large increase in women, youths and part-

time employment, traditionally nonunion

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∞ Energy costs shifted production to South & West

∞Unions successfully increased wages in 1970s

~ Unionized firms switched to nonunion methods of production where possible.

~ Nonunion firms expanded output and employment due to their lower costs.

• Criticisms∞Other countries have had similar structural

changes w/o unionism decline.

∞In past unions grew by organizing non-unioners.

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o Managerial-opposition hypothesis• The managerial-opposition hypothesis

argues that in the 1970s high union wages increased firm anti-union acts

∞Firms hire permanent strike breakers∞ Firms hire consultants∞ Firms “educate” workers about union

negatives, i.e., lost jobs, strikes, etc.∞ Firms increased illegal actions, like

identifying and firing pro-union workers

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o The substitution hypothesis• The substitution hypothesis argues that the

government and employers now provide services that used to be gained by unions.

∞The government now provides services such as workers’ compensation and health and safety laws that unions used to provide.

∞Some firms try to prevent unionization by using grievance procedures and providing worker-management communication methods.

∞Willingness to join unions has declined

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o Other factors• Unions have decreased their organizing

efforts.• The National Labor Relations Board, which

oversees unionization efforts, became less pro-union under Reagan-Bush.

• American values of free markets and individualism are at odds with collective unionism.

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o Relative importance• Freeman concludes that the total decline

in unionization is due to: ∞Structural changes (40%)∞Increased managerial-opposition (40%)∞Decreased union organizing (20%)

• Krueger argues nearly all of the recent decline in unionization is due to decreased demand for unions among nonunion workers.

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Union Responses to Decline

o Increased mergers among unions• Example: NEA and AFT

o Changes in strategies• Unions have increased organizing efforts

and targeted white-collar workers.• Unions have tried to avoid strikes and

used work slowdowns in their place.• Less emphasis on wage and more on

work conditions, i.e., safety, schedules, parental leave, etc.

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Questions for Thought1. Critically evaluate each of these statements:

(a) “The relative decline of the American labor movement can be explained by the shift from goods- producing to service-producing industries and the closely related shifts from blue-collar to white-collar occupations and from male to female employees.

(b) “The success of unions in raising their wages relative to nonunion workers has contributed to the decline in unionism.

(c) “Unionized firms have tended to be less profitable, and therefore, employers are more resistant to unionization.

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4. What Do Unions Want?

• Monopoly Union Model• Efficient Contracts Model

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Monopoly Union Modelo Economists usually assume that the

goal of a union is to increase both the wages and employment of its members.

o Economists construct union indifference curves that show the combinations of wage and employment where the union is indifferent.• Characteristics of indifference curves

∞Negatively sloped∞Convex

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Monopoly Union Model

o The monopoly union model assumes that the union sets the wage rate and the firm sets the level of union employment based on this wage rate.

o The firm maximizes profits and thus chooses an employment level based on its labor demand curve.• The available wage and employment

combinations for the union are on the labor demand curve.

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Monopoly Union Model

Employ

Wage

0

• In the monopoly union model, the utility maximizing wage and employment for the union is point u, where union indifference curve I3 is just tangent to the labor demand curve DL.

I1

I3

DL

Qu

Wu

u• The union raises the wage rate from Wc to Wu, the firm decreases employment from Qc to Qu, and the union increases total utility from I1 to I3.

c

I4

Wc

Qc

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Efficient Contracts Model

Employ

Wage

0

• The outcome of the monopoly union model is point u. This combination is not efficient for the two parties since at least one of them could be made better off by moving off the labor demand curve.

I3

DL

Qu

Wuu

• The combinations of wage and employment where at least one party is better off without the other party worse off are called efficient contracts.

y

I4

Wy

Qy

1

• For example, at point y, the union has achieved a higher utility level than at point u by being on a higher indifference curve and the firm is no worse off because it stays on the same isoprofit curve.

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Efficient Contracts Model

o The contract curve is composed of the set of efficient contracts (tangencies of union indifference curves and isoprofit curves).• The slope of the contract curve

depends on the shapes of the firm’s isoprofit curves and the union’s indifference curves.

• A vertical contract curve at the competitive employment level is called a strongly efficient contract curve.

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Efficient Contracts Modelo In general, the efficient contract

outcome will result in lower wage and more employment than the monopoly union outcome. • Economists have suggested this helps

explain the requirements for excess labor in union contracts.

• These stipulations or “feather bedding” take the form of work rules specifying minimum work crew sizes or narrow job descriptions.

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Empirical Evidence

o A direct test of the efficient contracts model is whether unions bargain over employment as well as wages. • Contrary to the efficient contracts

model, union contracts almost always allow firms to unilaterally set the employment level.

• Some researchers have suggested they may indirectly affect employment by bargaining over capital-labor ratios.

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Empirical Evidence

o Indirect tests of the efficient contracts model rely on the fact that efficient contracts and monopoly union models have different predictions regarding which factors affect the level of union employment.• Monopoly union predicts union employment level should be

related to the union wage, but it should have no relationship with the competitive wage.

• Strongly efficient contract model predicts union employment level should be related to the competitive wage, but it should

have no relationship with the union wage. o The findings from these indirect tests yield mixed

support for the efficient contracts model.

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5. Unions and Wage Determination

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Unions and Wages

o Unions can increase the wages of their members by:• Increasing the demand for union

labor• Restricting the supply of labor• Bargaining for an above

equilibrium wage

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Increasing Labor Demand

Quantity of Labor Hours

Wage rate• To the extent that unions can increase the demand for union labor from (D0 to D1), they can gain both higher wages and employment.

S

D0

Q0

W0

D1

Q1

W1

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Methods to Increase Union Labor Demand

o Increasing product demand• Lobbying for tariffs on foreign goods

o Enhancing productivity• Participation in labor-management committees on productivity

o Influencing the prices of related inputs• Lobbying for minimum wage hikes as they raise the price of

substitutable less-skilled, nonunion labor

• Davis-Bacon Act, which requires federal contractors pay the “prevailing” union wage scale

o Increasing the number of employers• Attempts to pass requirements for domestic content for

autos sold in the U.S.

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Changes in Labor Supply


Wage rate• If a union decreases the supply of available labor from S0 to S1, the equilibrium wage rate will rise to W1 but the equilibrium quantity will fall to Q1.

S0

D0

Q0

W0

S1

Q1

W1

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Methods to Decrease Labor Supply

o Reducing the number of qualified suppliers of labor• Lobby for laws that reduce immigration, child labor, and

length of the workweek• Limit entry into occupation through long apprenticeships• Occupational licensing which are laws that require

practitioners to meet certain requirements

o Raising nonwage income• Lobby to increase nonwage income sources such as

Social Security in order to decrease labor supply

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Craft vs. Industrial Unionso Craft unions are more successful in

limiting labor supply

o Industrial unions have a difficult time limiting labor supply• Must “monopolize” the supply of labor by

organizing all firms• Must make labor demand inelastic to preserve

labor income when increasing wages∞Prohibit subcontracting, mandatory severance,

require advance layoff notice

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Bargaining for an Above-Equilibrium Wage

• By organizing all workers and having a union shop (requiring all new hires to join the union), the union may achieve a wage WU that is above the competitive wage WC.

• The effect is to make the labor supply curve perfectly elastic at WU until point d.• The employment level will fall from QC to QU.

QCQU

WC

WU


Wage rateSL

DL

MWC

• An efficiency loss of abc will also result.

• The more elastic is DL, the larger is the employment loss. As result unions try to reduce the elasticity of DL.

db

c

a

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Questions for Thought1. Explain how each one of the following contract

provisions might affect the elasticity of labor demand during the period of the labor contract:

(a) Layoff and severance pay

(b) Prevention of subcontracting

(c) The limiting of plant shutdown or relocation

2. Under what elasticity of labor demand conditions could a union restrict the supply of labor—that is, shift the supply curve leftward—and thereby increase the collective wage income (wage bill) of those workers still employed?

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6. Strikes and the Bargaining Process

Why do strikes occur?

• Accident Model• Assymetric Information Model

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Accident Model

Expected Strike Length

Wage

0

• The employer concession curve EC shows the maximum wage that the firm would be willing to pay to avoid a strike of a given length.

EC

UR

W*

• The union resistance curve UR shows the minimum wage that the union would be willing to accept to avoid a strike of a given length.

• If both the union and the firm are well informed about the other party’s concession curve, then the wage settlement will occur at W* where the UR and EC curves intersect and no strike will occur.

• If either party misperceives the other party’s concession curve, then a strike will occur.

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Accident Model Implicationso Strikes occur because either mgmt or union

misperceive where the other’s concession curve is

o Strikes more likely if:∞There’s more uncertainty about each other∞Employer demand is more elastic, i.e., elastic

customers, substitute inputs & big labor costs∞Employee strike costs are low, i.e., strong labor

market, U.I. & strike benefits

o Strikes end over time as costs rise for each side

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Asymmetric Information Models

o Two types of strike models based on asymmetric information have been developed. • The first focuses on the information gap

between the union leadership and rank and file union members.

∞Union leaders have better information about bargaining possibilities.

∞Union members have unrealistic demands but leaders want to remain in office.

∞Union leaders call strike to moderate demands, making settlement possible.

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Asymmetric Information Models

• The second asymmetric info model emphasizes the information differences between the union and the firm.

∞Firm has more information about the profitability of the firm than the union.

∞The firm has an incentive to understate its profitability since it can reduce wage offer.

∞ Unions make high wage demands to measure hidden profits

~ If firm has big profits, it’ll pay to avoid strike~ If it doesn’t, strike happens which will lower union

wage demands

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Is Money the Issue?

o Many participants in industrial relations believe collective bargaining is more about justice than economics• Union thinking

∞Pattern bargaining despite ability to pay∞“Just” wage demands

• Mgmt thinking∞Firm reputation∞Mgmt reputation in their communities

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Questions for Thought1. Assume that a union’s utility only depends

on the wage rate and not the level of employment. In this case, what will be outcome under the efficient contracts model?

2. What role does information differences play in causing strikes?

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Chapter 10