Chapter 28

Labor Unions

28-1Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter Objectives

• A short history of the labor movement

• Labor legislation

• The economic power of unions and employers

• The economic power of monopsonies

• Collective bargaining

• The strike

28-2Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

A Short History of the Labor Movement

• Labor unions are a traditional American institution

• Until the 1940s most Americans had unfavorable opinions of unions

• The AF of L rang in the modern era of unions in 1886

• With the emergence of the large corporation, individual workers had little bargaining power– Thousands of workers banded together did have

some leverage

28-3Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

A Short History of the Labor Movement

• Employers fought labor unions tooth and nail– Union members were blacklisted

– Those who were suspected of union sympathies were fired

– Court orders were obtained to prevent strikes

– Some times private detectives , labor goons, and sympathetic local police were used to put down strikes violently

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Key Labor Legislation

• The National Labor Relations Act (The Wagner Act, 1935)– The Wagner Act put the force of government

behind collective bargaining

• The Taft-Hartley Act (1945) was put forth as a measure to protect “employers” rights

28-5Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Key Labor Legislation

• The Landrum-Griffin act (1959)– This act protected union members from

abuses by their own union leadership– This act also attempted to cut down on

embezzlement of union funds by union leaders

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Union Membership, 1900-2000

28-7Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

24

21

18

15

12

9

6

3

81900 1920 1940 1960 1980 2000

A. Number of union members

Union membership reached its peak in the late 1970s

Union Membership, 1900-2000

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Union membership as a percentage of the labor force reached its peak in the late 1950s

B. Union membership as a percentageof the civilian labor force

40

30

20

10

01900 1920 1940 1960 1980 2000

Union Membership As a Percentage of Employed Labor Force, Selected Nations,

1999

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America is one of the least unionized industrial nations in the world

Britain

Sweden

Australia

Italy

Germany

Japan

United States

France

0 20 40Percentage Unionized

80 10060

The Economic Power of Labor Unions

• Are unions a monopoly?– We define a monopoly as the seller of a good or

service for which there are no close substitutes

– Technically, labor is not really a good or service, but rather a factor that helps produce a good or service

– If we brush aside that technicality, then for all intents and purposes unions are sometimes monopolies

28-10Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

The Economic Power of Labor Unions

• Unions have two ways of exerting power– The method of inclusion

• Take in as members virtually everyone who works in a particular craft or industry

• The power is in the numbers

– The method of exclusion• You don’t take in just anyone

• You need experience

• You must take test

• Who you know wouldn’t hurt your chances

• By keeping people out, you limit the supply and wages amazingly go way up

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Inclusive and Exclusive Unions

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15

10

5

A. Inclusive union

D

15

10

5

B. Exclusive union

S1

D

S2

3 6 9 12 3 6 9 12Number of workers

(in hundreds of thousands)Number of workers

(in hundreds of thousands)

S

The wage rate is set by supply and demand

The Economic Power of Large Employers

• Unions have become quite powerful

• Corporations not only have remained powerful, but this power is becoming increasingly concentrated because of the rapid pace of corporate mergers

• An extreme case of corporate power is that of monopsony

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Monopsony

• Monopsony is the market situation in which there is only a single buyer for a product– The most common kind of monopsony is a

labor market where there is only a single employer

• Sometimes 60 to 80% of jobs in some areas are provided by a single employer

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Monopsony

• The monopsonist faces the entire supply curve of labor– Because that curve sweeps upward to the

right, to induce more people to work more, it has to pay them a higher wage rate

– The best know monopsonists these days are professional baseball, football, and basketball leagues

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Bilateral Monopoly• When a union that controls the supply of labor is

opposed by an employer that controls the demand for labor, we have a bilateral monopoly

• Some examples are– Auto workers, professional sports, teachers in most

large school districts, and aerospace workers– Like the competitive oligopolists, a union dealing with

a monopsony employer knows that any move it makes will invite a countermove by the firm

– At the bargaining table, who ends up with what depends largely on the relative power on both sides

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The Collective Bargaining Process

• Collective bargaining is the main arena of the power struggle between labor and management– Labor generally tries to secure substantial

increases in wages, fringe benefits, and perhaps better working conditions

– Management, of course, offers considerably less than labor wants

– And so they bargain

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The Collective Bargaining Process

• Labor’s ultimate weapon is the strike• Management’s ultimate weapon is its

ability to take a strike– Sometimes management has been know to “lock

out” their workers• But, does it really make any sense to lock out workers who

are about to leave anyway?• It might if you lock them out right before payday• Conversely, the best time to begin a strike is right after

payday

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The Collective Bargaining Process• The ability to take a strike varies from firm to

firm• Manufacturing fares better than services because

inventories can be built up in anticipation of a strike

• Service industries cannot make up for lost sales because their competitors will have picked up the slack

• A diversified firm can ride out a strike more easily than can a firm that produces a single good or service

• A multinational corporation might simply shift operations to another country

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The Collective Bargaining Process

• A union might be hesitant to strike a company that was about to go under– You might win the strike and lose your job

• If a company is financially weak union demands will likely be moderate– During the 1981-82 recession, some unions

actually negotiated not only no wage increases but even wage reductions

– Saving jobs can sometimes take precedence over anything else

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Pressure to Reach a Settlement

• The cost of a strike can be extremely high– General Motors lost $90 million a day during

a 67-day strike in 1970• This was approximately $5.7 billion total

– The United Auto workers lost $50-$60 million a day (almost $4 billion total)

• Real issues are presented and discussed– COLAs, productivity, wages are always key

• Pattern setting is always a major consideration on both sides

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The Strike

• In fact, very few strikes have disrupted the U.S. economy– Only two have caused major economic

disruptions• The 1959 steel strike and the UAW strike against

General Motors in 1970

• With the exception of 1946, in no year did strikes result in as much as a 1% loss in total labor hours worked

– 1946 was an aberration because unions had been restricted from striking during the war

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Work Time Lost Because of Strikes, 1945-2000

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0

1.0

0.9

0.1

0.8

0.2

0.7

0.3

0.6

0.4

0.5

1975 1985 1995 2000196519551945

Why People Strike

• Most union members do not make any kind of cost-benefit analysis

• Sometimes the opposing sides are further apart than is realized

• Workers think the strike will be settled quickly

• Workers exhibit a combination of machismo and credibility

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Averting Strikes

• Collective bargaining is the basic way of averting strikes– The two sides sit down together

– After some tough bargaining, they hammer out an agreement both can live with

• What if they can’t reach agreement, or even agree to sit down together in the same room?– This is where mediation and arbitration come in

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Mediation

• A mediator is literally a go-between

• A mediator tries to speed up the process of negotiation, getting each side to give a little more and take a little less

• A mediator does not have the power to impose a settlement but can play a valuable role as an expediter

28-26Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Arbitration

• The job of an arbitrator is to impose a settlement– Under compulsory arbitration, a labor contract or

law actually stipulates that if the two parties cannot reach an agreement, an arbitrator will make the decision

– This takes the decision out of the hands of labor and management

– This makes arbitration a situation both sides want to avoid

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Have Unions Raised Wages?

• The answer is yes, but the real question is by how much?

• Various studies indicate that unions have raised the wages of their members by 10 to 45%

• In 2000, total compensation for unionized workers averaged $24.75, compared to $18.20 for nonunion workers [but unions have effects on nonunion work pay/conditions]

28-28Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Have Unions Raised Wages?

• Unions have tended to spring up in relatively productive occupations, often in very profitable industries– There is evidence that even without unions the pay

would be better than in the other non unionized sectors

• The decline in the nation’s industrial sector may contribute to a decline in the differentials between unionized and non unionized workers

28-29Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

The American Medical Association (AMA)

• The AMA has been amazingly successful in raising the median wage rate of doctors – which is well in excess of $200,000 a year – by restricting their numbers– This process work the same with sheet metal

workers, bricklayers, and electricians, but the AMA does it better

28-30Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Comments

• Unions do raise wages• Unions provide a badly needed measure

of job security• Until unions were organized, workers

were powerless to bargain with huge corporations

• Now many fear the power has shifted too far the other way

28-31Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.