Chapter 30
Unions and
Labor Market
Monopoly Power
Introduction
What are labor unions?
What are the objectives of unions, and
what strategies do they utilize to pursue
their goals?
Why have the aims of some unions
recently clashed with others?
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30-2
Learning Objectives
• Outline the essential history of the labor
union movement
• Discuss the current status of
labor unions
• Describe the basic economic goals
and strategies of labor unions
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30-3
Learning Objectives (cont'd)
• 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
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30-4
Chapter Outline
• Industrialization and Labor Unions
• Union Goals and Strategies
• Economic Effects of Labor Unions
• Monopsony: A Buyer’s Monopoly
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30-5
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?
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30-6
Industrialization and Labor Unions
• Labor Unions
 Worker organizations that seek to secure
economic improvements for their members
 They also seek to improve safety, health,
and other benefits (such as job security)
of their members.
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30-7
Industrialization
and Labor Unions (cont'd)
• Craft Unions
 Labor unions composed of workers who engage
in a particular trade or skill
• Collective Bargaining
 Negotiation between the management of a
company or of a group of companies and the
management of a union or group of unions for the
purpose of reaching a mutually agreeable contract
that sets wages, fringe benefits, and working
conditions for all employees in all unions
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30-8
Industrialization
and Labor Unions (cont'd)
• Unions in the U.S.
 Knights of Labor
 American Federation of Labor
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30-9
Industrialization
and Labor Unions (cont'd)
• Early labor issues
 8-hour workday
 Equal pay for men and women
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30-10
Industrialization
and Labor Unions (cont'd)
• The formation of industrial unions
 National Industrial Act of 1933
 National Labor Relations Act 1935,
otherwise known as the Wagner Act
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30-11
Industrialization
and Labor Unions (cont'd)
• The Congress of Industrial
Organizations (CIO) was formed
in 1938.
 It was composed mainly of
industrial unions.
 Prior to the formation of the CIO, most
labor organizations were craft unions.
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30-12
Industrialization
and Labor Unions (cont'd)
• Industrial Unions
 Labor unions that consist of workers from
a particular industry, such as automobile
manufacturing or steel manufacturing
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30-13
Industrialization
and Labor Unions (cont'd)
• Congressional control over labor unions
 The Wagner Act (1935)
 Gave
unions the right to organize workers and
to engage in collective bargaining
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30-14
Industrialization
and Labor Unions (cont'd)
• Congressional control over labor unions
 Taft-Hartley Act of 1947
 Allowed

right-to-work laws
Laws that make it illegal to require union
membership as a condition of continuing
employment in a particular firm
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30-15
Industrialization
and Labor Unions (cont'd)
• 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
 A union

shop however, is legal
Non-union members join later
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30-16
Industrialization
and Labor Unions (cont'd)
• 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
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30-17
Industrialization
and Labor Unions (cont'd)
• 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
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30-18
Industrialization
and Labor Unions (cont'd)
• 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
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30-19
Industrialization
and Labor Unions (cont'd)
• 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.
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30-20
Industrialization
and Labor Unions (cont'd)
• The current status of labor unions:
we consider
 Worldwide trends in unionization
 U.S. unionization trends
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30-21
Figure 30-1 Union Membership
as a Share of Total Employment
in Selected Nations
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30-22
Figure 30-2
Decline in Union Membership
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30-23
Industrialization
and Labor Unions (cont'd)
• Explaining the fall in union membership
 Deregulation
 Immigration
 Shift from manufacturing to services
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30-24
Table 30-1 The Ten Largest Unions
in the United States
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30-25
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.
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30-26
Union Goals and Strategies (cont'd)
• Strikebreakers can reduce the
bargaining power of the strike
 Temporary
or permanent workers hired by
a company to replace union members who
are striking
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30-27
Union Goals and Strategies (cont'd)
• 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.
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30-28
Figure 30-3
Unions Must Ration Jobs
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30-29
Union Goals and Strategies (cont'd)
• Unions must ration the available
jobs by
 Seniority
 Apprenticeship
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30-30
Union Goals and Strategies (cont'd)
• Union wage and employment strategies
 Employ all union members
 Maximize member income
 Maximize wages for certain workers
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30-31
Policy Example: Higher FDIC Wages
for Some Means Fewer FDIC Jobs
for Others?
• Employees of the FDIC are represented
by the National Treasury Employees
Union (NTEU).
• Over the years, the NTEU has won
significant wage increases for its members,
including workers at the FDIC.
• During the 2000s, the agency’s earnings
failed to keep pace with the NTEU-bargained
pay increases.
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30-32
Figure 30-4
What Do Unions Maximize?
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30-33
Example: To Save Members Jobs, the
UAW Agrees to a Two-Tier Pay Scale
• Many of DaimlerChrysler’s Jeep
vehicles are assembled in two plants
located in Toledo, Ohio.
• In an effort to reduce hourly wage
costs, some pre-assembly work was
shifted out of these plants.
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30-34
Example: To Save Members Jobs,
the UAW Agrees to a Two-Tier Pay
Scale (cont'd)
• To preserve union jobs, the UAW
agreed to adopt a two-tier wage system
at the Toledo Jeep plants.
• Workers who specialize in final
assembly make $26 per hour; those in
pre-assembly make $15 per hour.
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30-35
Union Goals and Strategies (cont'd)
• Union strategies to raise
wages indirectly
 Limit entry over time
 Alter demand for union labor
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30-36
Union Goals and Strategies (cont'd)
• 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.
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30-37
Figure 30-5
Restricting Supply over Time
If union membership limited to Q1,
wages increase to 21 instead of
20 and employment is reduced
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30-38
Union Goals and Strategies (cont'd)
• The demand for union labor can be
increased by
1. Increasing worker productivity
2. Increasing the demand for
union-made goods
3. Decreasing the demand for
non-union-made goods
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30-39
Economic Effects of Labor Unions
• Do union members earn higher wages?
• Are they more or less productive than
nonunionized workers?
• What are broader economic effects
of unionization?
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30-40
Figure 30-6 The Most Heavily Unionized
Occupations in the United States
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30-41
Economic Effects
of Labor Unions (cont'd)
• 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.
• Yet annual earnings for union workers are not
necessarily higher, because they may work
somewhat fewer hours.
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30-42
Economic Effects
of Labor Unions (cont'd)
• Question
 How do unions affect labor productivity?
• Answers
 There is some evidence that
featherbedding creates inefficiency
in the unionized industries.
 But some economists argue that unions
actually enhance productivity by reducing
labor turnover.
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30-43
Economic Effects
of Labor Unions (cont'd)
• Featherbedding
 Any practice that forces employers to use
more labor than they would otherwise or to
use existing labor in an inefficient manner
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30-44
Economic Effects
of Labor Unions (cont'd)
• Economic benefits and costs of labor
unions—two opposing views
1. Unions are monopolies whose main
effect is to raise the wage rate of high
seniority members.
2. Unions increase labor productivity
by promoting generally better
work environments.
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30-45
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.
 One factory not only hires the workers but
also owns all the businesses in the town,
this buyer of labor is called a monopsonist,
the single buyer.
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30-46
Monopsony:
A Buyer’s Monopoly (cont'd)
• The monopsonist faces an upwardsloping 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.
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30-47
Figure 30-7 Derivation of a Marginal
Factor Cost Curve, Panel (a)
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30-48
Figure 30-7 Derivation of a Marginal
Factor Cost Curve, Panel (b)
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30-49
Monopsony:
A Buyer’s Monopoly (cont'd)
• Monopsonistic Exploitation
 Paying a price for the variable input that is
less than the marginal revenue product
 The difference between marginal revenue
product and the wage rate
• Bilateral Monopoly
 A market structure consisting of a
monopolist and a monopsonist
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30-50
Figure 30-8 Wage and Employment
Determination for a Monopsonist
MRP > W
Hire Qm where
MFC = MRP
and pay Wm
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30-51
Figure 30-9 A Monopsony’s
Response to a Minimum Wage
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30-52
Figure 30-10 Pricing and Employment
Under Various Market Conditions,
Panel (a)
Firm operating in perfect
competition in both
input and output markets
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30-53
Figure 30-10 Pricing and Employment
Under Various Market Conditions,
Panel (b)
Firm operating in
perfect competition
in the input market
but a monopoly in
the output market
Why are fewer workers hired in
this market compared to perfect
competition in both markets?
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30-54
Figure 30-10 Pricing and Employment
Under Various Market Conditions,
Panel (c)
Firm operating as
monopsonist in the
input market and a
perfect competitor
in the output market
• Hire where MFC = MRPC
• W = WC
• WC < MRP
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30-55
Figure 30-10 Pricing and Employment
Under Various Market Conditions,
Panel (d)
Firm operating as
a bilateral monopoly
• Hire where MFC = MRPm
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30-56
Issues and Applications:
Big Labor Breaks Up
• A gradual splintering of goals and strategies:
 Beginning in the 2000s, seven unions within the
AFL-CIO began advocating for changes in its
goals and strategies.
• The big breakup:
 During years of discussion and then months of
intense negotiation, the seven rebel unions could
not reach an agreement with the other unions.
 Accordingly, they withdrew and established
a new labor organization, called the Change
to Win Federation.
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30-57
Figure 30-11 Membership Shares for
Unions in the Change to Win Federation
versus Unions Remaining in the AFL-CIO
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30-58
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.
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30-59
Summary Discussion
of Learning Objectives (cont'd)
• The current status of U.S. labor unions
 In the United States, 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
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30-60
Summary Discussion
of Learning Objectives (cont'd)
• 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
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30-61
Summary Discussion
of Learning Objectives (cont'd)
• 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.
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30-62
Summary Discussion
of Learning Objectives (cont'd)
• 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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30-63
Summary Discussion
of Learning Objectives (cont'd)
• Comparing a monopsonist’s wage and
employment decisions with choices by firms
in industries with other market structures
 Compared to a perfectly competitive firm in both
the labor and output market

A monopolist in the output market employs
fewer workers

Pays the same wage if faced with perfect competition in
the labor market

Pays a lower wage if also a monopsonist
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30-64
End of
Chapter 30
Unions and
Labor Market
Monopoly Power