Principles of Economics
2nd edition
by Fred M Gottheil
PowerPoint Slides prepared by Ken Long
©1999 South-Western College Publishing
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Chapter 16
Wages and Employment:
Monopsony & Labor Unions
3/23/2016
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What is a Labor Union?
An association of workers,
each of whom transfers
the right to negotiate
wage rates, work hours,
and working conditions
to the association
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Types of Unions
Craft or trade union--members practice the
same craft--plumbers, etc.
Industrial union, workers in the same
industry--auto, steel
Public employees union, members are
government employees--teachers, police,
etc.
Employee Associations: American medical
association, etc--not really unions but
similar in many ways
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Brief History of Unions
• Early unions, groups of craft workers
• Knights of Labor, early attempt at a
national union of all workers
• Problems faced by the Knights, skilledunskilled debate
• In early days, courts very anti-union
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AFL, American
Federation of Labor,
formed in 1883
Attempted to organize
the skilled craft
unions
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Congress of Industrial
Organizations (CIO)
Formed in 1938, attempt to
organize the industrial workers
Auto and Steel industries among
their first successes
AFL-CIO merged in the 1950’s
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What are the major Acts?
• Norris-La Guardia Act of 1932
• Wagner Act of 1935
• Taft-Hartley Act of 1947
• Labor Management Reporting
& Landrum-Griffin Act 1959
• Civil Rights Act of 1964
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Norris-LaGuardia Act,
1932
• Outlawed yellow-dog contracts in
which workers agreed to not join
unions in order to get a job
• Restricted injunctions against
unions
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Wagner Act, 1935
(national labor relations
act)
• Gave workers the right to join
unions if majority of workers vote
to
• Required management to engage
in good faith bargaining
• Created national labor relations
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board
Taft-Hartley Act, 1947
• Closed shops illegal, union shops
illegal if state passes right to work
law
• Certain strikes illegal
• Cooling off period can be ordered
in national emergency cases
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What is a Closed Shop?
An arrangement in
which a firm may hire
only union labor
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What is a Union Shop?
An arrangement in which a
firm may hire nonunion
labor, but every worker
hired must join the union
by a certain date
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Landrum-Griffin Act,
1959
• Unions must hold
elections, keep financial
records
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Union Behavior, Ways of
Raising Wages
• Increase the demand for labor
• Decrease the supply of labor
• Collective bargaining
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Wages
Increasing the demand for labor
S
W2
W1
D2
D1
Labor
L1
L2
16
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Increasing the demand
for Union Labor
• Trying to increase the demand for the
product produced
• “Look for the Union Label”
• Improve the productivity of union labor
• Restrict the supply of non-union made
goods, such as via import restrictions
• Featherbedding, trying to require more
work than necessary
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Wages
Decreasing the supply of labor
S2
W2
W1
S1
D
L2
L1
Labor
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Decreasing the supply of
labor
• Exclusive unions, such as the craft
unions, via initiation fees,
apprenticeship programs
• Employee associations such as AMA
often accused of restricting supply
• Usually requires help from the
government
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Wage Rate
W2
S
B
S'
W1
A
S' S. This is the supply curve
the union may want
management to believe exists.
It says no one will work
for less than W2.
D
S
0
Q2
Q1 Q3
Quantity of Labor
Successful
Collective
Bargaining by
Union
What is a Monopsony?
A labor market with
only one buyer
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Why is the Supply Curve
for Labor upward sloping?
Because as the wage rate
increases the incentive
for more people wanting
to work increases
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W2
S
W1
Q1
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Q2
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What is Marginal
Labor Cost?
The MLC is the cost of
hiring one more worker
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Why does the MLC
Curve lie above the
Supply Curve?
When the Monopsonist
increases employment,
it must offer a higher
wage to all workers
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W
MLC
S
Q
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What is Marginal
Revenue Product?
MRP is the addition to
total revenue that one
more worker contributes
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How many workers
will a firm hire?
It continues hiring
workers as long as
MRP > MLC and stops
when MRP = MLC
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Why is the MRP Curve
downward sloping?
Because each additional
worker hired adds less
and less to total product
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W
MLC
S
Wc
MRP (D)
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6,000
Lc
Labor
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Comparison of
Monopsony and
Competition
Monopsony wages are
lower, hire less labor than
in a perfectly competitive
market
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W
MRP = MLC
MLC
$26
$16
Return to
Monopsony Power
S
MRP
Q
6,000
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When workers are
unionized, who is the
supplier of labor?
The Union
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For more information
about labor disputes:
http://www.ljx.com/practice/labor
employment/index.html
http://cher.eda.doc.gov/nlrb/home
pg.html
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What happens if the
company offers a lower
wage than $26?
Collective bargaining
ensues where the
company and the labor
union negotiate
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What is a Strike?
The withholding of labor
by a union when the
collective bargaining
process is unacceptable
to the union
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What problem does the
union have at $26?
It must control the supply of
labor or it will have too
many workers and weaken
its bargaining power
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For more information
about labor unions:
http://www.unionweb.org
http://www.teamster.org
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Union Impact on wages
Studies by Lewis and others find
average union wage 10-15% higher
than comparable nonunion labor
In some industries, this is higher,
others lower
Does not include fringe benefits
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Union Impact on nonunion waqes, 2
possibilities
Spillover effect--fewer jobs in the union
sector means a greater supply of labor
to nonunion jobs, lowers wages in the
nonunion sector
Threat effect--do nonunion firms pay
more due to the “threat” of
unionization?
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Effect of Labor Unions on Union and
Nonunion Wages (spillover effect)
Changes in supplyconditions and wagerates in the unionizedsector can bring on
changes in supplyand wage rates in thenonunionized sector.
S'
U
Wage Rate
Wage Rate
SNU
SU
W2
W1
S'
NU
2
1
1
W1
W2
2
DU
0
Q'
QU
U
Quantity of Labor
(a) Unionized Sector
DNU
0
QNU Q'
NU
Quantity of Labor
(b) Nonunionized Sector
Union Impact on
Productivity, 2 different
views
Traditional, sees unions as harming
productivity via strikes, restrictive
work rules, etc.
New view (Freeman and Medoff)-sees
unions as giving workers a collective
voice, reduces turnover of workers,
lowering training costs, worker
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“married” to the firm
• What is a Monopsony?
• Why is the Supply Curve for Labor
upward sloping?
• What is Marginal Labor Cost?
• What is Marginal Resource Product?
• How many workers will a firm hire?
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• Why is the MRP Curve downward
sloping?
• What wage rate will the union
agree to work?
• What is a Strike?
• What is a Closed Shop?
• What is a Union Shop?
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END
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