Chapter 10
Labor Unions
and Collective Bargaining
McGraw-Hill/Irwin
Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved.
1. Why Unions?
10-2
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.
10-3
US Union History
o 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
10-4
Depression & Later Reforms
o 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
10-5
Depression & Later Reforms
o 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
10-6
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
10-7
2. Labor Unionism:
Facts and Figures
10-8
Table 13.1 Union Membership and Bargaining Coverage, Selected
Countries, 2004
10-9
Union Membership by
Industry,
2008
• Unionization tends to
be higher in the goods
producing industries
such as manufacturing
and construction.
Finance & Insurance
Agriculture
Trade
Mining
• Unionization tends
Manufacturing
to be lower in service
Services
industries such trade
Construction
and finance, real
estate, and
Transportation, Comm, & Utilities
insurance.
Public Administration
• Unionization is high in
transportation,
communications, and
utilities due to low labor
demand elasticities.
0
10
20
30
40
Percent Union Membership
10-10
Union Membership by
Occupation, 2008
• White-collar
workers such as
managers and
sales workers tend
to have low
unionization rates.
Sales Workers
Managers
Clerical Workers
Service Workers
Production
Install and Repair
• The low whiteTransportation
collar worker
Professional and Technical
unionization rates
Construction
are because they
have higher wages
0
and some
managers are
exempt from
unionization.
5
10
15
20
Percent Union Membership
10-11
Figure 13.1 Union Membership as a Percentage of All Workers, by
Sector, United States, 1973–2008
10-12
Union Membership by Public
Sector Status, 2008
• Public sector
workers have a much
higher unionization
rate than privatesector workers.
Public
• The unionization
rate of public sector
workers rose rapidly in
the 1960s and 1970s
when laws allowing Private
public-sector workers
to unionize were
passed and public
sector managers did
0
not aggressively fight
the unionization of
their workers.
10
20
30
40
Percent Union Membership
10-13
Union Membership by
Demographic Group, 2008
10-14
High Unionization States,
2008
Oregon
Nevada
Connecticut
New Jersey
California
Michigan
Washington
Alaska
Hawaii
New York
0.0
5.0
10.0
15.0
20.0
25.0
Percent Union Membership
10-15
Low Unionization States,
2008
10-16
Structure of Organized Labor
Federations
National Unions
Local Unions
10-17
Structure of Organized Labor
o 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
10-18
Structure of Organized Labor
o 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
10-19
Structure of Organized Labor
• National Education Association (3 million), a
national union, is not associated with either AFLCIO 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
10-20
Collective Bargaining
o 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
10-21
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
10-22
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.
10-23
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%).
10-24
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 parttime employment, traditionally nonunion
10-25
Causes of Decline
in Unionism
∞ 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.
10-26
Causes of Decline
in Unionism
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
10-27
Causes of Decline
in Unionism
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 workermanagement communication methods.
∞Willingness to join unions has declined
10-28
Causes of Decline
in Unionism
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.
10-29
Causes of Decline
in Unionism
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.
10-30
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.
10-31
Questions for Thought
1. Critically evaluate each of these statements:
(a) “The relative decline of the American labor
movement can be explained by the shift from goodsproducing 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.
10-32
4. What Do Unions
Want?
• Monopoly Union Model
• Efficient Contracts Model
10-33
Monopoly Union Model
o 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
10-34
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.
10-35
Monopoly Union Model
• 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.
• 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.
Wage
u
Wu
I4
I3
Wc
c
0
Qu
Qc
I1
DL
Employ
10-36
Efficient Contracts Model
• The outcome of the monopoly Wage
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.
• For example, at point y, the
union has achieved a higher
utility level than at point u by
being on a higher indifference
Wu
curve and the firm is no worse
Wy
off because it stays on the
same isoprofit curve.
• The combinations of wage
and employment where at
0
least one party is better off
without the other party worse
off are called efficient
contracts.
I3 I4
u
y
P1
DL
Qu
Qy
Employ
10-37
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.
10-38
Efficient Contracts Model
o 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.
10-39
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.
10-40
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.
10-41
5. Unions and Wage
Determination
10-42
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
10-43
Increasing Labor Demand
• To the extent that
unions can increase the
demand for union labor
from (D0 to D1), they can
gain both higher wages
and employment.
Wage rate
S
W1
W0
D1
D0
Q0 Q1
Quantity of
Labor Hours
10-44
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.
10-45
Changes in Labor Supply
• 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.
S1
Wage rate
S0
W1
W0
D0
Q1 Q0
Quantity of
Labor Hours
10-46
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
10-47
Craft vs. Industrial Unions
o 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
10-48
Bargaining for an AboveEquilibrium Wage
• By organizing all workers and Wage rate
having a union shop (requiring
all new hires to join the union),
the union may achieve a wage
WU
WU that is above the
competitive wage WC.
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.
SL
b
d
MWC
c
a
DL
• 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.
QU QC
Quantity of
Labor Hours
10-49
Questions for Thought
1. 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?
10-50
6. Strikes and the
Bargaining Process
Why do strikes occur?
• Accident Model
• Assymetric Information Model
10-51
Accident Model
• The employer concession
curve EC shows the maximum
wage that the firm would be
willing to pay to avoid a strike of Wage
a given length.
• 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.
EC
W*
UR
0
Expected Strike
Length
10-52
Accident Model Implications
o 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
10-53
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.
10-54
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
10-55
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
10-56
Questions for Thought
1. 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?
10-57