Lecture 5
Industrial Relations
Unions provide their members with higher wages,
more benefits and greater protection against job loss
than workers employed in nonunionized firms. Despite
these manifest benefits, the U.S. workforce has
become steadily less unionized over the last half
century, with the notable exception of the burgeoning
public sector. After documenting these stylized facts,
we analyze how and why this has happened. This
leads into a discussion of how strategic behavior is
used in determining work rules.
Unions
Unions are defined as a continuous associations of
wage earners for the purpose of maintaining or
improving their remuneration and the conditions of
their working lives.
Discussions of industrial relations in personnel
strategy would be incomplete without an analysis
of the union movement, because unions:
1. play a major role in shaping certain industries
and occupations.
2. reflect deep underlying tensions between
shareholders, management and labor,
regardless of whether an industry is currently
unionized or not.
Industry concentration
11% of non-farm workforce is unionized, but less
than 7% in the private sector.
The highest percentage of union membership is
among government, education, and protective
service employees.
Transportation, communication, public utilities,
construction, and manufacturing have the highest
percentage in private industry.
Union membership in production jobs in metropolitan
areas, and in the construction industry, has declined.
Current organizing efforts focus on health care,
custodial, and hotel and restaurant workers.
4
Geography of unions
Within the U.S. membership is highest in the industrial
belt connecting New York with Chicago though
Pittsburgh and Detroit (20 – 30%), lower in upper
New England and the west (10 – 20%), and lowest in
the South and Southwest (10% or less).
Males are 50% more likely to be union members than
females, mainly reflecting their occupational choices.
Union membership differs greatly across countries:
Canada
35%
France
12%
Sweden
85%
United Kingdom
40%
How unions promote themselves
Unions trumpet to their members and
non-union brothers and sisters the
benefits from unionizing:
1.Higher wages and benefits.
2.Greater job security
3.Promotions based on seniority
Are their claims true?
7
8
Unions and the economy
Secretary of Labor Department Perez (January 2014):
"Workers' ability to form unions . . . has been a
cornerstone of a strong middle class. . . . When workers
. . . are better able to bargain for their fair share of the
value they helped create . . . that leads to greater
economic security and economic mobility for everyone.”
AFL-CIO ( American Federation of Labor and Congress of
Industrial Organizations” “Unions help bring workers out
of poverty and into the middle class. In fact, in states
where workers don’t have union rights, workers’ incomes
are lower.”
These statements suggest that more unionization would
lead to greater overall prosperity.
The economics of unions:
competition before unionization
$
The tan shaded
triangles show net
output of firms.
competitive
wage
labor in sector
to be unionized
$
Marginal
product of
labor in
nonunionized
sector
The red
rectangle
shows total
payments to
labor
labor in
nonunionized sector
The economics of unions:
effects of unionization
Labor contracts in the union sector
but expands in the nonunion sector.
union wage
nonunion wage
The purple shows the net output of the unionized sector,
the tan the net output of the nonunionized sector, the blue
wages payments to union workers , the red wages to
nonunion workers and the green net loss to the economy.
How unions achieve their gains
Unions negotiate on behalf of all their workers, to prevent
employers from making agreements with some of their
workers and replacing the others.
Collective bargaining and final offer arbitration over pay
and conditions includes :
1.Conditions for dismissal: “at will” versus “just cause plus
grievance procedures”.
2.Wages and promotion: seniority versus merit.
3.Other benefits (retirement pensions with defined benefit
versus defined contribution)
Note the union would prefer an efficient allocation of labor
resources within the firm if they can extract the gains from
such an arrangement.
Where unions are likely to be most successful
Unions are more likely to be successful in organizations
with:
1.homogeneous labor (automotive) . . . Since individuals
workers are easy to replace there are gains from
banding together with a common objective.
2.costly plants with rigid schedules (airlines) . . .
Threating to close a plant or disrupting a schedule is
relatively straightforward.
3.regulated industries (mining) . . . Weighed down with
laws, the firm cannot easily counter labor’s proposals.
4.nonprofit organizations (museums) . . . Firm income
net of wages has no residual claimant.
14
How their composition has changed
Hidden within these gross trends are three
composition effects worth mentioning:
1. Employment in the government sector increased
from 5% in the early part of the 20th century to
15% in the 1980s, and then stabilized. Union
membership in this sector jumped from about 10%
to about 40% between 1960 and 1975.
2. Employment in agriculture declined from 20% to
3% in the same period. This sector was not
unionized at the turn of the 20th century.
3. Unionization in the nonagricultural private sector
has reflected the aggregate trend, declining to
about 10% of the workforce down from 35%.
Decomposing the decline
Decline is worldwide, in 17 of 20 major nations.
There has been attrition of existing union members.
Non-union workers are less interested.
Global competition in the product market, and the
mobility of capital, has diluted the potential gains
from unionization.
Unions have not been successful organizing workers
in new high technology industries.
Many new economy employers classify their workers
as temporary or independent contractors.
Foreign-owned Southern Auto Plants
In 1965 United Automobile Workers (UAW) produced
95% if cars and trucks built in the US. The percentage
had fallen to 86 by 1999 and 54 in 2013 .
Following Honda’s entry in 1982 (Ohio), foreign-owned
auto plants have been built by Toyota (Kentucky,
Indiana, West Virginia), BMW (South Carolina), Nissan
(Tennessee), Mercedes-Benz (Alabama) and
Volkswagen (Tennessee).
None are unionized. Last year the AWU failed in an
organizing drive at Volkswagen’s new plant in
Chattanooga. (President Obama responded that local
politicians were more interested in German
shareholders than American workers.)
17
Industrial breakdown and strikes
Strikes are dramatic and newsworthy, but they
are also quite rare:
Less than 5% of union members go on strike
within a typical work year.
Less than 1% of potential working hours of
union members are lost from strikes, before
accounting for compensating overtime.
About 90% of all collective agreements are
renewed without a strike, but the threat of a
strike affects more than 10%.
Labor history of Copperweld
(132 W Main St, Shelby Ohio)
Historical background:
1. 1853, Shelby is incorporated.
2. 1890, Seamless tube industry begins (in Shelby).
3. 1915, Copperweld’s name comes from a company
started in Rankin (about 5 miles from here next to
the Monongahela).
4. 1988, $90 million invested in Shelby plant upgrade.
5. 2010, Shelby’s population stands at 9,000.
6. About 400 employees work at the Copperweld plant.
7. The plant is unionized.
Recent ownership history of Copperweld
Takeover history:
1. 1975, Imétal S.A. acquires controlling interest.
2. 1999, LTV Steel acquires Copperweld Corporation
from Imétal for $650m.
3. 2000, LTV files for Bankruptcy.
4. 2002, Dofasco acquires most of LTV Copperweld
assets.
5. 2006, Copperweld resold to a private investor.
6. 2011, acquired by Fushi International for $22.5m.
7. 2012, Private investor group headed by Chairman
Fu Li delists company from Nasdaq.
Scheduling production at Copperweld
Copperweld swaps dyes on a welding machine to make
steel tubing of different diameters.
It takes several hours of labor to replace a dye.
Once the dye is changed, there is less work because
the welding machine requires little supervision.
Copperweld processes orders for different types of
steel tubing when they receive them.
This implies a trade-off between:
1. how much inventory of completed tubing stands on
the floor waiting for an order to be shipped.
2. how often the dye is changed.
The employees, not the plant manager, decide when to
change a dye (subject to the plant remaining viable).
Southwest in the cold midwest
In the first week of 2014, Southwest cancels 40% of its
flights at Midway and delays another 40%.
Ramp workers at Midway call in sick more than 450
times, for about 22% of their scheduled shifts.
Southwest begins requiring doctor's notes for sick leave.
The union sues the carrier for breach of contract.
Southwest alleges the sick calls are "widely perceived to
be a coordinated job action to protest the slow progress"
of contract negotiations. (Southwest workers are now
paid very generously and its price increases reflect that.)
The union says no: A spike in illnesses was fueled by
mandatory overtime that exhausted workers.
The judge dismisses the case, and suggests the union
file a grievance instead.
Leadership described
This previous slides on Copperweld and Southwest
suggest that what might look like a logistic problem
(scheduling or inclement weather) is actually a personnel
problem, indicating there might be a role for leadership.
A good leader is someone who persuades other people to
follow his or her suggestions when they would have
behaved differently otherwise, even the the advice giver
has no power of coercion. A poor leader is ignored.
Managers are routinely called upon to be leaders,
directing activity without having the power to enforce
their suggestions.
They compete with unions on how to organize and
schedule work activities.
Work rules
In the absence of a strong chain of command, work
rules should be self enforcing. Otherwise they run
the risk of being disregarded.
In other words, it should be in the interests of each
worker to follow the instructions given to him or her,
if every other worker is following the instructions
given to them.
Formally this is saying that given the incentive
structure in place work rules form a Nash
equilibrium.
The goal of the personnel manager is to design work
rules that have this property.
Cleanup crew
To illustrate this concept, we now consider a
firm who employs two cleaners.
Suppose Tom and Jerry are cleaners hired to
take away trash, vacuum the floors and clean
bathrooms each night after work .
The players choose between shirking on the
job or working diligently.
Overtime possibilities
If they both work diligently, cleaning is
completed without any overtime.
If one shirks and the other is diligent, then
the diligent worker is paid an extra 6
hours of overtime, while the shirker is paid
just 1 extra hour.
If they both shirk, they each collect 4
hours of overtime pay.
Net benefits to the crew
We assume that each player’s benefits are
proportional to the amount of overtime
received.
Multiplicity and mixing
There are two pure strategy Nash equilibrium,
yielding (6,1) and (1,6) respectively.
There is also a mixed strategy Nash equilibrium.
In fact one can prove that if a
game has more than one pure
strategy Nash equilibrium, then
it also has at least one mixed
strategy Nash equilibrium.
We shall call the mixed strategy
Nash equilibrium an
uncoordinated solution.
Solving the mixed strategy solution
Let p denote the probability that Tom shirks rather
than working diligently.
Jerry is indifferent between the choices if:
4p + (1 – p) = 6p => p = 1/3
Similarly let q denote the probability that Gerry
shirks rather than works diligently.
By symmetry, setting q = 1/3 makes Tom indifferent
between the two choices.
Therefore the mixed strategy equilibrium solution is
to set p = q = 1/3 , yielding an expected payoff to
both employees of:
4*1/9 + 1*2/9 + 6*2/9 +0*4/9 = 2
Achieving coordination with repetition
Now suppose the cleaning contract lasts for N nights.
Some coordinated solution outcomes might be:
(6,1), (6, 1) . . .
for the N nights.
(1,6), (1,6) . . .
for the N nights.
(6,1), (1,6) . . .
for the N nights.
(4,4), . . ., (4,4), (1,6), (6,1)
N - 2 rounds of (4,4) followed by (1,6), (6,1).
Feasible average payoffs
(1,6)
Jerry’s
average
payoffs
This area shows what
average payoffs in a
finitely repeated game
are feasible given the
firms’ strategy spaces.
(4,4)
(6,1)
(0, 0)
Tom’s average payoffs
Individual rationality
Jerry’s
average
payoffs
Individual
rationality
coordinate
pair (1,1)
(1,6)
The area, bounded below by
the dotted lines, gives each
player an average payoff of
at least 1. It is guaranteed
by individual rationality.
(6,1)
(1,1)
(0, 0)
Tom’s average payoffs
Average payoffs in equilibrium
Jerry’s average payoffs
(1,6)
(4,4)
The theorem in the next
slide states that every
pair in the enclosed area
represents average
payoffs obtained in a
solution to the finitely
repeated game.
(6,1)
(1,1)
(0, 0)
Tom’s average payoffs
Folk theorem
Let w1 be the worst payoff that Player 1 receives
in a solution to the one period kernel game, let
w2 be the worst payoff that Player 2 receives in
a solution to the one period kernel game, and
define w = (w1, w2)
In our example w = (1,1)
Folk theorem for two players: Any point in the
feasible set that has payoffs of at least w can be
attained as an average payoff to the solution of
a repeated game with a finite number of rounds.
Selecting a solution
More generally, the maximum punishment for
deviating from a prescribed contract path is the payoff
guaranteed by the individual rationality constraint that
comes from repeatedly playing the unfavorable kernel
equilibrium until the end of the game.
This penalty supports any contact with payoffs that
average more than the value given by individual
rationality over the remaining rounds of the repeated
game.
A union leader selects the contract that maximizes his
utility, which might be positively related to the sum of
the worker’s wages, subject to the constraint that the
individual rationality is satisfied by each player.
A union sets the work rules
The outcome {(4,4), (1,6), (6,1)} comes from
Tom and Jerry playing:
(shirkT1, shirkJ1)
(workT2, shirkJ2)
(shirkT3, workJ3).
Is this history the outcome of a solution strategy
profile to the 3 period repeated game?
Strategy for Tom
Round 1:
Round 2:
Round 3:
shirkT1
shirkT1  workT2
workT1  shirkT2
workJ1  workT3
shirkJ1  shirkT3
Tom should shirk on the first night. If Tom does shirk on the
first night, then he should work on the second night. If
however Tom worked on the first night, Tom should shirk on
the second. Tom should work on the third night if Jerry
worked on the first, but otherwise he should shirk.
Strategy for Jerry
Round 1:
Round 2:
Round 3:
shirkJ1
shirkT1  shirkJ2
workT2  workJ2
shirkJ1  workJ3
workJ1  shirkJ3
Jerry should shirk on the first night. If Tom does too,
then Jerry should shirk on the second. However if
Tom worked on the first night, then Jerry should
work on the second. If Jerry shirked on the first
night, then Jerry should work on the third, but
otherwise he should shirk.
Do these union work rules
form a (Nash) solution?
Note that the last two periods of play, taken by
themselves, are solutions to the kernel game,
and therefore strategic form solutions for all
sub-games starting in period 2.
To check whether shirking is a best response
for Tom if Jerry obeys union rules (shirking in
the first period), we compare the value of Tom
also following union rules versus deviating by
being a goody-goody on the first night.
Checking for deviations
by Tom on the first night
Compare
1. (shirkT1, shirkJ1)
2. (workT2, shirkJ2)
3. (shirkT3, workJ3)
with
1. (workT1, shirkJ1)
2. (shirkT2, workJ2)
3. (shirkT3, workJ3)
4
6
1
--11
Since 11 > 8 Tom
does not increase his
wages overall from
deviating on the first
night. A similar result
holds for Jerry.
6
1
1
--8
Therefore, by
symmetry, the
strategy profile is a
coordinated solution.
Will the plant manager coordinate the crew?
The goal of the plant manager is to minimize the
cost of cleaning the workplace.
If the plant manager can prevent coordinated
shirking, then the mixed strategy equilibrium for
the crew cost 4 units per period.
But if the crew coordinates then they can achieve
a summed payoff of at least 7 each period.
Cost minimizing contracts
A plant manager may not be able to set pay but can suggest
rules that the employees should follow.
What is the lowest sum of payoffs in a 3 period repeated
game that can be supported by a coordinated solution?
Consider the outcome of receiving (0,0) in the first period
(both diligent), followed by (1,6), (6,1), in the final 2
periods. (Tom shirks and then Jerry.)
It is induced by playing (workT1, workJ1) followed by
(shirkT2,workJ2) and (workT3, shirkJ3).
Can this outcome be supported by a coordinated solution?
Strategy for Tom
Night 1:
Night 2:
Night 3:
workT1
workJ1  shirkT2
shirkJ1  workT2
workT1  workT3
shirkT1  shirkT3
Tom should work on the first night. If Jerry shirks on the first
night, then Tom should work on the second night too. If
Jerry works diligently on the first night, Tom should shirk on
the second. Tom should work on the third night, unless he
shirked on the first night.
A strategy for Jerry is constructed in a similar way.
Confirming the solution strategy
Strategy for Tom:
If Jerry plays deviates from the profile
prescribed in previous slide, work diligently
for all the remaining nights. Otherwise
follow prescription. Similarly for Jerry.
Note that on the last two nights, Tom and Jerry
are playing a Nash equilibrium for that
particular night, regardless of what has
happened previously.
As in the “union rules” case we can confirm the
best response is to work on the first night,
given the repercussions from deviating.
Should the plant manager intervene?
The overtime hours cost for cleaning is:
(0 + 0) + (6 + 1) + (6 + 1) = 14
The expected cost from leaving Tom and Jerry to play
an uncoordinated game is:
(2 + 2) + (2 + 2) + (2 + 2) = 12
Therefore the manager should not intervene unless
Tom and Jerry are coordinating.
This result shows that a decentralized contract, leaving
the workers to play a period by period game with each
other, may be more profitable to the employer than
direct intervention.
Longer term contract employment
Now suppose the contract lasts 4 nights.
The expected cost of an uncoordinated piece rate
contract is 16 overtime hours, computed from 2 (crew)*2
(overtime hours per round)*4 (nights).
The individual rationality constraint guarantees each crew
member an average of at least 1 unit of overtime. So
consider the following contract of 14 overtime hours:
(0,0) for the first 2 nights and then (1,6), (6,1), to
conclude the final 2, yielding each worker 1.75.
This coordinated solution is supported by a penalty
system that awards 1 hour overtime for the remaining
nights to the first player that deviates from the contract.
The loss from unionizing work rules
In a 3 period contract we deduct from the total payments
under unionization (22) the amount management would
pay if the crew are uncoordinated and play a mixed
strategy (12) to obtain a loss of 10 or 3.33 per period.
However as the contract length, or number of nights
extends indefinitely, the loss to management from
unionization increases to 8 per period.
This arises because leaders (plant manager, or union) can
benefit from longer periods of coordination, and more
credibly threaten bigger punishments to deviations from
their orders when contracts are longer.
Summary
Workers in the unionized sector, and to some extent
managers and shareholders in the nonunionized sector,
benefit at the expense of workers in the nonunionized sector
and managers and shareholders in the unionized sector.
These benefits come in the form of higher pay, better
benefits and (for the most part) greater job security.
Leadership combines the talent of recognizing the set of self
enforcing contracts, selecting a strategy profile from the set,
and persuading everyone else to play their part.
Devising and enforcing work rules is one arena where plant
and scheduling managers battle with union bosses for the
upper hand. Collective bargaining is another.