Ch. 27: Wages, Unions, and Labor
Del Mar College
John Daly
©2003 South-Western Publishing, A Division of Thomson Learning
Types of Unions
• Craft or Trade Union: a union whose membership is
made up of individuals who practice the same craft or
trade.
• Industrial Union: a union whose membership is made
up of workers who work in the same firm or industry
but do not all practice the same trade or craft.
• Public Employees Union: a union whose membership
is made up of workers who work for local, state, or
federal government.
• Employee Association: an organization whose
members belong to a particular profession.
Some Objectives of Labor Unions
• Employment for all Members
• Maximizing the Total Wage Bill:
Maximizing the dollar amount coming from
the employer to the union members. The
total wage bill is maximized where the
demand for labor is unit elastic.
• Maximizing income for a limited number of
union members.
Labor Union
Objectives
If total membership in
the union is Q1, and the
union’s objective is
employment for all its
members, it chooses W1.
If the objective is to
maximize the total wage
bill, it chooses W2,
where the elasticity of
demand for labor equals
1. If the union’s
objective is to maximize
the income of a limited
number of union
workers (represented by
Q3), it chooses W3.
Elasticity of Demand for Union
Labor
• Availability of Substitute Products: unions would
attempt to reduce the availability of substitutes for the
products they produce, through such means as import
restrictions.
• Availability of Substitute Factors: Two general
substitutes for Union labor: Nonunion labor and certain
types of machines; unions would attempt to reduce the
availability of nonunion labor and nonhuman workers
by opposing relaxation of immigration laws, supporting
a high minimum wage, and opposing automation
substitutes for labor.
For union A, which has an inelastic demand for its labor
between W1 and W2, a higher wage rate brings about a
smaller cutback in the quantity of labor than for union B,
which has an elastic demand for its labor between W1 and
W2. We predict that union B will be less likely to push for
higher wages than union A because of its wage-employment
tradeoff is more pronounced.
The Demand for Union Labor
Labor unions can try to meet their objectives by increasing
the demand for union labor.
• Increasing Product Demand: Unions occasionally urge
the public to buy union products, or support legislation
that keeps out imports or makes the imports more
expensive
• Increasing Substitute Factor Prices: Unions have
often lobbied for an increase in the minimum wage.
• Increasing Marginal Physical Product: unions prefer
to add skilled labor to their ranks, and they sometimes
undertake training programs for new entrants.
Decreasing the Supply of Labor
• One method to achieve Union objectives includes
decreasing the supply of labor, which translates to
higher wage rates.
• A closed shop is an organization in which an
employee must belong to the union before he or
she can work: Currently Prohibited by TaftHartley Act.
• A union shop is an organization does not require
individuals to be part of a union to be hired, but
does require them to join the union within a
certain period of time after becoming employed.
Affecting Wages Directly
• Collective bargaining is the
process whereby wage rates
are determined by the union
bargaining with management
on behalf of all its members.
• Collective bargaining is
unlikely to be successful
unless a union can strike.
• A strike occurs when
unionized employees refuse to
work at a certain wage or
under certain conditions.
Strikes
The purpose of a strike is
to convince management
that the supply curve is
what the union says it is.
This often depends on the
ability of striking union
employees to prevent
nonstriking and nonunion
employees from working
for management at a lower
wage rate than the union is
seeking through collective
bargaining.
Successful Collective Bargaining
By The Union
We start at a wage rate of W1. The
union’s objective is to increase the
wage rate to W2. This means the
union holds that the new supply
curve is SS – the heavy supply
curve. To convince management that
the new supply curve looks as the
union says it does, the union will
have to either threaten a strike or call
one. We assume that the union is
successful at raising the wage rate to
W2. As a consequence, the quantity
of labor employed is less than it
would have been at W1.
Q&A
• What will lower the demand for union
labor?
• What is the difference between a closed
shop and a union shop?
• What is the objective of a strike?
The Case of Monopsony
• A single buyer in a factor market is known
as a monopsony. A monopoly is a single
seller of a product; a monopsony is a single
buyer of a factor.
• Marginal factor cost increases as it buys
additional units of a factor, and the supply
curve of the factor is different from the
monpsonist’s marginal factor cost curve.
The Labor Union and the
Monopsonist
For the
monopsonist,
higher wage
rates do not
imply fewer
persons
working
Facing a Monopsonist?
• Some persons contend that labor unions and
collective bargaining are necessary in situations
where labor is being paid less than its marginal
revenue product.
• Successful collective bargaining on the part of the
labor union in this setting will not be subject to the
wage-employment tradeoff it encounters in other
settings.
• There is no wage-employment tradeoff for the
labor union when it faces a monopsonist. It is
possible to raise both the wage rate and the
number of workers employed.
Union Effects on Wages
• Most studies show that some unions have
increased their members’ wages substantially
whereas other unions have not increased their
members’ wages at all.
• There are theoretical and empirical reasons for
believing that labor unions increase the wages of
union employees and decrease the wages of
nonunion employees.
• The percentage of the national income that goes to
labor (Union plus nonunion) has been fairly
consistent over time.
Median Weekly Earnings in the Union and
Nonunion Sectors, Selected Industries, 1998
In five of the six
industries shown,
union workers
earned a higher
weekly salary in
1998 than did
nonunion workers.
Overall in 1998, the
median weekly
salary was $659 for a
union worker and
$499 for a nonunion
worker.
SOURCE: Statistical Abstract
of the United States, 1999.
The Effect of
Labor Unions on
Union and
Nonunion Wages
We begin at a wage rate of W1 in both unionized sector (a) and the
nonunionized sector (b). Next, the union manages to increase its wage
rates to W2 either through collective bargaining or by decreasing the
supply of labor in the unionized sector (shown). Fewer persons now
work in the unionized sector, and we assume that those persons who
lose their jobs move to the nonunionized sector. The supply of labor in
the nonunionized sector rises and the wage rate falls.
Unions’ Effects on Prices
• Higher union wages ill
cause higher prices for the
products the union labor
produces.
• Lower nonunion wages
mean lower costs for the
firms that employ
nonunion labor and thus
lower prices for the
products produced by
nonunion labor
Unions’ Effects on Productivity &
Efficiency: The Traditional View
• Labor unions have a negative impact on
productivity and efficiency.
• They often have unnecessary staffing requirements
and insist that only certain persons be allowed to
do certain jobs.
• Strikes disrupt production and prevent the
economy from realizing its productive potential.
• Labor Unions drive an artificial wedge between
the wages of comparable labor in the union and
nonunion sectors of the labor market.
Union’s Effects on Productivity
& Efficiency: A New View
• Without a labor union, workers who are
disgruntled with their jobs, who feel taken
advantage of by their employers, or who feel
unsafe in their work will leave their jobs and seek
work elsewhere.
• The labor union makes the employees feel more
confident, less intimidated, and more secure in
their work. Such positive feelings usually mean
happier, more productive employees. Some
proponents of this view also hold that the
employees are less likely to quit their jobs.
Q&A
• What is a major difference between a
monopsonist and a factor price taker?
• Under what conditions will the minimum wage
increase the number of people working?
• How could a collectively bargained higher wage
rate in the unionized sector of the economy lead
to a lower wage rate in the nonunionized sector
of the economy?