Professional Documents
Culture Documents
Chapter 10
Labour Unions
McGraw-Hill/Irwin
Labor Economics, 5th edition Copyright © 2010 The McGraw-Hill Companies, Inc. All rights reserved.
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Introduction
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• US uunion
o membership
e be s p & uunionisation
o sat o rates
ates rose
ose between
betwee 1930
930
and 1960 and then began a steady decline.
• Unionisation in the US has declined more rapidly than in other
nations! The phenomenon of ‘vanishing’ unions!
• Differences in unionisation rates across countries (see Table 10-
1). They arise from variations in the degree of political
effectiveness
ff i off union
i movements!!
- Specific US history of ‘business unionism’. Unions not so much
associated with a particular political party as in other countries etc.
- History of US unionism (not compulsory; read if interested).
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• A wo
worker
e joins
jo s a union
u o if the
t e union
u o offers
o e s her/him
e/ a wage-
wage
employment package that provides more utility than the wage-
employment package offered by a nonunion employer.
- Application of the labour-leisure choice model (see Figure 10-3)!
- Simple model: Only wages & employment included as job characteristics
(differences in working conditions, fringe benefits etc. neglected).
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• Thee ‘demand’
de a d for
o union
u o jobs iss depe
dependent
de t on
o the
t e size
s e of
o the
t e
wage increase, the amount of employment loss, and the costs of
union membership.
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• The structure of the economy and the labour market has been
changing.
h i Blue Bl collar
ll workers
k are less
l prevalent.
l t
• There has been a marked increase in labour force participation
rates of women (who tend to take most of the part-time jobs).
• Workers in oligopolistic industries (where economic rent is
earned) more unionised than workers in industries where there
is little economic rent.
• Etc.,
Etc , etc.
etc
• Deregulation in NZ meant that ‘excess rents’ that unions could
bargain for disappeared in many industries?!
- Also see: Cooper and May (2006), Union Rivitalisation in
Australia and New Zealand, 1995-2005, NZ Journal of
Employment Relations, 31(3), 17 pages.
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• A model of monopoly
p y unionism: A union is the sole seller of
labour to a firm.
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• The union chooses a wage and then the firm decides how many
workers to hire to maximise profit.
• The model suggests some workers lose their jobs due to the
union setting a wage above the competitive wage w*.
• Union better off when the labour demand curve is less elastic: It
can choose a higher
g wage
g but cause fewer job
j losses,, therebyy
obtaining higher utility.
- Recall “Marshall’s rules of derived demand” from chapter
3-7, p. 115! Unions will try to make labour demand and
product demand less elastic etc.
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EM E* Employment
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• Figure 10-5 and formulae (10-1 & 10-2). Note the assumptions
made to draw the figure: Two sectors in the economy, two
demand curves in one diagram, inelastic labour supply etc.
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Dollars D ll
Dollars I th
In the absence
b off unions,
i the
th competitive
titi
A D2 wage is w* and national income is given
A'
E by the sum of the areas ABCD and
wU
A′BCD′. Unions increase the wage in
B
w* sector 1 to wU. The displaced workers
D1
wN
F
move to sector 2, lowering the nonunion
wage to wN. National income is now
ggiven byy the sum of areas AEGD and
D G C D'
A′FGD′. The misallocation of labour
_ Sector 1
0 E'1 E1 H Employment reduces national income by the area of the
H
_
E'2 E2
Sector 2
0 Employment
triangle EBF (the deadweight loss of
employing too few workers in sector 1
and too many workers in sector 2).
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• The upper bound to the wage-employment combinations that the firm can
offer is given by the zero-profit
zero profit isoprofit curve πZ.
• Line PZ: All points where union’s indifference curves and firm’s isoprofit
curves are tangent. These points are all Pareto optimal. PZ is the contract
curve.
• The efficient contract curve lies to the right of the labor demand curve. An
efficient contract leads to more employment than would be the case with
monopoly unionism. Implies that unions and employers bargain over both
wages and employment.
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Featherbedding
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• On the vertical contract curve, the firm’s output and revenue are
constant.
• Th
The point
i realised
li d on a vertical
i l contract curve shows
h h the
how h
available rent is divided between (extra) profits for the firm and
workers’ wages. It depends on the bargaining power of both
parties.
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EZ E* Employment
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10-6 Strikes
• Economists have problems explaining why strikes occur (maybe they should
askk other
th social
i l scientists?)!
i ti t ?)!
• Because strikes are costly, they shrink the amount of rents over which the
parties are negotiating.
• When parties have g good information about the costs and likelyy outcome of a
strike, then it is irrational to strike.
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Union's
R
Rents The firm
Th fi makes k theth offer
ff att point
i t RF,
100
keeping $75 and giving the union $25.
The union wants point RU, getting $75
75
RU for its members and giving the firm
$25. The parties do not come to an
R* agreement and a strike occurs. The
50
strike is costly, and the poststrike
S
40 settlement occurs at ppoint S;; each
RF
25 party keeps $40. Both parties could
Firm's have agreed to a prestrike settlement
25 40 50 75 100 Rents at point R*, and both parties would
have been better off.
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• Since the union will experience losses during a strike, it will reduce its wage
demands throughout the duration of a strike (there is a downward-sloping
union resistance curve).
• A firm knows that the union will moderate its demands over time (it knows
the union resistance curve).
• A firm incurs costs during a strike, so it will choose a strike duration that
maximises the present value of profits (the ‘optimal’ length of the strike).
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• Al
Also note
t that
th t the
th fringe
fi benefits
b fit package
k received
i d by
b union
i
workers is generally worth more than the package received by
nonunion workers, resulting in a “union compensation gap”
somewhat larger than the union wage gap.
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