McConnell_12e C10 Labour economics slides

Labour economics

1. Chapter 10 The Demand for Labor Copyright 2022 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

2. After reading this chapter, you should be able to: L O 10-01: Describe the historical background to the development of labor unions. L O 10-02: Describe the distribution of union membership and the basic structure of American labor unionism. L O 10-03: Summarize recent trends in private sector unionism and evaluate the various explanations for the relative decline in union membership. L O 10-04: Explain the monopoly union and efficient contract models of unions and summarize the empirical evidence. L O 10-05: Summarize the techniques that unions use to raise the wages of their members. L O 10-06: Explain the accident and asymmetric information models of strikes.

3. 1. Why Unions?

4. Why Unions? Workers prior to industrial revolution were self-employed (that is worked for themselves). Industrialization separated the functions of management and labor. Workers became dependent on owners for employment and income. Workers formed unions to protect their interests and bargain collectively with employers. L O 10.1

5. 2. Labor Unionism: Facts and Figures

6. Union Membership by Industry Unionization tends to be higher in the goods producing industries such as manufacturing and construction. Unionization tends to be lower in service industries such trade and finance, real estate, and insurance. Unionization is high in transportation, communications, and utilities due to low labor demand elasticities. L O 10.2 Access the text alternative for slide images.

7. Union Membership by Occupation 1 White-collar workers such as managers and sales workers tend to have low unionization rates. The low white-collar worker unionization rates are because they have higher wages and some managers are exempt from unionization. L O 10.2 Access the text alternative for slide images.

8. Union Membership by Occupation 2 Public sector workers have a much higher unionization rate than private-sector workers. The unionization rate of public sector workers rose rapidly in the 19 60s and 19 70s when laws allowing public-sector workers to unionize were passed and public sector managers did not aggressively fight the unionization of their workers. L O 10.2 Access the text alternative for slide images.

9. Union Membership by Demographic Group L O 10.2 Access the text alternative for slide images.

10. High Unionization States L O 10.2 Access the text alternative for slide images.

11. Low Unionization States L O 10.2 Access the text alternative for slide images.

12. 3. Unionism’s Decline

13. 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 19 80 and has fallen to slightly more than 14 million now. The percent of labor force that is unionized fell from 30% in 19 50 to 10% now. L O 10.3 Access the text alternative for slide images.

14. Causes of Decline in Unionism 1 Structural changes: The structural-change hypothesis is the labor force and economy has changed in ways that are unfavorable to unions. Employment growth has been greater in traditionally nonunion sectors such white-collar jobs, services, women, small firms, part-time, and Southern states. L O 10.3

15. Causes of Decline in Unionism 2 The union wage differential increased in the 19 70s. 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 and their unionism has not decreased. Unions have been able to unionize traditionally nonunion workers in the past. L O 10.3

16. Causes of Decline in Unionism 3 Managerial-opposition hypothesis: The managerial-opposition hypothesis argues that the increased union wage advantage in the 19 70s caused firms to fight unions more aggressively. Firms may hire permanent strike breakers, illegally fire pro-union workers, hire consultants, etc. The number of illegal anti-union has increased. L O 10.3

17. Causes of Decline in Unionism 4 The substitution hypothesis: The substitution hypothesis argues that the government and employers now provide services that were previously provided 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 worker-management communication methods. L O 10.3

18. Causes of Decline in Unionism 5 Other factors: Unions have decreased their organizing efforts. The National Labor Relations Board, which oversees unionization efforts, became less pro-union under Reagan-Bush. L O 10.3

19. Causes of Decline in Unionism 6 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. L O 10.3

20. Union Responses to Decline Increased mergers among unions: Example: N E A and A F T. 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. L O 10.3

21. 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 goods-producing 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. L O 10.3

22. 4. What Do Unions Want?

23. Monopoly Union Model 1 Economists usually assume that the goal of a union is to increase both the wages and employment of its members . 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. L O 10.4

24. Monopoly Union Model 2 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 . 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. L O 10.4

25. Monopoly Union Model 3 In the monopoly union model, the utility maximizing wage and employment for the union is point u, where union indifference curve I 3 is just tangent to the labor demand curve D L . The union raises the wage rate from W c to W u , the firm decreases employment from Q c to Q u , and the union increases total utility from I 1 to I 3 . L O 10.4 Access the text alternative for slide images.

26. Efficient Contracts Model 1 The outcome of the monopoly 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 curve and the firm is no worse off because it stays on the same isoprofit curve. The combinations of wage and employment where at least one party is better off without the other party worse off are called efficient contracts. L O 10.4 Access the text alternative for slide images.

27. Efficient Contracts Model 2 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. L O 10.4

28. Efficient Contracts Model 3 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. L O 10.4

29. Empirical Evidence 1 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. L O 10.4

30. Empirical Evidence 2 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. The findings from these indirect tests yield mixed support for the efficient contracts model . L O 10.4

31. 5. Unions and Wage Determination

32. Unions and Wages 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. L O 10.5

33. Increasing Labor Demand To the extent that unions can increase the demand for union labor from ( D to D 1 ), they can gain both higher wages and employment. L O 10.5 Access the text alternative for slide images.

34. Methods to Increase Union Labor Demand Increasing product demand. Lobbying for tariffs on foreign goods. Enhancing productivity. Participation in labor-management committees on productivity. 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. Increasing the number of employers. Attempts to pass requirements for domestic content for autos sold in the U.S. L O 10.5

35. Changes in Labor Supply If a union decreases the supply of available labor from S to S 1 , the equilibrium wage rate will rise to W 1 but the equilibrium quantity will fall to Q 1 . L O 10.5 Access the text alternative for slide images.

36. Methods to Decrease Labor Supply 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. Raising nonwage income: Lobby to increase nonwage income sources such as Social Security in order to decrease labor supply. L O 10.5

37. Bargaining for an Above-Equilibrium Wage By organizing all workers and having a union shop (requiring all new hires to join the union), the union may achieve a wage W U that is above the competitive wage W C . The effect is to make the labor supply curve perfectly elastic at W U until point d. The employment level will fall from Q C to Q U . An efficiency loss of abc will also result. The more elastic is D L , the larger is the employment loss. As result unions try to reduce the elasticity of D L . L O 10.5 Access the text alternative for slide images.

38. Questions for Thought 2 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. 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? L O 10.5

39. 6. Strikes and the Bargaining Process

40. Accident Model The employer concession curve E C shows the maximum wage that the firm would be willing to pay to avoid a strike of a given length. The union resistance curve U R 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 U R and E C curves intersect and no strike will occur. If either party misperceives the other party’s concession curve, then a strike will occur. L O 10.6 Access the text alternative for slide images.

41. Asymmetric Information Models 1 Two types of strike models based on asymmetric information have been developed . The first model 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. Union leaders call strike to moderate demands. L O 10.6

42. Asymmetric Information Models 2 The second type of strike model emphasizes the information differences between the union and the firm. Firm has more information about the current and future profitability of the firm than the union. The firm has an incentive to understate the profitability of firm since it can reduce the wage settlement by doing so. L O 10.6

43. Questions for Thought 3 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? What role does information differences play in causing strikes? L O 10.6

44. End of Main Content Copyright 2022 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.