Chapter 10 Labor Unions

Union wage gap

D= Wu bar- Wn bar/ Wn bar -percent wage differential between union jobs and non-union jobs *although the union wage gap gives the differential between workers who are in union jobs and comparably skilled workers who are in non-union jobs, we will see that the union wage gap may have little to do with the union wage gain

What do Unions Want?

Samuel Gumpers- "more" -unions utility is assumed to depend on w&E and unions want more of both -highest indifference curve tangent to demand curve- unions wish to maximize utility, demand is constrained by the firms behavior and downward sloping labor demand curve is the constraint on union behavior

Janus vs. AFSCME

The case, Janus v. AFSCME, involved a challenge to the practice of public sector unions charging "agency fees" to employees who decline to join the union but who still benefit from the deals it bargains. The fees are typically similar to, but a bit lower than, union dues. In a 5-4 opinion written by Justice Samuel Alito and joined by the four other conservative justices (Anthony Kennedy, Clarence Thomas, John Roberts, and Neil Gorsuch), the Court ruled that requiring public employees to pay agency fees is unconstitutional under the First Amendment. The logic is that unions are political actors, and by allowing unions to charge agency fees, state governments are effectively compelling employees to financially support a political organization that they may or may not agree with. That, the plaintiffs claim, is compelled speech and thus unconstitutional.

Unions and Resource Allocation

W-E solution implied by the unionism model is inefficient because it reduces the total value of labor's contribution of national income - unions reduce employment in a union firm and increase employment in nonunion firms bc wage differs between the two sectors, unionism introduces and allocation inefficiency into the economy (last worker hired by non union firms would have a greater productivity if he or she had been hired in the union sector -why the value of labor's contribution to national income would increase if workers were reallocated across sectors There is Dead Weight Loss in this model to calculate this =1/2(Wu-Wn) (E* - E') -this bc increasing union wage drives non-union wage down bc more ppl enter are allocated to these jobs Efficiency loss/national income = 1/2 *(percent union-nonunion wage gap) *(percentage decline in employment in union sector) *(fraction of labor force that is unionized) * (labor share of national income)

Spillover Effects

as workers lose their jobs in union firms, the supply of workers in the nonunion sector increases and the competitive wage falls -this would overestimate the impact of the union on the wage of unionized workers

Strikes

firm makes offer at Rf keeping $75 and giving union $25, union offers Ru keeping $75 and giving firm $25. parties cant come to agreement and strike occurs- strike is costly and post-strike settlement occurs at point S each firm gets $40 , couldve agreed to R* where each get $50 and both had been better off -workers lose income and perhaps jobs -firms may lose customers permanently and diminish the long run value of the brand name

How much do unions increase the wage of their members?

percenage gain for union worker is =Wu-Wn/Wn Union wage gain- sum of gain for all union workers K/ K - measures what the avg worker in the economy would gain in percentage terms if he/she became a union member - hard to measure

The Civil Service Reform Act of 1978

prior to 1960s pubic sector workers were prohibited from forming unions - this order now regulates unions in the federal sector -this legislation prohibits strikes and protects the rights of federal workers to either join or not join unions -a number o state laws have extended the right to organize to state and local workers in many jurisdictions - led to a rise in public sector unionization rates at the same time that union membership in the private sector was collapsing -public sectors unions rose from 20% in 1960 to 36% in 2012

yellow-dog contracts

prior to the great depression, social attitudes and the political climate toward labor unions in the U.S. were quite unfavorable -employers made frequent use of yellow-dog contracts which was a condition of employment that the worker would not join a union -when unions attempted to organize workers who had signed these contracts, unions were found guilty of inducing a breach of contract -1917 supreme court upheld he constitutionality of yellow dog contracts

Evidence on Efficient Contracts

regardless of bargaining process, efficient contracts suggest that both firms and unions will want to move off the demand curve- available studies indicate that w-e outcomes in unionized firms do not lie on the labor demand curve

The contract curve

shows why both firms and unions have the incentive to move off of the demand curve -monopoly union demands Wage m , however can move to points that are along same indifference curve for unions and increase profits for firms, or opposite move along same indifference curve for firms and increase utility of unions (between Qand R) -the highest Isoprofit curves provides and upper bound to the w-e combinations that the firm is willing to offer - zero-profit curve, a curve any higher the firm would have to exit the market due to losses contract curve PZ gives al the points where the union's indifference curves are tangent to the firm's isoprofit curves - called pareto optimal bc once a deal is struck anywhere on this curve, deviaitons from that particular deal can improve the welfare of one of the parties only at expense of others - any agreement on this curve is called an efficient contract -point P union workers are paid the competitive wage and firms keep profits -point Z all rents given to workers and the firm makes zero profits

Interaction of supply and demand forces

the extent of unionization observed is determined by the interaction of these two forces -unionization rate will be higher the more workers have to gain by becoming unionized and will be lower the harder it is to convert jobs from nonunion to union status

Threat Effects

unions have an impact not only on the wage of union worker but also on the wage of nonunion workers -threat effects- a way in which unions influence the wage in nonunion sector - profit maximizing employers in the industry have an incentive to keep the union out and might be willing to share excess rents in the hope that the workers will not unionize - imply that unions have a positive impact on nonunion wages, thus union wage effects underestimate the true impact of the union wage

Strongly Efficient Contracts

vertical contract curve- hire same amount of workers as in the absence of a union @ competitive level E* -union and firm are splitting a fixed-size pie as they move along the curve because output and revenue are constant -point p employer keep all the rents point z union gets all the rents -contracts on this curve are called strongly efficient

Wage dispersion

wage distribution of unionized workers has less dispersion than that of nonunion workers 25% less in union firms than nonunion -bc union workers are more homogenous groups in terms of observable skill measures than nonunion workers

Union trends

- between 1940-1970 when unionization peaked, income inequality narrowed -unions were organizing the least-skilled workers -before and after that time, unions were smaller and a higher fraction of their members were high skilled- so b4 1940 and after 1970 unions were less of an equalizing force

Unions, Productivity and Profit

- workers in unionized firms are more productive- 9% higher than non union firms -this is bc firms move up the demand curve as a result of union wage increase, employment falls and vmp rises -more selective in hiring decisions and a beter screened workforce -have lower profits bc impact of unions on productivity is not large enough to compensate he firm for its large payroll cost- unions reduce rate of return to firms capital by 19%

Union membership in the 1900s

-1930 fewer than 10% of civilian workers were union members -began to rise in the 1930s as a result of important policy changes -by the early 1950s over 25% of the civilian workforce was unionized, rates stayed around here in the mid 60s as well -mid way thru the 60s a steady decline in union membership began, accelerated into the 90s -2012 only 11.2% of civilian workers were unionized -if you look at private sector only 6.6% *US trends are not unique, other developed countries also experienced a decline in unionization over the 1970 to 2003 period, however, decline was less pronounced -Variation in the proportion of workers who are unionized across countries is influenced by differences in the political effectiveness of the various union movements

What federal legislation was passed during the New Deal

-The Norris Laguardia Act of 1932- first major federal regulation of the union-employer relationship (attempted to even out the game by restricting the employer's use of court orders and injunctions to hamper union organizing drives as well as by making yellow -dog contracts unenforceable in courts The national Labor Relations Act of 1935- increased the power of unions by defining a set of unfair labor practices for employers -employers bargain in faith with unions and that employers do not interfere with the workers right to organize, Wagner act (firing of workers involved in union activities and discrimination against workers who support the union) (NLRB to enforce provisions) Certification elections- NLRB also runs the elections where workers decide if a particular union is to represent them in collective bargaining The Labor-Management Relations Act of 1947- this legislation curbed union power by permitting states to pass right-to-work laws (laws prohibit union from requiring that workers become union members as a condition of employment in unionized firms) Decertification elections- permits workers to hole elections that would decertify a union from representing them in collective bargaining -Labor Management Reporting and Disclosure Act of 1959- passed in reaction to the increasing evidence of corruption among union leaders, requires the complete disclosure of union finances, requires unions to hold regularly scheduled elections

Monopoly Unions

-a monopoly union maximizes utility by choosing the point on the demand curve D that is tangent to the union's indifference curve -demands a wage of Wm and employer cuts back employment to Em(from competitive level E*) -if demand curve is more inelastic the union can demand a higher wage and get more utility(employment falls by less ) -this model implies some workers will lose their jobs as a result of W demand *unions want to manipulate labor demand elasticity by making it difficult for firms to substitute between union and nonunion activities and for consumers to substitute between union and nonunion jobs- elasticity of labor demand in union firms is about 20% smaller than in nonunion firms

Featherbedding

-as long as contact curve is upward sloping unionized firms hire too many workers(more than the competitive level e*)- in a sense the firm is overstaffed ex: need two pilots but firm hires 3 thus has to negotiate make-work or featherbedding practices to share the available tasks among the many workers extreme example of this is a worker added to payroll but never shows up to work made work rules may be employing a certain number of workers to conduct a particular ask-for example contracts in construction industry requiring a foreman be hired to supervise as few as 3 workers or police being hired by private companies to direct traffic around a construction site

Why have rates of unionization declined since 1970

-decline in manufacturing (where union organizing drives have historically been most successful) -jobs moving to souther and western states, which are more likely to have right to work laws -the economy has become more competitive- bc of globalization and because of deregulation

Estimates of the Union Wage Gap

-differential between union and nonunion workers is large in some time periods but narrows substantially in others -1930s- union members earned 39% more than non union -1970s- 15-20% range -2012- 15.1% *some evidence that it is counter cyclical

Does the Union Wage Gap measure the Union Wage Gain

-does the fact hat the typical union worker earns 15% more than typical nonunion worker imply that if we became unionized we would earn 15% more ,no! -collective bargaining agreements make it difficult for firms to fire and layoff workers- stuck with workers it hires, so wants to screen applicants very carefully bc the 15% wage increase attracts many applicants -as a result firm only chooses the productive workers - so workforce overtime only composed of productive workers -measures of skill they control for do not completely account for skill differentials among workers- thus typical worker in union job will be more productive than comparable worker in nonunion job -union wage gap overestimates he union wage gain- cant be used to predict how much a randomly chosen worker would gain if they became unionized

Firms Isoprofit curves

-gives the various w-e combinations that yield the same level of profits- profit maximizing firms indifferent along the curve -choose point on lowest curve bc that is most profit along the demand curve

Non-wage Effects of unions

-influence workers productivity, labor turnover and job satisfaction exit-voice hypothesis- only way nonunion workers can register their dissatisfaction is through exit- leave the firm -unions give workers a formal channel for airing their grievances - acts as an agent for the workers and provides the workers with a voice- workers let unions pass on the information- influences job satisfaction of union members - this means labor turnover should be lower in unionized firms - 7% job turnover rate in two year period versus 14% non union firms - despite having a voice, it is also lower because of higher wages

Business Unionism

-originally U.S. unions were not attached to a political party -practiced Business Unionism , where the main goal of the union movement was to improve the wags and working conditions of its members, mainly through collective bargaining, rather than push to a particular social agenda through legislative and political action

Efficient Bargaining

-perhaps firms and unions can find an agreement on an employment contract that does not lie on the demand curve and that would make at least one party better off without hurting the other

Empirical Determinants of Strike Activity

-strikes more likely to occur and last longer the higher the initial level of union wage demands-if initial offer is unreasonable firm will find it worth while to wait until the union members learn the facts o fslive -more likely to occur if unions are willing to settle for a low wage eventually -strikes are relatively rare adn do not involve a large fraction of the workforce -2010 only 45,00 workers were involved in a strike that lasted more than a day -lost less than a hundredth of apercent in worktime -wage falls by about 2% after a 50 day strike and 4% after a hundred day strike -more likely to occur when unions are uncertain about the firms financial conditions- increases if firm has a volatile stock value- volatility reflects the investors uncertainity about firms financial conditions -strike reduces shareholder wealth by 3%

Supply of Unions

-the ability of union organizers to deliver union jobs depends on the costs of organizing the workforce, on the legal environment that permits certain types of union activities and prohibits others, on the resistance of management to the introduction of collective bargaining, and on whether the firm is making excess rents that can be captured by the union membership

Demand for Unions

-workers are more likely to support unions when they promise a high wage and a small employment loss -when union costs are small

Determinants of Union Membership

-workers choose to be in a union if the union offers him a wage-employment package that provides more utility than the wage employment package offered by a non-union employer

Are contracts along contract curves efficient?

1. w-e combinations on an upward sloping contract curve are only efficient in the sense they exhaust all bargaining opportunities between the employer and the union , other options can only improve at expense of other party- not efficient in allocative sense bc these contracts do not yield an optimal allocation of labor within the firm and between the union and nonunion sector 2. however on vertical contract curve efficient in two ways -first they also exhaust all bargaining opportunities between employer and union -second firms hire the right amount of workers so that union does not distort the allocation of labor and there is no deadweight loss to the national economy

sizable differences in unionization rates by gender, race, industry and occupation

12% of men unionized 10.5% women- women are more likely to be employed in part time jobs or in jobs that have more flexible hours (jobs that dont tend to be unionized) 13.4% black, 11% whites, 10% hispanics and 10% asians - blacks more likely to support unions bc unions compress wages within the firm reducing the impact of labor market discrimination on the black wage -hispanics may be low due to predominance of immigrant workers in the hispanic population-fringes of labor market an these jobs are not unionized -workers employed in concentrated industries are more likely to be unionized- they earn excess profits bc of their monopoly power so unions can extract rents from workers -positive relation between unionization rates and both the unemployment rate and the rate of inflation - demand for unionization increases when economic conditions worsen bc of job insecurity(unemployment rate) and decline of real wages (inflation)

how to escape the HICKS paradox

*when parties have reasonably good info about the costs and likely outcome of the strike it is irrational to strike, can agree to strike outcome in advance and save costs associated with the strike and share the savings between them (both parties better off) - the irrationality of strikes known as the HICKS PARADOX -many ingenious models have been proposed to escape this paradox -most models tend to stress that strikes to occur because workers are not informed about firm's financial status and have optimistic expectations about amount firm can give away meaning there is asymmetric information , firm knows more about the size of the pie than the workers optimal duration of strike- unions will moderate their wage demands the longer the strike lasts, generating a down-ward sloping union resistance curve. the employer chooses the point on the union resistance curve that puts him on the lowest isoprofit curve (maximizing profits) - occurs at point P strike lasts t* periods and poststirke settlement wage is Wt *unions demand high wages initially bc here is a chance that the firm is earning excess profits and the firm will accept the unions wage demands to avoid the cost of a strike. firm knows union will moderate its demand overtime, compares the PV of profits if it gives unions initial wage demands and pv of profits if strike last one period, or two periods and so on - firm chooses the strike duration that maximizes profits