Investment in Human Capital, see page 377 in Chapter 14.

Labor Union: collective organization of employees who bargain as a group (joint bargaining) with employers for wages, benefits, working conditions, grievance procedures, etc.  Biggest current issue for UAW???

Several views on unions:
Necessary weapon for workers against greedy employers.
Played an historic role for workers' rights but are no longer necessary.
Monopolies (worker cartels) that gain higher than market wages at the expense of other workers, consumers, efficiency, etc.

We will explore these issues as we try to understand the labor market effects of unions.
 

UNION MEMBERSHIP STATISTICS

See graphs/charts pages 387-389.  Major Points:

1. Union membership gradually rose during the first part of the century, peaked in 1954 (32% of labor force), has declined gradually since then, now at < 15%.  Why the decline?

a.  Recent growth in employment has been in small firms (not large firms), service industries (not manufacturing) and in high-tech industries (not low-tech).  These are all areas where unions have either been weak or unnecessary.  High-tech industries have also been the most dynamic, unions operate more effectively under static conditions.

b. Increased competition has eroded union strength and led to declines in employment in areas of traditional union strength, e.g. foreign competition in automobiles, steel, mining, heavy manufacturing has led to decline in U.S. union jobs.

c. Deregulation in telecommunications, transportation has made those industries more dynamic and competitive, reducing the strength of unions.  The more dynamic the industry, the less power unions have.

d. Regional migration from the North, Midwest and Northeast to the South and West affected union membership, since people were moving from areas of traditionally strong union membership to areas of lower union membership.

e. Success of unions has led to their decline.  To the extent that unions raise wages relative to productivity in unionized industries, and relative to non-union workers of similar productivity, they retard the growth of union employment in those industries.    Business investment and employment will move towards geographic areas, industries and classes (sizes) of firms where wages are low relative to productivity.  The more successful unions are at raising wages, the faster investment will flow away from those workers and industries, and the faster consumers will seek alternative, cheaper products from non-union workers.

2. Union membership varies by demographics and private vs. public workforce.  See page 388.  Union membership is higher for M vs F, B vs W or H, Manufacturing vs. Service, Govt vs. Private (by 4x).  Biggest growth in union membership has been in the PUBLIC sector, it is shrinking in the private sector.

3. Union membership varies geographically, see page 389.  Union membership is higher in the N, NW, NE and Midwest than in the South and West.
 

THE COLLECTIVE BARGAINING PROCESS

Collective bargaining contract: the primary, detailed legal document between a union and its employer describing the conditions of employment - wages, benefits, profit sharing, work rules, grievance procedure, outsourcing issues, etc. usually for a period of 2 or 3 years.  Union leaders meet and bargain with management (several months ahead of the expiration of the old contract)  for a new contract, then submit it to the membership for a vote.

Labor-mgmt contracts (UAW) in many states (MI) have a Union-shop Provision that requires ALL new workers to join and pay dues to the union after 30 days employment, under the reasoning that since all workers benefit from collective bargaining they should all have to join.

Opponents of Union-shop Provision argue that workers should not be forced to join a union as a condition of employment since a) some workers might be better off negotiating their own contract and b) union dues go to support political activities which may not represent all employees.

In 1947, Congress passed a law that allowed individual states to prohibit mandatory union membership under the Union-shop Provision with a "Right-to- Work Law" - workers have the "right" to work for a company even without belonging to a union.  Currently 21 states have Right-to-Work Laws and 29 have Union-shop Provisions.  See page 389 - states with lowest unionization all have very low union memberships.
 

STRIKES

Usually union representatives and management negotiate for months before the expiration of the old contract.  Under normal conditions, the new contract is usually approved before the old one expires, ensuring continual operations.  When the bargaining process breaks down, e.g.union members veto a contract, either side can withhold employment as way to force the other side to compromise.  Management could withhold employment but rarely does, they would prefer to continue under the terms of the old contract.  Usually what happens is the workers withhold employment in the form of a work stoppage or STRIKE.

A Strike consists of two actions by employees: a) union workers refuse to work and b) try to prevent replacement workers from working during the strike or being hired permanently.  Reason: If the employer could hire permanent replacement workers, then the strike would essentially be just a MASS RESIGNATION.  How do unions discourage or prevent replacement workers???

Purpose of strike?  To impose economic costs on employer, force settlement.  Last UAW strike cost GM $1.2B.

All federal employees and most state employees, members of government unions, are not allowed to strike.  Why???  Example: air-traffic controllers were fired in 1981.
 

COSTS OF A STRIKE
A strike imposes costs on both the employer and the employee.
Employer costs:
1. Lost money during the strike
2. Possible permanent or long term loss of market share (e.g. UPS), either due to switching or customer dissatisfaction (baseball or basketball).

Employee Costs
1. Lost wages during strike (UAW strike lasted 8 weeks last summer).
2. Profit-sharing?
3. Fewer jobs in the long run if there is a permanent loss in market share.
 
Point: Strikes receive worldwide, media attention, but are by far the exception.  Every year there are 120,000 contracts negotiated, and far more than 99% of the time contracts are settled without a strike.
 

HOW CAN UNIONS INFLUENCE (RAISE) WAGES?

Unions cannot negotiate higher wages in isolation from market forces.  Market forces play a strong role in the labor market, and unions cannot operate independently from the market.  Higher wages increase the firm's cost, and competition in the product market limits the union's bargaining power.  The more (less) competition present from nonunion producers and foreign competitors, the less (more) bargaining power the union has.  Demand for labor is a "derived demand", so the more competition (more substitutes, more elastic demand) in the product market, the more competitive the labor market.

Unions can raise wages three ways:

1. Restrict the supply of workers to raise wages.  See page 394.  To restrict supply, unions can impose "barriers to entry" such as licensing requirements (carpenters, barbers, plumbers, movers, etc.), long apprentice programs (master plumber, etc.), high initiation fees, limiting the number of members, prohibition of nonunion workers from holding jobs, etc.  The more unions can restrict the supply (competition), the higher the barrier to entry, and the higher the wages.  At wage rate W1, employment is reduced from E0 to E1.  Workers who would have been willing to work for less than W1 will be forced into other areas of unemployment.  Excess supply (AB) will result, increased unemployment.

2. Bargaining Power.  If unions can use their bargaining power effectively, e.g. threat of strike by airline mechanices, they can raise wages above the market level because of their concentrated bargaining power.  The effects are the same as restricting the supply, W1 and E1, unemployment of AB.

3. Increased Demand for Union Products.  If unions can convince the public to buy union-made products over nonunion or foreign products, the increased demand for the final goods will increase the demand for union labor, leading to higher wages.  "Buy American."  "Look for the Union label."

This may work, but most consumers are most interested in what???

Alternatively, unions can use their political power to artificially increase demand for their products.  For example, railroad unions had laws passed that required a minimum crew on all trains, even if unneeded ("make-work rules"), which artificially increased demand.  Or unions can use political power to secure protectionist legislation against foreign competition, and they have successfully done so in the automobile and textile industries among others.  With protection against foreign competition, unions (and employers) can artificially raise demand for their products.  Unions and management have been united in their joint support for trade protection.  At the expense of whom??  See graph page 396.
 

WHAT GIVES A UNION STRENGTH?

For a union to be effective, the demand for labor must be INELASTIC, wages can increase without significantly reducing employment.  If demand for labor is elastic, wage increases will result in a large loss of jobs.  What determines elasticity for labor demand??

1. Availability of substitutes.  The more (less) substitutes available for union workers, the more elastic (inelastic) the demand.  Firms can substitute capital (machinery, automation) for labor.  If machines are a good (poor) substitute for union workers, the demand for union labor will be elastic (inelastic).  Examples: elevators, gas pumps, bar code systems, automation, ATMs, etc.

The best substitutes for union workers is ?????  The power of unions is related to their ability to insulate themselves from direct competition from nonunion labor.  If employers can easily substitute nonunion labor for union labor, it will be difficult for unions to raise wages above the market wage.  If firms can easily shift production to other countries, that is another way to substitute nonunion labor.  Firms (GM) usually use both union and nonunion labor (outsourcing), and will try to substitute external sourcing (nonunion labor) for internal production with union labor.

Point: Firms don't mind paying high wages, as long as what?????

2. Unions have more (less) strength when demand for final product that they produce is inelastic (elastic).  Reason: higher union wages leads to higher product prices, and higher prices are much easier to pass on to consumers when demand is inelastic.  Example: tobacco.  Demand is inelastic.  If tobacco workers are unionized, they could demand higher wages and tobacco companies could pass on the higher wages by charging higher prices.  Example: automobiles.  Demand is elastic, highly competitive market, fierce global competition.  Hard to pass along wage increases in the form of higher vehicle prices.  Example: trucking was deregulated in the early 1980s, Teamsters lost 100,000 jobs due to increased competition from new, nonunion labor.

Point: Higher union wages result in fewer employment opportunities when union labor has to compete with nonunion labor, especially when union wages are above the market level.  Teamsters, United Steel Workers, UAW have all lost membership since they have had to compete with the increasing presence of nonunion labor.

Paradox: The more successful unions are at raising wages above market levels, the greater the chance that unionized employment will decrease in those sectors.

3. Union Labor as a Share of Total Cost of Production
The greater (smaller) the share of total costs that union labor represents, the more elastic (inelastic) the demand for union labor.  Example: UAW wages may represent 70% of GM's total costs, so GM is very sensitive to wage increases, since they will affect 70% of costs.  Example: Union pilots' salaries represent a small share of total costs for airlines, so demand for their labor would be more inelastic.

4. Supply Elasticity.  The more inelastic the supply of substitute labor (nonunion), the more inelastic the demand for union labor.  Example: union and nonunion labor are substitutes.  If union wages rise, firms will substitute nonunion labor.  If supply of nonunion labor is inelastic (elastic), the shift from union to nonunion will (not) put upward pressure on nonunion wages, which will strengthen (weaken) the union's position.
 

UNIONS AND THE NATURE OF THE WORKPLACE

Overall labor-market effects of unions:

1. Union contracts have contributed to a form of "industrial jurisprudence" or "workers' rights" that protects workers against arbitrary actions by an employer by establishing formal rules that govern promotions, terminations, layoffs, etc. Contracts define a worker's rights and outline a formal system of appeals for wrongful termination.  Union protection of workers' rights also disciplines nonunion producers, who have an incentive to avoid time-consuming, rigid and inflexible union contracts by treating employees well and thus possibly avoiding unionization.

2. Unions emphasize the importance of seniority more than nonunion counterparts, who emphasize what???  Union members with seniority generally have more job security and receive more favorable opportunities for promotion compared to nonunion workers.

3. Union workers generally get a more generous fringe benefit package (health care, pensions, life insurance, etc.) than nonunion workers, and benefits are a larger percentage of their total compensation. Senior union members play a more active role and have greater influence, and are more likely to advocate for increased benefit packages.

4. Unions reduce employee turnover, since union members are less likely to quit than nonunion workers.  Benefits: Increases workforce stability, reduces firm's labor costs for recruitment, hiring and training.  Costs: Unproductive workers may never leave, may be harder to tie wages to productivity, may be harder to get workers to adapt to new technology, e.g. modular assembly, more rigid/less dynamic workforce.  Hard to determine the net effect of unions on firm's costs.
 

WAGES OF UNION VS NONUNION LABOR

See page 402 - Wage premiums of union workers vs nonunion workers with equal productivity - 15-20% in recent years, but has been declining slightly recently.
 

PROFITS OF UNIONIZED FIRMS VS NONUNION FIRMS

If unions receive wages above the competitive market wage, firms will be paying more than the MRP of the union labor.  Labor costs will be higher, and profits will be lower for unionized firms.  Research shows that when the union-nonunion wage premium increased during the 1970s, the profitability of unionized firms lagged behind nonunion firms.

Problem: If unions can transfer profits from union firms to union workers, workers enjoy higher than market level wages.  But investment moves away from unprofitable industries and sectors, toward more profitable areas, i.e. investment will move FROM unprofitable unionized industries TO more profitable nonunion sectors.  The more mobile capital and investment is, the faster the shift will occur.  And the greater the union wage premium, the greater the incentive to shift production away from unionized sectors.  As capital  moves toward more profitable nonunion sectors, the investment in capital, property, plant, equipment will improve productivity in the nonunion sector, resulting in higher productivity and wages in the LR for that sector.

Paradox: The more successful the union is at raising wages above the market level, the faster that employment, investment, productivity, production will move away from union sectors of the economy towards nonunion sectors.  This is reflected in declining union membership show on page 387.
 

CAN UNIONS RAISE WAGES (COMPENSATION) OF ALL WORKERS?

Probably not.  Unions can raise wages in unionized sectors, but the law of demand shows that fewer workers will be hired at the higher wages.  With fewer high-paying union jobs, large numbers of workers will move to the unionized sector, depressing wages in the nonunion sector.  If union workers get a 10% wage premium, nonunion workers would be paid a 10% discount, so that overall average wages won't increase.

Important Point: Increases in average real wages depends on increases in the  productivity of labor per hour.  In the long run, the real source of higher wages is higher productivity, not labor unions.  Higher productivity depends on investment in physical capital, machinery, research, technology, human capital, efficiency of legal and government institutions, etc.  (Shifts in the PPF or LRAS).