ECW2121ECG9170

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ECW2121/ECG9170 Labour Economics
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Topic 6 Alternative models of the labour market
Topic 7 Discrimination in labour markets
Topic 5 Internal labour markets
Topic 8 Trade unions
Topic 4 Education, training and human capital
investment
Labour Economics
Topic 9 Wage relativities and the personal
distribution of income
Topic 3 (Two weeks) Labour supply, labour demand
and market equilibrium
Topic 2 The supply of labour
Topic 1 An overview of the study of labour
markets
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Aims
Trade unions

• On completion of this topic you will have insight
  into
• the objectives pursued by trade unions, and the
  impact of this on wage determination
• the process of collective bargaining
• the effect of trade unions on relative wages
  and
• the debate on effect of trade union activity on
  economic efficiency - unions as a labour market
  imperfection versus the exit-voice model.

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Reading
Trade unions

• Textbooks
• Norris, Ch. 6.
• Cartter, A.M., Theory of Wages and Employment,
  Greenwood Press, Westport, reprinted 1975,
  pp.116-133 (Reader).
• Hamermesh and Rees, Chs. 9, 10, 11.
• King, Ch. 5.
• McConnell and Brue, pp.170-182, Chs. 8, 9.
• Other
• Freeman, R.B. and Medoff, J.L., Unions and
  Efficiency, in Whitfield (ed.) pp.222-230
  (Reader).

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Trade unions
The membership maximisation model
The survival model
The union as a monopoly seller
Bi-lateral monopoly
Efficient bargaining model
Bargaining models
A survival model
The bargaining process
Unions and wage relativities
Unions and efficiency
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Trade unions
A trade union is a type of monopoly - seller of
labour (???)
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Trade unions
Key Questions

• What are the trade unions objectives?
• What does a trade union try to maximise?
• How do they behave?
• How will the pursuit of unions objectives
  affect the process of wage determination?

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Trade unions
The membership maximisation model

• Unions are analogous to a business enterprise.
• The difference was that whereas business tried to
  maximise profits, trade unions aimed to maximise
  their membership.
• They struggle for wage level that maximises
  union membership and that is likely to be higher
  than a market determined wage.

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Trade unions
The membership maximisation model
Membership as a positive function of the real
wage. Unless there is a closed shop membership
will be smaller than the total labour supply in
the occupation. The union will prefer a wage
rate higher than the market level. The market
equilibrium would be W1 with N1 units of labour
employed. However, given demand, the union would
maximise its membership by forcing the wage rate
up to W2.
N2
N1
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Trade unions
The survival model

• Unions are not maximisers of anything.
• Trade union is a political organisation operating
  in an economic environment.
• The objectives tended to be defined by the union
  leadership, but their actions were constrained by
  threats to survival - of the union itself, and
  the union leaders.
• Leaders define and pursue the objectives, subject
  to minimum levels of performance required to
  ensure their own, and the unions survival.

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Trade unions
The union as a monopoly seller

• The trade union can behave as a monopoly seller
  of labour.
• That is the union chooses the wage rate at which
  it will supply labour, but the employer then
  decides how much labour to buy at that wage.

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Trade unions
The union as a monopoly seller

• The penalty for higher wages is a loss of
  employment.
• The extent of this penalty, and therefore the
  power of the union to raise wages, is governed by
  the elasticity of demand
• The goal of maximising the wage rate is absurd.
  The highest possible wage OA would mean zero
  employment.
• The wage will be higher than Wc, the competitive
  wage- otherwise there would be no benefit to
  workers in having a union.
• Where will the wage be?
• Wage W2 maximises the total wage payment to their
  members (not the wage rate) - (sales maximisation
  VS profit maximisation), or
• W1 which maximises economic rent payment over
  and above of the supply price for labour WC.

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Trade unions
Bargaining models
Bi-lateral monopoly

• The union is a monopoly seller of labour, and
• The employer is assumed to be a monopsony buyer
  of that labour.
• This is essentially a neo-classical approach to
  an analysis of trade union behaviour which treats
  the trade union as analogous to the profit
  maximising firm.
• The union tries to maximise economic rents

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Trade unions
Bargaining models
Bi-lateral monopoly

• The union tries to maximise economic rents and
  prefers employment N2 at wage W2.
• The firm on the other hand maximises profits by
  employing N1 at wage W1.
• Hence the distance W1, W2 represents the area in
  which bargaining will take place.

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Trade unions
Bargaining models
Efficient bargaining model

• The unions various levels of utility are a
  combination of both wages and employment.
• The employer will be indifferent between certain
  wage employment combinations, that yield equal
  profit.
• The union will be indifferent between certain
  wage/employment combinations, that is they yield
  equal utility.
• Other combinations will be more or less
  preferred.
• Union attempts to maximise utility subject to
  constraint.
• In this case the constraint is profit
  maximisation by the firm.

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Trade unions
Bargaining models
Efficient bargaining model
Wage
Demand for Labour
Employment
Norris - Figure 6.7
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Trade unions
Bargaining models
Efficient bargaining model
Wage

• Iso-profit curves
• The employer will be indifferent between wage
  employment combinations along each of the curve,
  for those combinations yield equal profit.

I3
I2
I1
Demand for Labour
Employment
Norris - Figure 6.7
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Trade unions
Bargaining models
Efficient bargaining model
U3
Wage
U2

• Union indifference curves
• The union will be indifferent between the
  wage/employment combinations along each of the
  curves for those combinations yield equal
  utility.

U1
Demand for Labour
Employment
Norris - Figure 6.7
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Trade unions
Bargaining models
Efficient bargaining model
U3
Wage

• If the firm determines the level of employment,
  the union chooses point A.
• Point B equally profitable to the firm, but may
  be not preferred by the union .
• Point C delivers equal utility to the union, but
  may yield less profit to the company
• CB - contract curve the range of possible
  agreements

U2
.
.
B
.
A
U1
C
I2
I1
Demand for Labour
Employment
Norris - Figure 6.7
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Trade unions
Bargaining models
A survival model

• The greatest threat to the survival of a union
  leader is a reduction in the status quo
• reduction in wages, or
• a fall in employment.
• Rise in wages is necessary to compensate for
  reduced employment.
• Large increase in employment is necessary to
  compensate for a fall in wages,
• i.e. wages and employment are not regarded by
  unions as good substitutes.
• That is, the unions preference functions, or
  indifference curves tend towards right angles,
  kinked at the current wage/employment level.

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Trade unions
Bargaining models
A survival model

• Wages and employment are not regarded by unions
  as good substitutes.
• The unions preference functions, or indifference
  curves tend towards right angles, kinked at the
  current wage/ employment level.

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Trade unions
Bargaining models
A survival model

• If demand for labour increases, unions would
  prefer an increase in wages rather than a rise in
  employment.
• Similarly, if demand for labour falls, unions
  prefer a reduction in employment rather than
  wages.
• If a choice has to be made, unions regard the
  wage level as more important than the level of
  employment.
• Thus, a trade union preference function is kinked
  at the present wage/employment level.

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Trade unions
Bargaining models
The bargaining process

• The source of union bargaining strength is the
  strike or work stoppage
• imposing of a cost on an employer who will not
  agree to union requests.
• In a dispute both sides in fact face costs
• For employers
• Cost of disagreeing - loss of profit during
  strike.
• Cost of agreeing - higher wage to pay in future.
• For unions
• Cost of disagreeing - loss of wages in a strike.
• Cost of agreeing - lesser wage in future.

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Trade unions
Bargaining models
The bargaining process

• If both parties weigh up the cost of disagreeing
  with the cost of agreeing, then a strike should
  only occur if
• for both parties.
• The tactics of bargaining involve measures by
  both sides
• to reduce their own costs in a stoppage, and
• to raise the costs of not settling for the other
  party.
• Skilful negotiation and compromise may persuade
  the other party that the cost of agreeing is less
  than they anticipated.

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Trade unions
Unions and wage relativities

• If a trade union is an important institutional
  factor in wage determination then we would
  expect union labour to receive a higher wage
  relative to non-unionised labour.
• The impact of trade unions on relative wages is
  difficult to assess.
• In Australia the process is complicated by the
  existence of compulsory arbitration.
• union/non-union differentials
• about 9-10 for males, and
• about 7-8 for females.
• A union mark-up does exist, possibly around 10
  in the USA and 25 in the UK.

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Trade unions
Unions and wage relativities

• Where a trade union succeeds in raising a wage
  rate, employment in that industry or firm will be
  limited.
• This will mean fewer employees in unionised
  areas, and
• consequently an increased supply of labour to
  non-union employment areas.
• Thus the tendency will be for trade union
  activity to depress wages in the non-union
  sector.
• Increases in union wage rates may lead to
  increases in non-union wages.
• Employers of non-union labour may raise wages to
  reduce the threat of their workers being
  organised by a union.
• In a tight labour market, non-union employers
  will be obliged to match union rates of pay in
  order to retain their employees.

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Trade unions
Unions and wage relativities

• A key factor is the link between higher wages
  and a reduction in employment.
• Generally a successful trade union push for
  higher wages can be expected to result in a fall
  in union employment.
• The extent of the reduction is governed by
  elasticity of demand for labour.
• Therefore some unions will be better placed than
  others to obtain higher wage rates for their
  members.

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Trade unions
Unions and efficiency
Neoclassical viewpoint

• Neoclassical theory sees trade unions as a market
  imperfection which reduce efficiency in the
  allocation and use of resources.
• Given that the competitive market price (wage)
  represents the efficient price, then any
  deviation from this outcome is by definition
  inefficient.
• Unions produce further inefficiencies through
  enforcing restrictive work practices, and through
  frequent strikes which lower output.

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Trade unions
Unions and efficiency
An alternative viewpoint

• (Freeman and Medoff). Unions add to efficiency
  via a favourable effect on labour productivity.
  This occurs in three main ways.
• Unions reduce labour turnover therefore lowering
  hiring and training costs.
• Union demands pressure management into operating
  more efficiently
• Unions provide for better information flows
  between workers and management leading to more
  efficient production.