Imperfect Competition in Labor Markets
Imperfect Competition in Labor Markets
The Supply Side of Resource Markets
Djehane Hosni,
Students typically find it difficult to comprehend resource markets. However, as the resource market is presented after the discussion on the structure of product markets, I take advantage of this fact and explain the resource market in reference to the product market. There is an analogy between the supply side of the resource market and the demand side of the market and as a buyer of a factor in the resource market. Figures 29‑1 and 29‑2 illustrate some parallels.
Figure 29‑1
Figure 29‑2
Market Structure Product Market Resource
Market
Perfect Market D & S Market D & S dictate
competition dictate price wage, rent, interest
Firms and their Workers (or other
customers are resource owners) and
price takers. those who hire them
are price takers.
D facing firm S facing firm is
is perfectly perfectly elastic
elastic.
P = d = AR = MR W = S = ACF = MFC
Imperfect Monopoly=1 seller Monopsony = 1 buyer
competition Industry = 1 firm Market buyer = 1 firm
The firm controls The firm controls the
price of the good wage, rent or interest
Demand slopes Supply slopes up
down
Marginal revenue Marginal factor cost
is downsloping (MFC) slopes up,
and below demand above supply
(D > MR) (S > MFC)
Exclusive Unionism and The Ph.D. "Union Card"
Eric Steger,
When I discuss the two ways in which unions attempt to raise wages, I typically include the Ph.D. in economics labor market example. I explain that some economics graduate schools may restrict the number of Ph.D. in economics graduates much like the exclusive unionism practiced by traditional craft unions that require an extended apprenticeship before a journeyman union card is obtained. Students then realize that all exclusive labor markets operate in a similar fashion.
Robert C. Graham,
The impact of a labor union on a monopsonistic market yields one of the most surprising results in a principles of economics course. On the diagram of a monopsony, it can be shown that a union can establish a higher wage than was previously paid and, at the same time, cause an increase in the number of workers employed by the firm.
I have found that students understand and enjoy this analysis when an analogy is drawn with Sally Field's Academy Award for the movie Norma Rae. In that movie Sally Field portrayed a textile mill employee who assists a union representative in organizing the workers at the mill where she works. After much hardship and conflict with her fellow employees, Sally Field and the union are successful in organizing the workers. The subsequent admiration and respect (not to mention the Academy Award) that Sally Field wins is not surprising given the result predicted by the model, where workers have both higher wages and more jobs.
Labor Unions as "Fleets In Being"
Edward D. Lotterman,
Students are often sharply polarized in their estimates of the effects of unions. Some see unions as monsters spreading their slithering tentacles to strangle liberty and free choice while extorting vast sums of money from employers and the public. Other students view unions as fraternal clubs, pure as the driven snow, spreading wholesomeness, sweetness, and light throughout the universe. It is striking, however, that both groups of students tend to focus only on the effects of unions on unionized firms. The effects on other firms are largely ignored. The following analogy is useful in communicating a broader view of the effects of unions, especially in classes that include numbers of history or political science majors.
The 19th century American naval
strategist, Alfred Thayer Mahan, postulated the concept of "the fleet in
being." Mahan argued that one country's navy could have a powerful effect
on the actions of a rival country without ever fighting a battle. The mere
existence of a fleet would force the other country to devote resources to defensive
efforts. If handled correctly, a modest "fleet in being" could force
the opposing country to expend proportionately much greater resources on
defensive measures. Kaiser Wilhelm II was a devotee of Mahan, and the German
surface fleet in both World Wars essentially served as a "fleet in
being." Resources devoted to the German surface fleet were relatively
small and no decisive battles were ever fought. But in both wars,
Labor unions can be compared to "fleets in being." It is not necessary that a union go on strike for it to have effects. It is not even necessary that the union organize a specific firm for it to affect that firm. Since many firms view union organization of their workforce as something to be avoided, these firms will often adjust their wage scales and personnel policies so that their employees will have little incentive to seek unionization. The effects of such defensive actions may be much more widespread than the direct effects of union collective bargaining with organized firms. Note that this powerful influence is not necessarily positive for the union itself. A union "fleet in being" in effect has many free‑riders on board for the cruise who do not stoke the boilers or man the guns!
Curt L. Anderson,
When discussing inclusive unions and their attempts to secure higher than equilibrium wages, I often refer to the union (the collective bargaining unit) as a labor cartel. This is useful in that "cheating" on the cartel (working for less than union established wages), like for any cartel, must be controlled by the cartel for it to survive. Hence, the turbulent history of the labor movement may be partially explained by the need for strong‑arm tactics by the unions to keep members (and non‑members) in line with the cartel arrangement.
A Marginal Analysis of the Football Player's Strike
Thomas Wyrick,
When players in the National Football League went on strike at the start of the 1987‑88 season, teams recruited non‑union players and continued their regular schedules. A sharp fall in attendance and particularly vocal, sometimes physical, opposition to team policies by striking players caused many observers to conclude that the strike would probably be settled in the players' favor.
Economic theory suggested otherwise. The story is told by table 29‑1, which give the weekly revenues and costs of a typical NFL team.
Table 29‑1
The most important thing to note in the table is that the strike had very little effect on weekly team revenues. Because of long‑term contracts between the NFL and broadcasting networks, teams received weekly payments of about $1 million regardless of the quality of play or the number of fans watching or listening to game broadcasts. The strike had a far larger impact on team expenses. The average team hired non‑union players for $230,000 per week, while regular (union) players had earned $854,000. Although a few regular players crossed union picket lines, the number was fairly small until the outcome was apparent.
In the margins of the table, note that the strike cost team owners $503,000 per week in revenues lost due to lower attendance, but saved $624,000 per week in costs due to lower salaries. As a result, the strike actually increased team profits by $121,000 per week. This suggests that team owners were under little immediate pressure to settle the strike. Because striking players were not paid during the labor dispute, it was only a matter of time until they would agree to return to the playing field.
Yet one cannot conclude that owners would have been content to let the strike continue indefinitely or that players made a mistake by striking. The key to the owners' ability to resist player demand ultimately rested on having a steady (fixed) source of revenue from broadcasting contracts. Over the longer run, extending beyond the current contract period, a lengthy strike in '87‑'88 may cause broadcasters to insist on contracts protecting them from losses resulting from future strikes.
One possibility is a contract for smaller weekly payments to reflect the additional risk broadcasters perceive of recurring strikes. Because of this possibility, team owners were risking future income by permitting the strike to continue and were under more pressure to settle the strike than the short run analysis in the table indicates. Another alternative would be for broadcasters to insist on new contracts tying weekly payments to game attendance. A contract of that type would make owners much more vulnerable to future strikes than they were in '87‑'88, surely a prime objective of players looking to the future.
Wage Discrimination and Efficiency
Ralph T. Byrns
Point out that just as the inefficiency of monopoly can be reduced through price discrimination, the inefficiency of monopsony can be reduced through wage discrimination, and that monopsony power is commonly associated with power to structure wages. Discuss why pervasive wage discrimination makes it unlikely that unionization or higher minimum wages will increase employment, a possibility when a union is used as a "countervailing power" to offset the monopsony power. Suggest further that if labor monopsonists in e.g., the textile industry, compete vigorously with others in the product market (foreign producers?) who have comparable cost advantages (perhaps from monopsony power of their own), unionization or higher minimum wages will almost certainly result in disemployment or even permanent shutdown. For example, if one "sweat shop" owner is forced to pay high union wages but competes only with other sweat shop owners, the unionized firm will fail.
Child Warfare and Labor History
Robert L. Hermann,
Students are often confused as to the rationale behind federal labor legislation in a market economy stressing competition and free enterprise. The following "story" helps to clear the air.
Imagine the "World of Work" as a big playground, with Government being the playground supervisor, the little kids on the playground being the workers, and the playground "bully" (on any playground there is always a bully), who in this case represents management. For most of recorded history, the bully had things his own way on the playground, and the supervisor left things alone, believing that "Kids will be kids." When the bully wants to swing, he doesn't wait his turn, he just pushes the little kids out of the swing. When they play ball the Bully always gets to bat first, and he is usually the pitcher. If the rules of the game being played don't agree with the Bully, the rules are changed, etc. The playground supervisor finally comes to the conclusion that the Bully has had things his own way far too long. The supervisor calls the little kids together in a conference and says, "I'll tell you what I am going to do. I'm going to give you little guys sharp sticks. When the Bully pushes you out of the swing, knocks you off the teeter totter, or changes the rules of the games to suit himself, I want you all to gang up on him and jab him with these sharp sticks."
And "Kids being kids", that is exactly what happens. The Bully no longer has things his own way. In fact, without any provocation at all, many of the little kids give the Bully jabs with their sharp sticks whenever they walk by him. The supervisor, watching this, realizes that maybe he has gone too far. So he calls the little kids to another conference and tells them, "I'm going to let you keep your sticks, but I am going to break off the sharp points, since you have been using them to excess." The playground then settles down to peaceful play for the first time. The little kids still have their sticks to control the Bully when needed, and the Bully realizes that he can no longer have everything his own way.
Putting this story into the proper time frame: Before 1935 the Bully had his own way on the playground. Between 1935, (Wagner Act) and 1947, (Taft‑Hartley Act) was a period of sharp sticks in the hands of the little kids. The Taft‑Hartley act had the effect of breaking off the points on the sticks. Since 1947, the supervisor has been able to sit back and watch the kids play. "Kids will be kids" and there are still playground squabbles, but neither the Bully nor the little kids alone can dictate the action and the rules of play.
A
Ralph T. Byrns
Poll your students about their opinions of whether unions raise wages by less than 5 percent. Over 5 percent? Over 10 percent? Over 20 percent? Over 30? Approximate the average of student opinions about the union/nonunion wage differential. Then state that you are going to start a union for mid‑level managers (the position to which many students aspire), and ask how many would be interested in joining (many college students are very antiunion). Most will indicate NO. Tell them that dues will equal only 3 percent of their wages, and remind students of the ideas they just covered about profit (or in this case, income) maximization. If unionization generates say, 20 percent extra income but only costs 3 percent of income, it seems almost sinful for them not to join. Discuss this for a while. Some student will eventually suggest that higher wages for union members cause wages to fall for nonunion workers.
Symmetry between Corporate Structures and Unions
Ralph T. Byrns
Many students are vehemently anti‑union, and appeal to laissez faire notions to support their positions. You can lead them to reexamine whether unions are inconsistent with a free market approach by pointing out that corporate managers act as agents for huge numbers of stockholders when they deal with consumers by setting prices, or when they act as stockholders' agents in dealing with workers by trying to specify working conditions and wages. Symmetrically, union officers act as the collective agent of a large number of workers. Suggest that if unions are perceived as exercising monopoly power in the sale of labor, that managers of giant firms may similarly exercise considerable economic power in their decisions. And that competitive forces (e.g., imported goods) may equally limit the power of both corporate managers and labor unions.
Robert D. Witherill,
One economic model presented to students learning about wages is that of bilateral monopoly. The instructor explains that the wage usually lies between the upper limit of the marginal labor cost curve's intersection with the marginal revenue product curve and the lower limit of the monopsonistic labor buyer's supply curve, with the exact wage will be determined by collective bargaining.
A role playing model helps students understand the bargaining process, and why it often takes so long is so difficult. The class is divided into groups of four or five so that there are two groups for each company‑‑a management negotiating team and a union team. Each group is given specific information pertaining to their position. The management team is given information about labor's marginal revenue product, costs and profits. Labor's team is given information about the concerns of the union's membership for higher pay, better working conditions, and the state of the union's strike fund.
After the distribution of information sheets, each side is given time to formulate their bargaining positions. They then meet, and union and management present their demands or positions. At this point, a recess may be in order to discuss the response to the other side's position. The sides then reconvene to bargain a contract. A time limit should be set on bargaining. If there are two or more companies, the best management or union team may be determined from the agreed settlement. A further discussion can then be held on what elements are involved in collective bargaining, why bargaining takes so long, and what factors can improve the bargaining process.
Union Team You are a member of the Union Negotiating Team for the Ajax Corporation‑‑manufacturer of steel office furniture. There are 1500 employees in the firm and they are represented by your Amalgamated Steel Fabricators Union. You are currently involved in the negotiation of a new wage contract. The following information may help you in your negotiations. This information is confidential. It is not known to the management representatives.
Your members is pushing for a wage increase. You also want an additional 1/2 hour of clean up time‑‑currently cleaning up and changing from work clothes is on the employees' own time. You want more vacation time, another paid holiday, and another half hour for lunch making lunch time one hour. In addition, the plant is very hot in the summer time. You would like the company to air‑condition the plant. Your union's strike war chest is low‑‑but the company does not know this. Your membership would find a strike difficult right now, but they are likely to vote you out of a job if you do not get a good settlement of the union contract.
Currently the average wage is $5.94 per hour. Employees have six paid holidays per year. Employees are given one week paid vacation after one year of employment and one more day for each additional year worked.
Management You are a member of the Management Negotiation Team for the Ajax Corporation‑‑manufacturer of steel office furniture. There are 1500 employees in the firm and they are represented by the Amalgamated Steel Fabricators Union. You are currently involved in the negotiation of a new wage contract.
The following facts may help you in your negotiations. These facts are confidential‑‑they are not known to your union representatives.
Number of Marginal Revenue
workers Product (per hour)
1000 ‑ 1100 $8.00
1100 ‑ 1200 6.60
1200 ‑ 1300 7.40
1300 ‑ 1400 6.80
1400 ‑ 1500 6.40
The wage under the present contract is $5.94.
Any increase in other benefits would be proportionable; i.e., one‑half hour extra lunch time would reduce the average MRP by 40 cents; an extra holiday by 6 cents. Workers currently get one week of vacation after a year of employment and one extra day for each year with the company. They also get six paid holidays. Management would prefer to have workers on an incentive wage system, but so far, the union has refused to accept this.
Profits for your company last year were $1,600,000 which was 12% of sales or a return of 20% on invested capital. This profit represents earnings of $2.40 a share of the outstanding stock. The current market price of the stock is $50 a share. Your job is to negotiate the lowest‑cost contract possible. You really cannot afford a strike at this time but neither can you afford to negotiate a contract that will cause your company to suffer financially.
Ralph T. Byrns
When you discuss the collective bargaining process, point out that negotiation is typically conducted by specialized corporate management teams (not the stockholders who own the firms) who bargain with union leaders (not the workers themselves.) In major contract negotiations, government also plays a role because, presumably. the public interest is at stake. Thus, voters, politicians, and arbitrators also may play roles. Ask your students about what they perceive to be the objectives of each of these seven groups. Here are some possibilities:
a. corporate managers seek contracts that will justify high management salaries and minimize hassles and the filing of grievances after the contract is set; they must satisfy stockholders that they have negotiated a contract that permits acceptable profits or their own job security is threatened.
b. stockholders want maximum profits, which many view as incompatible with a contract settlement involving wages and fringe benefits higher than those paid by other firms or to comparable employments.
c. union leaders want the highest salaries and `perks' possible for themselves, and must satisfy their members that they negotiated the most advantageous package of wages and fringe benefits that the firm (or industry) could afford; otherwise, their tenure as union officials will be threatened. (Their objectives parallel those of corporate managers, with whom they have much in common.)
d. union members want the highest valued combination of pay and fringe benefits possible that is consistent with reasonable job security. Within unions, there will be older workers who are willing to forego high wages per se for seniority rules, fat pension plans, etc, and younger workers who want higher pay for apprentices, women who want maternity leave benefits and child care allowances, and so on.
e. voters typically want minimal labor conflicts and disruptions, and in their roles as consumers, they would like prices that do not reflect inflated wage payments.
f. politicians generally want to be reelected, and want to project images that their priorities reflect those of voters and consumers. At the same time, they recognize the potential benefits from campaign contributions from union or management PACs or political support.
g. arbitrators want job security, and seek settlements that are acceptable to all of the preceding parties.
Ask your students to indicate the areas in which these parties (e.g., managers and stockholders) have common and divergent interests. Then ask them to do the same for union leaders and workers, voters and politicians, etc. A thorough discussion of these problems can give students insights into how complex the problem of collective bargaining can be.
If you have time, a brief simulation of the collective bargaining process can be useful. A number of possibilities are outlined in texts on Labor Economics or Collective Bargaining, and in the preceding idea offered by Robert Witherill.