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Lecture Issues in economics today - Chapter 42: Unions

In this chapter, students will be able to understand: Describe why labor unions exist and model how they alter the bargaining relationship between employers and employees; distinguish between a competitive labor market and one where there is market power only with the employer, only with the employee, and when both have power; differentiate between labor unions that seek to raise wages by reducing supply and those that seek to raise wages by using collective bargaining as a monopolist;. | Chapter 42 Unions Chapter Outline WHY UNIONS EXIST A UNION AS A MONOPOLIST THE HISTORY OF LABOR UNIONS WHERE UNIONS GO FROM HERE Background Currently unions represent less than 15% of the total workforce and less than 10% of the private workforce. In the late 1800s-early 1900s unions’ actions were considered a violation of the Sherman Anti-Trust Act provisions against restraint of trade. Laws giving union members rights to collective bargaining were passed in the early 1900s but declared unconstitutional. It was not until the 1930s when union protections were created and affirmed by the courts. Why Unions Exist The labor market is not perfectly competitive If there is one buyer of labor, the wages and the number of workers hired will be lower than the economically efficient level. Unions can enhance the value of labor to firms with training and apprenticeships. A Perfectly Competitive Labor Market Labor W Demand Supply A W* B C 0 L* Value to the firms: 0ACL* Firms pay workers: OW*CL* | Chapter 42 Unions Chapter Outline WHY UNIONS EXIST A UNION AS A MONOPOLIST THE HISTORY OF LABOR UNIONS WHERE UNIONS GO FROM HERE Background Currently unions represent less than 15% of the total workforce and less than 10% of the private workforce. In the late 1800s-early 1900s unions’ actions were considered a violation of the Sherman Anti-Trust Act provisions against restraint of trade. Laws giving union members rights to collective bargaining were passed in the early 1900s but declared unconstitutional. It was not until the 1930s when union protections were created and affirmed by the courts. Why Unions Exist The labor market is not perfectly competitive If there is one buyer of labor, the wages and the number of workers hired will be lower than the economically efficient level. Unions can enhance the value of labor to firms with training and apprenticeships. A Perfectly Competitive Labor Market Labor W Demand Supply A W* B C 0 L* Value to the firms: 0ACL* Firms pay workers: OW*CL* The opportunity cost to workers: OBCL* Surplus to firms: W*AC Surplus to workers: BW*C The Monopsony Problem Monopsony: the market has only one buyer (e.g. a company town.) When there is a monopsony the wage is less than the Marginal Revenue Product of Labor (the additional revenue generated from hiring an additional worker). This is because the supply curve of labor is not the Marginal Resource Cost (the increase in total labor costs to the firm of buying increasing amounts of labor) curve for labor as it is under perfect competition. Modeling Monopsony Labor W Demand Supply A W* B C 0 L* Marginal Resource Cost WCT Wvalue LCT E F Deadweight loss is EFC Unions: Restricting Competition and Improving Quality With licensing unions can reduce supply by limiting the number of people who are eligible for a job. reduce supply by imposing increased training costs (either explicit training costs or opportunity costs in the form of lost wages) increase demand by improving the quality of the .