Labour Economics assignment 1
zaleel503
Chapter14.pptxChapter Fourteen Unions and Collective Bargaining
Prepared by Dr. Amy Peng
Ryerson University
© 2012 McGraw-Hill Ryerson Ltd.
1
1
Learning Objectives
Explain the nature of unions and the role they play in the labour market.
Summarize key measures of union influence in Canada
Describe the legal framework governing unions and collective bargaining and how it has evolved.
Use economic models to explain why some workers are more likely to be unionized than others and why unions are more prevalent in some industries, occupations, regions, and countries than in others.
Describe the key factors that determine union objectives and the constraints that unions face in trying to achieve their goals.
Explain and apply economic models that seek to explain how wages and employment are determined in unionized enterprises.
Chapter 14
2
© 2012 McGraw-Hill Ryerson Ltd.
2
Union Growth and Incidence
Unions
Are collective organizations whose primary objective is to improve the well-being of their members
The objective is met though collective bargaining and the outcome is an agreement specifying:
Wages
Benefits
Aspects of employment relations
Chapter 14
© 2012 McGraw-Hill Ryerson Ltd.
3
3
Union Growth and Incidence
There are two basic types of unions:
Craft Unions which represent workers in a particular trade or occupation such as printing and construction
Industrial Unions which represent all workers in a particular industry regardless of occupation such as automobile, steel, and forest industries
Chapter 14
© 2012 McGraw-Hill Ryerson Ltd.
4
4
Union Growth and Incidence
Unions’ additional roles:
Social and political affairs
Influence the Government in power
Provide financial support to the dominant parties
Chapter 14
© 2012 McGraw-Hill Ryerson Ltd.
5
5
Chapter 14
© 2012 McGraw-Hill Ryerson Ltd.
6
6
The Legal Framework
The evolution of the Unions legal framework in Canada
Prior to Confederation the law has discouraged collective bargaining
In the 1870s the law was “neutral” to collective bargaining
In 1944 the law encouraged the spread of collective bargaining
Chapter 14
© 2012 McGraw-Hill Ryerson Ltd.
7
7
The Legal Framework
Features of Canadian labour relations policy:
Workers have the right to join and form unions
Collective bargaining rights are protected under unfair labour practices legislation
System that defines bargaining representation is successfully established
Union is an exclusive bargaining representative of the workers
The rights are enforced by a labour relations board
Chapter 14
© 2012 McGraw-Hill Ryerson Ltd.
8
8
Factors Influencing Union Growth and Incidence
The main measures of the extent of unionization:
Union Density which defines the union membership as a percentage of paid workers (about 34% in Canada)
Collective Agreement Coverage which is the percentage of paid workers whose wages and working conditions are covered by a collective agreement (also about 34% in Canada)
Chapter 14
© 2012 McGraw-Hill Ryerson Ltd.
9
9
Union Density and Collective Agreement Coverage in Selected OECD Countries
Chapter 14
© 2012 McGraw-Hill Ryerson Ltd.
10
10
Union Density in Canada and the United States, 1920–2010
Chapter 14
© 2012 McGraw-Hill Ryerson Ltd.
11
11
Factors Influencing Union Growth and Incidence in Canada
The union is an exclusive bargaining representative for all employees in the bargaining unit
The extent of union organization in Canada varies considerably by industry, occupation, region and various individual employee or employer characteristics
Unionization is highest in nursing and blue-collar occupations
Industry differences are also substantial and public sector employees form unions more often
Full-time workers and workers above 40 are more likely to be unionized
Chapter 14
© 2012 McGraw-Hill Ryerson Ltd.
12
12
Incidence of Union Organization
Using demand and supply framework
Demand for union representation depends on the expected benefits and costs of union representation
The supply of union representation depends on the contract administration activities from union leaders and staff
Chapter 14
© 2012 McGraw-Hill Ryerson Ltd.
13
13
Demand for Union Representation
Benefits:
Higher wages
Nonwage benefits
Greater employment security
Protection from arbitrary treatment by management
Costs:
Union dues
Time
Potential loss of income
Chapter 14
© 2012 McGraw-Hill Ryerson Ltd.
14
14
Supply for Union Represenation
Supply side effects:
Administering contracts (costly)
Reallocation of resources to yield higher return
Organizing new workplace activities (depends on a number of factors)
Chapter 14
© 2012 McGraw-Hill Ryerson Ltd.
15
15
Factors Influencing Union Growth and Incidence
The extent of unionization depends on choices made by:
Employees
Organizational and Contract Administration activities of union leaders
Actions of the employers
The supply of union organizational and contract administration effort will be high where the per worker cost of organization and representation is low
Chapter 14
© 2012 McGraw-Hill Ryerson Ltd.
16
16
Empirical Evidence
Riddell, Farber, and later Lipset and Meltz explored the differences in Canadian U.S. unionization rates and discovered that:
The differences in rates can be attributed to differences in supply
The overall desire for unionization is similar in both countries
Chapter 14
© 2012 McGraw-Hill Ryerson Ltd.
17
17
Empirical Evidence
Factors influencing the demand and supply for unions:
Social attitudes towards unions
The legislative framework governing unionization
Other economic and social legislation
and Collective BargainingAggregate economic conditions
Chapter 14
© 2012 McGraw-Hill Ryerson Ltd.
18
18
Industry and Enterprise Characteristics
Unionization higher in:
Larger firms
Concentrated industries
Capital-intensive production processes
Hazardous jobs
Chapter 14
© 2012 McGraw-Hill Ryerson Ltd.
19
19
Industry and Enterprise Characteristics
Possible causes of higher union concentration in larger firms:
In larger organizations individual action is less effective
Per-worker cost of union organization is lower
Increase in potential gain from unions for the workers
Chapter 14
© 2012 McGraw-Hill Ryerson Ltd.
20
20
Personal Chracteristics
Less union formation with part-timers
Women are less likely to be represented by a union
Increase in potential gain from unions in blue collar jobs
Decrease in union formation with age
Low paying workers tend to be more interested in union formation
Chapter 14
© 2012 McGraw-Hill Ryerson Ltd.
21
21
Theory of Union Behaviour
Main Objectives:
Wages
Employment of union members
The goals of the organization itself
Factors Influencing Objectives:
Price level
Cost of living
Alternative wage
Employment
Chapter 14
© 2012 McGraw-Hill Ryerson Ltd.
22
22
Chapter 14
© 2012 McGraw-Hill Ryerson Ltd.
23
Union Objectives (Simplified)
Utility is a positive function of wage rate and employment
Indifference curve is downward sloping
Higher wage is needed to compensate for lower employment
Curves have a convex shape
Diminishing marginal rate of substitution
23
Union Constraints Demand for Labour
Wage negotiation/market determined employment
Unions negotiate wages taking into account the consequences
The firm decides the employment level
maximizing profits according to DL curve
DL curve is analogous to a budget constraint
Equilibrium is the tangent of the iso-utility curve and DL curve
Chapter 14
© 2012 McGraw-Hill Ryerson Ltd.
24
24
Chapter 14
© 2012 McGraw-Hill Ryerson Ltd.
25
DL
Union Objectives and Constraints
Real
Wage
Rate
W
P
Wa
P
Employment E
a2
a1
U0
a3
U2
a0
U1
Demand for Labour
25
Union Objectives and Constraints
Special Cases
Alternative objective functions have been suggested to describe union behaviour:
Maximize Wage Rate: Horizontal straight lines
Maximize Employment E: Vertical straight lines
Maximize Real Wage Bill: Rectangular hyperbolas where union attaches weight to both wages and employment
Maximize Real Economic Rent: Rectangular hyperbolas with respect to the origin
Chapter 14
© 2012 McGraw-Hill Ryerson Ltd.
26
26
Union Objectives: Special Cases
Chapter 14
© 2012 McGraw-Hill Ryerson Ltd.
27
Union maximizing wage, placing no weight on employment
27
Union Objectives: Special Cases
Chapter 14
© 2012 McGraw-Hill Ryerson Ltd.
28
Union maximizing employment, placing no weight on wage
28
Union Objectives: Special Cases
Chapter 14
© 2012 McGraw-Hill Ryerson Ltd.
29
Union maximizing the wage bill, wage time employment
29
Union Objectives: Special Cases
Chapter 14
© 2012 McGraw-Hill Ryerson Ltd.
30
Union maximizes economic rent, the product of employment times the difference between the union wage and the alternative wage
30
Union Objectives
More on factors influencing preferences
Availability of information
Heterogeneous Preferences
Union’s political decision-making process
Chapter 14
© 2012 McGraw-Hill Ryerson Ltd.
31
31
Union Preferences
Heterogeneous Preferences
Skills
Personal Characteristics such as: age, seniority, etc.
The median voter model does not apply precisely in the union setting since:
Unions do not choose among alternatives by conducting a sequence of pair-wise votes
Most choices are made by union leaders
Union leaders face tradeoffs among several alternatives
Chapter 14
© 2012 McGraw-Hill Ryerson Ltd.
32
32
Union Preferences
Union Leaders versus Union Members
Unions do not make choices in a fully democratic fashion
Leaders are elected to implement policy
Leaders have greater access to information
Union membership and union objective
Changes to membership alter union preferences
In rapidly expanding firm median voter theorem will fail
Chapter 14
© 2012 McGraw-Hill Ryerson Ltd.
33
33
Union Constraints
Union must negotiate with the firm
Union must take into account the consequences of its decisions
The firm chooses employment level where profits are maximized
Chapter 14
© 2012 McGraw-Hill Ryerson Ltd.
34
34
Union Constraints
Firm’s Isoprofit Curves
The curves are combinations of wage rates and employment rates that yield equal profits
Lower curves imply higher profits
Maximum is attained where the isoprofit and labour curves intersect at the maximum of isoprofit curve
With increasing employment, profit must decrease for a given wage rate
With higher wage profit falls for a given employment
Chapter 14
© 2012 McGraw-Hill Ryerson Ltd.
35
35
Chapter 14
© 2012 McGraw-Hill Ryerson Ltd.
36
Firm’s Isoprofit Curves
Isoprofit curves are upward sloping to the left of the labour demand curve,
are downward sloping to the right, and attain a maximum at the intersection with the
labour demand curve.
36
The Firm’s and Union’s Preferred Wage-Employment Outcomes
Chapter 14
© 2012 McGraw-Hill Ryerson Ltd.
37
E
W
DL
U*
Iu
0 = 0
W0
Wu
*
If
Wf = Wa
Negotiation Range: Wu - Wa
37
Chapter 14
© 2012 McGraw-Hill Ryerson Ltd.
38
The Firm’s and Union’s Preferred Wage-Employment Outcomes
Firm cannot pay wages below alternative wage (Wa)
Firm prefers If and union Iu
Bargaining range in the interval WaWu
Wage rate will lie in the bargaining range
With level of employment determined by labour demand function
38
Relaxing the Demand Constraint
Unions can alter the set of available options by altering the following constraints:
Making the demand for labour more inelastic
Alter the constraint of product market by supporting the quotas, tariffs, etc.
Opposition to regulations
Policies that focus on labour demand such as minimum wage laws or full employment policies
Limiting immigration
Chapter 14
© 2012 McGraw-Hill Ryerson Ltd.
39
39
Chapter 14
© 2012 McGraw-Hill Ryerson Ltd.
40
Efficient Wage and Employment Contracts
Negotiating over wage and employment is mutually advantageous
Pareto-efficient wage-employment outcomes
Union’s indifference curve tangent to the firms isoprofit curve
40
Efficient and Inefficient Wage-Employment Contracts
Chapter 14
© 2012 McGraw-Hill Ryerson Ltd.
41
U
DL
A
W
E
A’’
C
C’
Wa
B
A’
41
Efficient Wage and Employment Contracts
The parties are better off in the shaded areas
A’’ is Pareto-efficient outcome
The outcome is where union indifference curve is tangent to the firm’s isoprofit curve
The locus of Pareto-efficient wage employment outcome is called the contract curve which is CC’
The contract curve must lie to the right of the labour demand curve
Moving up on the CC: unions are better off
Moving down on the CC: the firm is better off
Chapter 14
© 2012 McGraw-Hill Ryerson Ltd.
42
42
Efficient Wage and Employment Contracts
Obstacles to Reaching Efficient Contracts
Information needed may not be available
An agreement about employment difficult to enforce
Changes in the market and economic conditions or the employers’ financial viability.
Monitoring and enforcing efficient contracts are too costly in most settings
Chapter 14
© 2012 McGraw-Hill Ryerson Ltd.
43
43
Chapter 14
© 2012 McGraw-Hill Ryerson Ltd.
44
Efficient Wage and Employment Contracts
Efficient versus Inefficient Contracts
Two main models discussed:
Labour Demand Curve Model: Involves two parties negotiating the wage rate and the firm setting the employment
Efficient Contracts Model: Involves two parties negotiating on both the wage rate and the employment
44
Efficient Wage and Employment Contracts
Chapter 14
© 2012 McGraw-Hill Ryerson Ltd.
45
Because of the obstacles explained, the firm and the union agree to set of approximately efficient contracts denoted by DC
L
45
Empirical Application
Union has a dominant power and can determine the wage
Union places high weight on employment
Union’s preferences display diminishing marginal rate of substitution
Union preferences are sensitive to alternative wage
Chapter 14
© 2012 McGraw-Hill Ryerson Ltd.
46
46
Union Bargaining Power
Assuming that the two parties negotiate over wages alone
Union bargaining power related to the elasticity of labour demand:
The more inelastic, the more power to raise the wage rates
Union bargaining power associated with the ability to raise wages
Related to both the labour demand elasticity and the costs of disagreement to each party
Chapter 14
© 2012 McGraw-Hill Ryerson Ltd.
47
47
Chapter 14
© 2012 McGraw-Hill Ryerson Ltd.
48
Alternative Aspects of Union Power
The union is willing to raise wages substantially because the demand for labour is relatively inelastic.
The union is not willing to raise wages substantially because the demand for labour is highly elastic.
48
Union Power and Labour Supply
Strike threat is the primary source of bargaining power
Restricting Supply: Craft Unions
Can raise wages artificially
Controlling entry to their craft
Try to control the whole trade
Set productivity related factors artificially high
Restricting Supply: Professional Associations
Have control over the process of occupational licensing and certification
The supply of labour to the occupation is restricted
The outcome is higher wage but lengthy education periods
Chapter 14
© 2012 McGraw-Hill Ryerson Ltd.
49
49
Summary
Definition: unions, objectives, and outcomes
Type of unions and the roles they play
Unions in Canada, their policy and features
Extensions of unions and their measures
Demand and supply analysis: costs vs. benefits
Empirical findings and their scope
Chapter 14
© 2007 McGraw-Hill Ryerson Ltd.
50
50
Chapter 15
© 2007 McGraw-Hill Ryerson Ltd.
51
Summary
Union preferences, causes and related theorem
A positive function of members’ wages and employment
The effect of price levels and alternative wages
Special cases
Union leaders preferences vs. members preferences
Union constraints, outcomes and implications
Labour demand and the firm profit
Efficient wage and obstacles
Negotiation based on wage only
Relaxing demand constraint: wage-employment negotiation
Pareto-efficient contracts and approximately efficient contracts
Theory of bargaining and union bargaining power
51
