Union Structure and Membership

oLabor unions are organizations of workers whose primary

objectives are to improve the pecuniary and non-pecuniary
conditions of employment among their members
oUnions can be classified into two types: an Industrial
union represents most or all of the workers in an industry or
firm regardless of their occupations, and a craft union

represents workers in a single occupational group.

 Cont. …
• Examples: industrial unions are the unions representing
automobile workers, bituminous coal miners, and rubber
workers;
• craft unions include those representing the various

building, trades, printers, and dockworkers.

• Unions bargain with employers over various
aspects of the employment contract: such as pay &
employee benefits; conditions of work; policies
 Cont. …
Bargaining can occur at different levels.
• Bargaining can be highly centralized, with representatives
of entire industries sitting at the bargaining table to decide
on contracts that bind multiple employers.
• Can be decentralized , bargaining can take place between a
union and a single company-or even between the workers
and management at a single plant within a company.
• As large collective organizations, unions also represent a
political force in democratic countries. Often, unions will
use the political process in the attempt to gain benefits
they could not as easily win through collective bargaining.
• In some countries (Great Britain, for example), unions
have their own political party.
• In others, such as the United States, unions are not
affiliated with any single political party; rather, they act as
lobbyists for various bills and policies at the federal, state,
and local levels of government.
Constraints on the achievement of
unions’ objectives
• Unions want to advance the welfare of their members in
one way or another.
• Some of their objectives are procedural; they want to give
workers some voice in the way employers manage the
workplace, especially in the handling of various personnel
issues, such as job assignment, the allocation of overtime,
the handling of worker discipline and grievances, and the
establishment of joint labor-management safety
 Cont. …
• Wanting “more” is usually associated with the union goal
of increasing the compensation levels of its members.
• The most visible element of compensation is the wage rate,
but bargaining also occurs over employee benefits as
pensions, health insurance, vacations and etc.
 Cont. ….
• The attempts to achieve “more,” of course, take
place in the context of constraints.
• Employers are on the other side of the bargaining
table, and they must make agreements that permit
them to operate successfully both with their
workers and within their product markets.
• Increased compensation for their workers will give
them incentives to substitute capital for labor, and
 Cont. …
• In short, unions must ultimately reckon with the
downward-sloping demand curve for labor.
• As a result, both the position and the elasticity of this
curve become fundamental market constraints on the
ability of unions to accomplish their objectives.
• Suppose
  a union seeks to raise the
wage rate of its members to W1
• This cause employment to fall to
if the union faced the relatively
elastic demand curve or to if it
faced the relatively inelastic
demand curve
• Other things equal, the more
elastic the demand curve for labor
is, the greater will be the
reduction in employment
associated with any given
increase in wages.
 Cont. …
••  Suppose now that the demand curve shifts out to while the

negotiations are under way, owing perhaps to growing

demand for the final product.
• If the union succeeds in raising its members’ wages to W1,
there will be no absolute decrease in employment in this
case. Rather, the union will have only slowed the rate of
growth of employment to instead of employment.
 Cont. …
• More generally, other things equal, the more rapidly the
labor demand curve is shifting out (in), the smaller (larger)
will be the reduction in employment or the reduction in the
rate of growth of employment associated with any given
increase in wages.
• Hence, unions’ ability to raise their members’ wages will
be strongest in rapidly growing industries with inelastic
labor demand curves.
• Conversely, unions will be weakest in industries in which
 Monopoly- Union Model
• Herein, the union sets the price of labor and the employer
responds by adjusting employment to maximize profits,

given the new wage rate with which it is confronted.

• The labor demand curve facing the worker is a function
of wage rate.
• Union’s utility if a function of wage and employment
level. This utility function is summarized by the family of
indifference curves, shown in the following figure.
Cont. …
• How does collective bargaining affect this solution?
• One possibility is that the union and the employer will
agree on a higher wage rate and then, given the wage rate,
the employer will determine the number of union members
to employ.
• Given a bargained wage rate, the employer will maximize
profits and determine employment from its labor demand
curve.
• Since the union presumably knows this, its goal is to
choose the wage that maximizes its utility subject to the
 Cont. …
• In terms of the above figure, the union will seek to move to

point b, where indifference curve U2 is just tangent to the

labor demand curve. At this point, wages would be Wu
and employment Eu. Given the constraint posed by the

labor demand curve, point b represents the highest level of

utility the union can attain.
 The Activities and Tools of Collective
Bargaining
• Having analyzed the general constraints facing unions as
they seek to accomplish their goals, we now turn to an
economic analysis of several activities that affect their
power.
A.Union Membership: An Analysis of Demand and Supply
• On the demand side, employees’ desire to be union
members will be a function of the price of union
membership; this price includes initiation fees, monthly
 Cont. ….
• It is costly to represent workers in collective bargaining
negotiations and to supervise the administration of union
contracts.
• Therefore, it is reasonable to conclude that, other things
equal, the willingness of unions to supply their services is
an upward-sloping function of the price of union
membership
• What are the forces that determine the positions of the
demand and supply curves?
• On the demand side: it is likely that individuals’ demand
for union membership is positively related to their
perceptions of the net benefits from being union members.
• Another factor is tastes; if individuals’ tastes for union
membership increase, perhaps because of changes in social
attitudes, the demand curve will also shift to the right.
• On the supply side: anything that changes the costs of
union-organizing activities will affect the supply curve.
 Cont. …
• Introduction of labor legislation that makes it easier for
unions to win representation elections will shift the supply
curve to the right.
• Changes in the composition of employment that make it
more difficult to organize the workforce will shift the curve
to the left and reduce the level of unionization.
• Demographic Changes: The fraction of the labor force
that is female has increased substantially and women have
historically tended not to join unions.
 B. Union Actions to Alter the Labor
Demand Curve
• Many actions that unions take are direct attempts to relax
the market constraints they face: either to increase the
demand for union labor or to reduce the wage elasticity of
demand for their members’ services.
• Many of these attempts have not occurred through the
collective bargaining process per se. Rather, they have
occurred through union support for legislation that at
least indirectly achieved union goals and through direct
 Cont. …
A. Shifting Product Demand To increase the demand for
the final product—and hence shift the labor demand curve
for union workers to the right—unions lobbies for import
quotas, which restrict the quantities of foreign-made goods
and for domestic content legislation, which requires goods
from abroad to have a certain percentage of home made
components. Unions also lobbies strongly against
legislation, that raise consumption of domestic goods by
influencing consumers’ preferences.
 B. Restricting Substitution:
Legislation
• When it becomes more difficult or expensive to
replace union labor with alternative factors of
production. Unions have therefore often sought, by
means of legislation, to pursue strategies that
increase the costs of other inputs that are potential
substitutes for union members.
• Furthermore, labor unions have been among the
primary supporters of higher minimum wages.
 Cont. ….
• While such support may be motivated by a concern for the
welfare of low-wage workers, increases in the mandated
wage also raise the relative costs to employers of hiring
nonunion workers, thereby both increasing the costs of the
products they produce and reducing employers’ incentives
to substitute them for higher-paid union workers.
 C. Restricting Substitution:
Bargaining
• Union attempts to restrict the substitution of other inputs
for union labor also can occur through the collective
bargaining process.
• Craft unions often negotiate specific contract provisions
that restrict the functions that members of each individual
craft can perform, thereby limiting the substitution of one
type of union labor for another.
• They also limit the substitution of unskilled union labor for
skilled union labor by establishing rules about the
 The Theory of Union Wage Effects
• Economists have long been interested in the effects of
unions on wages, and recently, attention has also been
given to their effects on total compensation (including
employee benefits), employment levels, hours of work,
productivity, and profits.
• Suppose we had data on the wage rates paid to two groups
of workers identical in every respect except that one group
was unionized and the other was not.
 Cont. …
••  Let Wu denote the wage paid to union members and Wn

the wage paid to nonunion workers. If the difference

between the two could be attributed solely to the presence
of unions, then the relative wage advantage (R) that unions
would have achieved for their members would be given, in
percentage terms, by
-
 Cont. ….
• This relative wage advantage does not represent the
absolute amount, in percentage terms, by which unions
would have increased the wages of their members, because
unions both directly and indirectly affect non union wage
rates as well.
• Moreover, we cannot say for sure whether estimates of R
will overstate or understate the absolute effect of unions on
their members’ real wage levels.
• To illustrate the difficulties in interpreting union–nonunion
 Cont. ...
••  The figure represents two sectors of the labor market, both

of which hire similar workers. Panel (a) is the union sector

and panel (b) is the nonunion sector.
• Suppose initially that both sectors are nonunion and that

mobility between them is costless.

• Workers will therefore move between the two sectors until
wages are equal in both sectors. With demand curves Du
and Dn, workers will move between sectors until the
supply curves and respectively.
 Cont. ….
••  The common equilibrium wage will be W0, and

employment will be and , respectively, in the two sectors.

• Once one sector becomes unionized, and its wage rises to ,
what happens to wages in the other sector depends on the
responses of employees who are not employed in the union
sector. In the following sections, we discuss four possible
reactions.
Cont. ….
 Spillover Effects
••  If the union succeeds in raising wages in the union sector

to this increase will cause employment to decline to

workers, resulting in- unemployed workers in that sector.
• If all the unemployed workers spillover into the nonunion
sector, the supply curves in the two sectors will shift to
and respectively.
• Unemployment will be eliminated in the union sector; in
the nonunion sector, however, an excess supply of labor
will exist at the old market clearing wage, W0.
 Cont. ….
••  As a result, downward pressure will be exerted on the wage

rate in the nonunion sector until the labor market in that

sector clears at a lower wage and a higher employment
level.
• In the context of this model, the union has succeeded in
raising the wages of its members who kept their jobs.
• However, it has done so by shifting some of its members to
lower-wage jobs in the nonunion sector and, because of this
spillover effect, by actually lowering the wage rate paid to
 Cont. …
••  will tend to be greater than the true absolute effect of the

union on its members’ real wage. This true absolute effect

(A), stated in percentage terms, is defined as
)/
Because A is lower than W0 ,R1 is greater than A.
Threat Effects: Another possible response by nonunion
employees is to want a union to represent them as well.
Nonunion employers, fearing that a union would increase
labor costs and place limits on managerial prerogatives,
 Cont. …
• Because there are costs to workers (as noted earlier) of
1
union membership, some wage less than W ubut higher than
Wo
would presumably be sufficient to assure employers
that the majority of their employees would not vote for a
union (assuming that the employees are happy with their

nonwage conditions of employment).

• The increase in wage in the union sector, and resulting
decline in employment there, is again assumed to cause the
1
Sn
supply of workers to the nonunion sector to shift to
Cont. …
 Cont. …
• In response to the threat of union entry, however, nonunion
employers are assumed to increase their employees’ wages
Wn* Wn1
to which lies between and This Wwage
o increase
causes nonunion employment to decline to at the higher
*
Ewage,
n nonunion employers demand fewer workers.
 Wait Unemployment
• Do workers who lose (or do not have) a union job
necessarily leave the union sector and take jobs in the
nonunion sector?
• Even with reduced employment in the union sector, job
vacancies occur as a result of retirements, deaths, and
voluntary turnover. Some of those who do not have union
jobs will find it attractive to search for work in the union
sector, and their search might be more effective if they are
 Cont. …
• The main behavior behind the wait-unemployment
response is that workers will move from one sector to
another if the latter offers higher expected wages.
• Expected wages in a sector are equal to the sector’s wage
rate multiplied by the probability of obtaining a job in that
sector.
• Thus, even if one were always able to find a job in the
nonunion sector, rejecting employment there might be
beneficial if there were a reasonable chance (even if it
 Cont. …
• The importance of the resultant wait unemployment for our
current discussion is that not everyone who loses a job in
the union sector will spill over into the nonunion sector; in
fact, it is even theoretically possible that some workers
originally in the nonunion sector would quit their jobs to
take a chance on finding work in the union sector.
• The presence of wait unemployment in the union sector
will reduce the spillover of workers to the nonunion sector,
thus moderating downward pressure on nonunion wages.
 Cont. ….
• In this case, unionization in one sector could cause wages
in the nonunion sector to rise, just as with the threat effect
(in fact, a “threat” here is being carried out: workers are
leaving the nonunion employers to search for union jobs).
• Shifts in Labor Demand: Finally, recall that we
discussed earlier the activities unions undertake to alter
the demand for their members’ labor services.
• In some cases, these activities involve attempts to shift the
product demand curve facing unionized firms (and hence
their labor demand curve) to the right.
• If unions were successful in their efforts to increase
product demand in the unionized sector, perhaps at the
expense of the nonunion sector, the rightward shift in the
union-sector labor demand curve—and the associated
 The Effects of Unions on
Employment
• If unions raise the wages and employee benefits of their
members, and if they impose constraints on managerial
prerogatives, economic theory suggests their presence will
have a negative effect on employment.
• Several studies have investigated this theoretical
prediction, and the results suggest that unions do reduce
employment growth.
• Finally, even when employment is not much changed in
the face of unionization, the total yearly hours of work
 The Effects of Unions on Productivity and Profits

• There are two views on how unions affect labor

productivity (output per worker).
1. unions increase worker productivity, given the firm’s
level of capital, by providing a “voice” mechanism
through which workers’ suggestions and preferences can
be communicated to management.
With a direct means for expressing their ideas or
concerns, workers may have enhanced motivation levels
 Cont. …
2. unions affect worker productivity stresses the limits
they place on managerial prerogatives, especially with
respect to using cost minimizing levels of the labor
input
• if unions care about the employment as well as the
wages of their members, they will put pressure on
management to agree to staffing requirements,
restrictions on work out of job title, cumbersome
 Cont. …
• Empirical analyses of union productivity effects have yielded
conflicting results. The effects of unions on workers’ output
apparently depend very much on the quality of the relationship
between labor and management in each particular collective
bargaining setting.
• In fact, one study found that unionized firms with human-resource
practices that combined joint labor-management decision making
with output-based pay had higher productivity than similar nonunion
firms; unionized firms without such practices had lower productivity
than comparable nonunion employers