Lecture9 - Unions I Lecture 9, March 13, 2012 Announcements...

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Unformatted text preview: Unions I Lecture 9, March 13, 2012 Announcements •  Term Paper -- Remaining deadline: –  Final Submission, Tuesday March 20th, 11:00 am •  On peerScholar and turnitin. •  No need for paper submission •  Don’t forget the “reflection” (no need to go overboard). •  Final Exam: –  A-LI TUE 17 APR AM 9-11 SEEL –  LL-Z TUE 17 APR AM 9-11 SHER •  And don’t forget to work on the problems. •  Tutorials continue this Friday –  Alfia will be taking up selected problem set questions –  Every Friday for the remainder of the semester 1 Outline of Unions •  Institutional Background (Chapter 14) –  –  –  –  Legal framework Descriptive statistics r.e. union coverage “supply” and “demand” for union representation Mostly: read on your own. •  Models of union-firm behaviour (Chapter 15) –  –  –  –  Union preferences: what do unions want? Employment and wage determination: The monopoly union Inefficiency of monopoly employment, and efficient contracts as alternative Models of bargaining •  The impact of unions on wages (Chapter 16) –  Interpreting the “union wage effect” –  How much do unions raise wages? –  The broader economic impact of unions 2 What are unions? •  Unions are collective organizations whose primary objective is to improve the well-being of their members. •  Unions may have political objectives as well (presumably in support of their members), but we will not focus on these. •  Unions have the legal monopoly rights to sell labour services to the employer. •  Historically, note the distinction between: –  Craft Unions (e.g., electrical workers, carpenters, plumbers, etc.) –  Industrial Unions (e.g., steel workers, auto workers, etc.) •  Also note the significant importance of public sector unions •  How important are unions in Canada? –  Note the distinction between union membership, and coverage by collective agreements. 3 CHAPTER 14: Unions and Collective Bargaining TABLE 14.1 417 Union Membership and Union Density in Canada, 1920–2010 Union Membership as a Percentage of Nonagricultural Paid Workers Year Union Membership (000s) Union Membership as a Percentage of Civilian Labour Force 1920 374 9.4 16.0 1925 271 7.6 14.4 1930 322 7.9 13.9 1935 281 6.4 14.5 1940 362 7.9 16.3 1945 711 15.7 24.2 1951* 1,029 19.7 28.4 1955 1,268 23.6 33.7 1960 1,459 23.5 32.3 1965 1,589 23.2 29.7 1970 2,173 27.2 33.6 1975 2,884 29.9 35.6 1980 3,397 29.2 35.7 1985 3,666 28.3 36.4 1990 4,031 28.5 34.5 1995 4,003 27.0 34.3 2000 4,058 26.0 32.2 2005 4,381 25.5 30.7 2010 4,645 25.3 30.8 *The survey was not conducted in 1950. SOURCE: Table 1: Union Membership in Canada, 2000–2010, published in Union Membership in Canada–2010, http:// www.hrsdc.gc.ca/eng/labour/labour_relations/info_analysis/union_membership/2010/unionmembership2010.shtml. Human Resources and Skills Development Canada, 2010. Reproduced with the permission of the Minister of Public Works and Government Services Canada, 2011. 2010 Public Sector: 64.7% Private Sector: 13.5% 4 CHAPTER 14: Unions and Collective Bargaining TABLE 14.2 Union Density and Collective Agreement Coverage in Selected OECD Countries Union Membership as a Percentage of Paid Workers Collective Agreement Coverage as a Percentage of Paid Workers 1980 2000 1980 2000 Australia 48 25 801 801 Canada 35 28 37 32 Denmark 79 74 701 801 France 18 10 801 901 Germany 35 25 801 68 Italy 50 35 801 801 Japan 31 22 251 151 Netherlands 35 23 701 801 New Zealand 69 23 601 251 Sweden 80 79 801 901 United Kingdom 51 31 701 301 United States 22 13 26 14 SOURCE: OECD (2004), OECD Employment Outlook 2004, OECD Publishing, http://dx.doi.org/10.1787/ empl_outlook-2004-en. NOTE: Figures with a 1 sign represent lower bound estimates. 5 in related firms and sectors. In these circumstances, there may be a substantial difference CHAPTER 14: Unions and Collective Bargaining Union DensityDensityCanadatheand States, 1920–2010 in in Canada and United the U.S. F IGURE 14.1 Union 40 Canada Union density is here as union me as a percentage cultural paid wor density rates for and the United S plotted at five-ye over the period s Union growth fol similar pattern in countries from 1 mid-1960s, after there has been a divergence. United States Union density (%) 35 30 25 20 15 10 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 00 05 10 Year 6 SOURCES: Human Resources and Social Development Canada, Directory of Labour Organizations in Canada, various issues; Union Membership and Coverage Database, www.unionstats.com. Why the divergence? •  Why has the unionization rate stayed high in Canada, while declining dramatically in the United States? •  Structural change: Different industrial structures? –  Very little. –  Slightly larger public sector in Canada •  Whatever the sector, the probability of unionization is higher in Canada •  The most likely explanation is a more favourable legal climate –  Historically, “automatic certification” or “card check” certification, which makes it easier to organize new unions. –  Versus mandatory union certification votes •  In the U.S., “Employee Free Choice Act,” introduced in 2009, would have reinstated “card check.” –  Currently stalled 7 Union objectives •  Focus on employment and wages –  But note the importance of unions for health and safety, fringe benefits, seniority rules, grievance procedures, etc. •  With firms and workers/consumers, objectives were clear: –  Firms maximize profits (or minimize costs) –  Consumers maximize utility •  Extend the idea of rationality to unions, so that unions maximize something, subject to constraints. •  Not really so cut and dry: Dunlop versus Ross (1944-48), where Ross emphasized the political nature of unions. •  Unions will be modeled as representing their membership. –  Blackbox: could appeal to “median voter” models –  But leadership may have independent interests as well. 8 Union preferences •  Imagine that we can capture union preferences over combinations of employment and wages using indifference curves: W u0 u1 E •  We could summarize these preferences with a utility function: u = u (W , E ) •  It would be easy to add other variables (e.g., price level, alternative wages, membership versus employees). 9 CHAPTER 14: Unions and Collect Union Preferences: Special Case 1 F IGURE 14.3 •  Maximize the wage rate: Union Objectives: Some Special Cases (a) Maximize wage rate (b) Maximize employment u =W u0 W P W P u1 u u2 u1 u0 Wa P Wa P 0 E (c) Maximize wage bill W u1 u2 0 (d) Maximize 10 economic re W u0 u1 u2 Union Preferences: Special Case 2 CHAPTER 14: Unions and Collective Bargaining 4.3 435 Union Objectives: Some Special Cases •  Maximize employment: u=E (b) Maximize employment e wage rate W P u0 u1 u2 u2 u1 u0 Wa P E e wage bill 0 E (d) Maximize economic rent u The panels illustrate four special cases of the union utility function. In panel (a) the union maximizes the wage, placing no weight on employment. The indifference curves are horizontal straight lines in wage employment space. In panel (b) the union maximizes employment, placing no weight on the wage. The indifference curves are vertical straight lines. In panel (c) the union maximizes the wage bill, wages times employment. The indifference curves are rectangular hyperbolas, and display diminishing marginal rate of substitution between wages and employment. In panel (d), the union maximizes economic rent, the product of employment times the difference between the union 11 wage and the alternative wage. The indifference curves are rectangular hyperbolas in wage-employment space 0 Wa P Wa P Union Preferences: Special Case 3 0 E •  Maximize the wage bill u = W wage bill (c) MaximizeE W u u1 0 P (d) Maximize econ u2 W P Wa P 0 0 u0 u1 u2 Wa P E 0 12 u0 Wa P cal straight lines. In panel (c) the union maximizes the wage bill, wages times employment. The indifference curves are rectangular hyperbolas, and display diminishing marginal rate of substitution between wages and employment. In panel (d), the union maximizes economic rent, the product of employment times the difference between the union wage and the alternative wage. The indifference curves are rectangular hyperbolas in wage-employment space above the alternative wage, and display diminishing marginal rate of substitution between wages and employment. Union Preferences: Special Case 4 E wage bill 0 E •  Maximize Economic Rent u = (W − W )E (d) Maximize economic a rent W P u0 u1 u2 Wa P E 0 E 13 Union Constraints Confirming Pages •  Of course, Unions will have to maximize their objectives subject to the PART 5: unions constraint of what is available from the firm. •  Firm objectives can be summarized by iso-profit curves, mapped in wageF IGURE 14.4 The Firm’s Isoprofit Curves employment space. 438 Firm isoprofit curves plot combinations of the wage and employment that yield equal profits. 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. W W* e • f • c a • • b • • g• • h 0 d 1 2 3 DL E* E 14 and employment is discussed subsequently.) In these circumstances, the firm will choose the level of employment that maximizes profits given the negotiated wage; that is, will choose Firm Objectives •  Firm profits are increasing in E, and decreasing in W. •  The optimal employment for the firm maximizes profits, given the wage. –  Tangency between the iso-profit curve and the wage rate (e.g., W*). •  The labour demand function will show the optimal employment level for the firm, for any given wage rate. •  Important to note that the firm is not indifferent among points on the demand curve (and prefers higher profits) 15 The Monopoly Union •  In this setting, the union sets the wage, and the firm chooses employment. •  The firm will choose the employment level that maximizes profits given the union wage. –  This will be on the labour demand function •  The union, knowing this rule, chooses its favorite combination of E, W: –  Maximize utility subject to employment and wages being on the labour demand function. •  Other considerations of the “bargaining range”: –  Minimum profits for firms –  Minimum wage (the alternative wage) for the union 16 CHAPTER 14: Unions and Collective Bargaining Employment: Monopoly Union F IGURE 14.5 The Firm’s and Union’s Preferred Wage-Employment Outcomes and the Bargaining Range The preferre the firm and illustrated fo in which the employment The union’s come Iu corr highest utilit attained, sub the labour d The firm’s pr If correspon profits that c subject to th that the wag equal the alt The bargain set of wage and Wu. W W0 Wu • • lu 0 =0 Bargaining range Wf = Wa • U* lf DL * E 17 corresponds to a different level of profits. The higher the wage rate, the lower the maximum attainable level of profits. Monopoly Union: On the Demand Curve •  In this setting, the union has every incentive to affect the slope of the labour demand function in order to reduce the tradeoff between employment and wages. •  Labour demand elasticity will depend on product market, as well as market for substitutes to labour: –  Protectionism –  Organize the entire industry –  Restrict supply of substitute workers 18 Pareto Efficiency? •  Recall the definition of Pareto Efficiency •  No outcome is efficient if one party can be made better off without making the other worse off. •  We can show that the arrangement above (the monopoly union) is inefficient, in the sense that there are contracts available to the parties that will make both better off. –  This requires allowing joint determination of employment and wages. •  Mutually beneficial trades are available at the monopoly union outcome. •  In the following figure, we can see: –  The monopoly outcome is given by A; –  The point A’ is feasible, and yields higher utility for the union, and higher profits for the firm; –  By contrast, the point A’’ is Pareto Efficient. 19 “gains from trade” and thus are inefficient in the Pareto sense. (Recall that an outcome is said to be Pareto-efficient or Pareto-optimal if no individual or group of individuals can be made better off without making some individual or group of individuals worse off.) This is illustrated in Figure 14.6. Starting at points on the labour demand curve such as A and B, it is possible to make one or both parties better off by moving to outcomes in the TheFIGURE 14.6 Efficientof Inefficient Wage-Employment Contracts inefficiency and monopoly employment Wage-employment contract on the labour demand curve are inefficient. For example, compared to the point A on the labour demand curve, both parties are better off a point A9, which yields higher union utility and higher firm profits. The set of Paretoefficient wage-employment contracts, called the contrac curve and shown as CC9, is the locus of points at which a union indifference curve is tangent to a firm isoprofit curve. Because the union indifference curves are downward sloping, this set of tangencies must occur to the right of the labour demand curve, where the firm isoprofit curves are also downward sloping. W C • A •• A′ A″ • B Wa C′ DL E 20 Efficient Contracts •  What types of contracts are efficient? –  Connect all tangencies between the union indifference curves and iso-profit curves. •  This locus of points is called the “contract curve.” –  It lies to the right of the labour demand curve –  At any given wage rate, more employment would make both parties better off. •  Clearly, unions and firms have an incentive to move to the contract curve. •  Implications: –  Firms and workers have an incentive to constrain themselves to the contract curve (featherbedding, etc.) –  “kills” the labour demand relationship in the data •  Obstacles: –  Information problems, mistrust – demand curve may be only credible alternative –  Difficult to enforce contracts (shifts in product demand, asymmetric information) 21 The contract curve W u0 Connect the tangencies between Iso-profit curves and indifference curves à༎ CC’ C π0 π1 π2 C' DL E 22 Which model is right: Evidence? •  How can one tell which model is correct empirically? •  It turns out that if union preferences can be represented by rentmaximization: u = (W − Wa )E •  That this yields a model where employment is set so that: VMP = Wa •  And that contract wages, W, are determined by whatever bargaining process. •  In this model, the alternative wage, not the contract wage, determines employment. –  This permits as relatively straightforward test to see which wage Wa or W, determines employment in union contracts. –  It turns out: “both” 23 Introduction to Bargaining •  Bargaining theory attempts to place more structure on the process by which two rational agents will come to an agreement. •  Consider the following representation, where S is the set of feasible bargains, and d is the threat/disagreement point: Union A C B S d Firm 24 What outcome would occur? •  Might the disagreement point, d, be an equilibrium outcome? •  No – both parties have an incentive to move to a point C, since both parties are better off. –  But this is not Pareto efficient. •  Incentives for conflict arise once we focus on the set of Pareto Efficient outcomes. –  By definition, one party is made worse off when movement occurs. There is no more “win-win”. –  For example, A versus B. •  Can threaten non-agreement to try and achieve a bargain.   Can threaten not to play – this makes one party worse off. –  But is it credible? 25 Nash Bargaining •  Assume full information about the nature of the game (though not necessarily about what the other players will do). •  Characterize the solution, but not the process. Axiomatic approach: –  A1) Pareto Efficiency –  A2) Symmetry (if the frontier is symmetric, then the parties must be equally powerful, and we expect equal outcomes). –  A3) Units of measurement shouldn’t matter. –  A4) Independence of Irrelevant Alternatives. •  Suppose A is the solution for S. Then the solution will not be altered if some outcome (previously available) were no longer available. •  Nash’s result: A1 through A4 imply a unique solution to the bargaining game. The outcome maximizes the product of the parties’ payoff increments from the threat point. (U − du ) × ( F − d f ) 26 Nash’s Solution •  Denoted by N, this maximizes the area, T: Union A N uN T d fN Firm 27 Rubinstein’s Bargaining Theory •  Two players take turns making offers. •  If the offer is accepted, then the game ends. If not, then the other player makes a counter offer. •  Wrinkle: Delay Costs. –  Taking turns causes the “pie” to shrink. –  Think of this as a “strike” •  We can represent this with a simple graphical representation. •  In our example: –  Let the union make the first offer. –  If no agreement after three rounds, then payoffs are just the threat points (“zero”). –  Assume that each party behaves rationally, and only responds to credible threats. 28 Rubinstein Bargaining Solution Union R uR u3 u4 d f4 fR Firm 29 Rubinstein Bargain Solution •  The solution is R, which we solve by backward induction. •  In the 4th period, there is nothing to share. Therefore, in the third period (when it’s the union’s turn), the union can credibly offer u3, f4. –  And there is no reason for the firm to turn this down, except spite, which is ruled out. •  In the 2nd period, when it’s the firm’s turn, it cannot offer u4, because the union get u3 for sure. Therefore offer the union u3, and take the best it can, which is fR. •  In the 1st period, with full knowledge of the remaining stages of the game, union knows that the firm can credibly offer u3, fR next period, therefore offers the firm uR, fR. –  This is the equilibrium. •  The costs of delay plus rationality lead the parties to the outcome. –  Rational parties will come to agreement without delay: No disagreements or strikes. 30 Strikes •  There is an interesting and rich literature on strikes; •  Unfortunately, we do not have time to study it. •  Big puzzle: why do strikes ever occur? –  If the bargain ultimately reached was available before a strike, why bother? •  Asymmetric information •  Political models (leadership versus membership) 31 Next week •  What is the impact of unions on the labour market, especially wages. –  Chapter 16 •  Recommended problems: –  These problems are less technical than I expect you should be able to do, but they are still useful: •  15.3, 15.8, and 15.11 32 ...
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