[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

ECONOMIC EFFECTS
The source of union power is collective action. When workers join
together in a union, they no longer negotiate as isolated individuals. The
threat of a strike (or a work slowdown) poses many more difficulties
for an employer than does the threat of any single employee quitting.
In the perfectly competitive model of labor markets, workers are
price takers; the market wage is given. But when there is a downwardsloping
demand curve for labor, as in Figure 16.2, 1 unions have some
power to be price setters. As a result of this power, a worker at a particular
level of skill who works in a unionized establishment will be paid
more than a comparable worker in a competitive industry. The firm
would like to hire that lower-priced, nonunion worker, and the nonunionized
worker could easily be induced to move, but the firm has a union
contract that prevents it from hiring anyone at a lower wage. But as
the union raises the price of labor (the wage), firms will employ fewer
workers. Higher wages are obtained at the expense of lower levels of
employment. In the figure, when wages rise from the competitive level
w c to w m , employment is reduced from L c to L m .
Short-Run Gains at the Expense of Long-Run Losses
Sometimes unions can increase both employment and wages, at least
for a time. They present the employer with, in effect, two alternatives:
either pay a high wage and maintain an employment level above the
labor demand curve for that wage, or go out of business. If the employer
already has sunk costs in machines and buildings, he may accede to the union
demands. In effect, the union takes away some of the employer’s monopoly profits
or return to capital. In competitive markets, where there are no monopoly profits,
the higher wages can only come out of employers’ return to capital. But these employers
will lose interest in investing in more capital. As capital wears out, an employer
has less and less to lose from the union threat. As she refuses to invest more, jobs
decrease. Even if the union makes short-run gains, they come at the expense of a
long-run loss in jobs.
Effects on Nonunion Workers The gains of today’s union members not only
may cost future jobs but also may come at the expense of those in other sectors of
the economy, for two reasons. First, the higher wages may well be passed on to consumers
in the form of higher prices, particularly if product markets are not perfectly
competitive. Second, the increased wages (and reduced employment) in the
union sector drive down wages in the nonunionized sector, as the supply of nonunion
labor increases. Some argue the opposite—that high union wages “pull up” wages in
WAGE (w )
w m
w c
Figure 16.2
Demand curve
facing a union
L m L c
QUANTITY OF LABOR EMPLOYED (L )
THE UNION AS A MONOPOLY SELLER
OF LABOR
Unions can be viewed as sellers of labor, with market
power. When they increase their wage demands, they
reduce the demand for their members’ labor services.
1 Chapter 8 showed how the demand curve for labor is derived in competitive markets. Firms hire labor up to
the point at which the wage equals the value of the marginal product of labor. The derivation of the demand curve
for labor in monopolies and imperfectly competitive markets follows along similar lines. Firms hire labor up to
the point at which the marginal revenue—that is, the extra revenue they obtain from selling the extra output
they produce from hiring an extra unit of labor—is equal to the wage.
LABOR UNIONS ∂ 359