Labor, Wages, and Collective Bargaining

Economists study the supply and demand for labor under different sets of conditions. Companies may hire workers in competitive or monopsonistic labor markets, and they may sell their output in competitive or monopolistic product markets. An individual company in a purely competitive product market cannot affect the price of the goods or services that it sells, nor can an individual company in a purely competitive labor market affect the wage rate that it pays to its workers. However, an individual company that is a monopolist in the product market does affect the price of the goods or services that it sells, and an individual company that is a monopsonist in the labor market affects the wage rate that it pays.

A company that hires workers in a purely competitive labor market faces a horizontal supply and MFC curve. lt will want to hire more workers if it sells its goods or services competitively than if it is a monopolist in the product market. This is the case because in a monopolistic product market a company's MRP curve is steeper than in a purely competitive one and so will intersect its MFC curve at a lower level of employment.

An individual worker's supply curve of labor is expected to be positively sloped at most, but not necessarily all, wage rates. At very high wage rates it may "bend back," or become negative, as the worker's income effect outweighs his or her substitution effect.

A market-supply curve of labor slopes upward because as the wage rate for that particular occupation rises in relation to the wage rates for other occupations, more and more people will offer their services for that occupation. A market demand curve for labor is derived by aggregating all of the individual firms MRP curves, The equilibrium wage rate and quantity of workers employed in a labor market is identified by the intersection of the market-supply curve with the market-demand curve. In a purely competitive labor market, that wage rate will be accepted as the going wage, and each individual firm will be able to hire as many or as few workers as it wishes to hire at that wage.

Individual firms that are monopsonists in the labor market face positively sloped supply curves of labor. This means that in order to attract more workers, they have to pay higher wage rates. Their MFC of hiring an additional worker is, how ever, higher than the wage rate paid to that additional worker, since all of the workers hired earlier must also be paid the higher wage rate. As in competitive labor markets, the equilibrium number of workers that a monopsonist will hire is found at the point where the monopsonist's MFC curve intersects its MRP curve. But, whereas for a purely competitive employer, MFC is equal to the equilibrium wage rate, for a monopsonistic employer, MFC is above the equilibrium wage rate.

Labor unions are collective organizations whose primary goals are to improve the wages and working conditions of their employee members. ft was difficult for them to become established in the United States. At first many people resented them and considered them a threat to the American free enterprise system.

Before the formation of the AF of L in 1886, American unions were fairly local and were often involved in political actions. In a sense, they were on a roller coaster, doing well during prosperous times but being all but wiped out during recessions. With the founding of the AF of L came the beginning of business unionism.

It was not until the Great Depression of the 193Os that public opinion swung over to support the union cause. This change of heart led to the passage of two important pro-union laws, the Norris -LaGuardia Act and the Wagner- Connery Act. After World War 11, Congress passed a somewhat compensating pro-employer labor law, called the Taft-Hartley Act.

An internal union struggle between craft unions, representing particular types of skilled workers, and industrial unions, representing all the workers in an industry, had been festering during the first three decades of the twentieth century. This struggle came to a head in 1938 when the AF of L expelled the CfO from its ranks. It was not until 1955 that the two finally merged.

The problem of corruption and racketeering in some unions led to the passage of the Landrum-Griffin Act in 1959. The problem of racial discrimination was a major concern of many unions in the early 1960s. Unions supported the efforts to pass the Civil Rights Act of 1964. 

Union membership increased during the 1960s, held fairly constant during the 1970s, and fell dramatically in the 1980s. The 1960s and 1970s saw a great change in the composition of union membership. The percentage of private firm employees who were union members declined, whereas the percentage of public employees who were unionized rose.

Collective bargaining is the approach used by labor unions to negotiate with employers or their representatives. The issues in collective bargaining fall into two broad categories: (a) the conditions of employment, such as wage issues, fringe benefits and work standards, and (b) the relationship between the union and management. The process of collective bargaining often calls for a great show of strength on both sides. The ultimate weapon of a union is the strike, which may be supplemented by picketing and boycotts.

Unions have an impact on wage rates. Just how much they are able to raise wage rates is difficult to determine. When bargaining takes place in purely competitive labor markets, unions may achieve higher wage rates through restricting the supply of labor, bargaining for an above-equilibrium wage rate, or raising the demand for labor. When bargaining takes place in a monopsonistic labor market, we cannot predict just how high the equilibrium wage rate will be. The relative power of the union and management along with the policies that they follow will dictate the result of the bargaining.

Government also has an impact on wage rates. Labor laws have strengthened unions and in turn have tended to raise wages. Whenever the government increases or decreases taxes that employees or employers must pay, it has an effect on both employment and wage rates.

Government affects some wage rates when it sets a minimum wage, or a lower limit on the wage rate that firms are allowed to pay. Generally, firms in industries affected by minimum-wage legislation are in fairly competitive labor markets, so that although the legislation increases the wage rates of some low-wage employees, it also reduces employment. In monopsonistic labor markets, the result of a minimum wage may be not only to increase the wage rate of low-wage employees but also to bring about a higher level of employment.

The general proposition that an equilibrium wage rate in a labor market is determined by the interaction of the forces of supply and demand hides a great many variables that operate to pro duce wage differentials. These variables may be placed in three categories: (a) the qualifications of the workers, (b) the desirability of the job, and (c) the institutions that surround the labor market. In most cases, workers who possess desirable qualifications will receive higher wages than workers who do not possess them. Workers who accept undesirable jobs are usually paid a compensating wage differential. Labor market institutions that stem from union action, government action, geographic labor immobility, and discrimination affect the degree of imperfection in a labor market and, in turn, wage rates.