Suppose Max, an engineer and project coordinator, has worked at a large construction company for eight years. He had been training new employees on various aspects of cost estimating and job specification, and he noticed that these new people were being hired at salaries approaching his own. He requested a raise several times, but was essentially ignored. Exasperated, he refused to go to work one day, informing his boss that he would not return without a raise. He did not quit; he simply staged a walkout and refused to return until given a raise. In other words, Max staged a one-man strike. He was out for two weeks before his supervisor called and asked him how much he wanted. They settled on a raise of over 20%.

296

This story is unique in that one-person strikes are rarely successful; more often they are career busters. In most instances, individual employees have little control over wages or job conditions, essentially being at the mercy of employers and the market. This is the primary reason that unions exist: Collective action is more powerful than the action of one individual. As individuals, we can easily be replaced (except in rare occasions as for Max in the story above). To replace an entire workforce, on the other hand, imposes serious costs to an employer.

This section looks at the role unions play in our economy, their history, and their effects on the labor market. We show how unions create wage differentials that work against the assumptions of the competitive labor market in which all workers earn the same wage. We will see that although unions have been successful in some industries, their influence has faded in other industries.

Labor unions are legal associations of employees that bargain with employers over terms and conditions of work, including wages, benefits, and working conditions. They use strikes and threats of strikes, as well as other tactics, to try to achieve their goals.

Unions are usually defined by industry, or by craft or occupation. A craft union represents members of a specific craft or occupation, such as air traffic controllers (PATCO), truck drivers (Teamsters), and teachers (AFT). An industrial union represents all workers employed in a specific industry. Examples include auto workers (UAW) and public employees (AFSCME).

Without a union, each individual employee would have to bargain with management over his or her own wages, benefits, and working conditions. Unions bring collective power to this bargaining arrangement. The source of this power is ultimately the willingness of the union to strike if no agreement is reached during negotiations. Collective bargaining often leads to a more equitable pay schedule than individual negotiation. It also provides workers with greater job security by protecting them against arbitrary or vindictive decisions by management.

Union membership, like everything else, has its price. First, union members must pay monthly dues. Then, if negotiations break down and a strike is called, wages are lost and the possibility exists, however remote, that management will refuse to settle with the union and replace the entire workforce. Finally, union workers must give up some individual flexibility because their work rules are more rigid.

Labor unions date to the late 18th century in England. In the United States, public attitudes toward unions were highly unfavorable until the Great Depression. In the early part of the 20th century, employers could easily secure legal injunctions against union organization by arguing that unions behaved like monopolies, in violation of antitrust laws. Employers often required employees to sign enforceable yellow dog contracts, in which they agreed not to join a union as a condition of employment. As a result, unions represented only 7% of workers in 1930.

With the onset of the Great Depression, attitudes about collective bargaining changed. In 1932 Congress passed the Norris-LaGuardia Act, which outlawed yellow dog contracts and prohibited injunctions against union organizing. Then, in 1935, Congress enacted the Wagner Act, or the National Labor Relations Act (NLRA). It prohibited employers from firing employees for engaging in union activities and required employers to “bargain in good faith,” among other rules. The act also established the National Labor Relations Board (NLRB) to oversee the process of union elections and certifications. These acts, along with improved attitudes toward unions, increased union membership dramatically until the late 1940s, when unions represented over one-quarter of American workers, mostly in large manufacturing industries.

297

The consequence of higher union participation is the increased likelihood of work stoppages, or strikes, which became more common. This resulted in some pushback, however, as many people believed unions had become too powerful. Because of this swing in public opinion, in 1947, Congress passed the Taft-Hartley Act, which prohibited unions from coercing or discriminating against workers who chose not to join the union, and required unions to bargain in good faith, just like employers. Specifically, the act prohibited closed shops, workplaces in which workers are required to be union members before being hired. It also placed restrictions on union shops, which required nonunion hires to join the union within a specified period, usually 30 days, and agency shops, in which employees are not required to join the union but must still pay union dues to compensate the union for its services. The Taft-Hartley Act essentially balanced the pro-labor aspects of the 1935 Wagner Act.

From the 1950s to the 1970s, union membership was steady. The right to collective bargaining was extended to federal workers in 1962, though public employees are not permitted to strike, but rather must submit to binding arbitration to resolve disputes. Since the 1970s, however, union membership has declined, partly due to political reasons but also due to changes in the economic landscape. Another aspect of the Taft-Hartley Act was to allow states to pass right-to-work laws that prohibit union shops. Today, about half of U.S. states have right-to-work laws in place, and some states have passed even tougher legislation to ban collective bargaining for public employees. But equally as important as the changes in labor laws is the fact that the service sector, which does not have a strong history of unionism, has expanded while manufacturing has fallen. As a result, union membership represents less than 10% of workers today and continues to shrink.

298

Why join a union? The primary benefit to unionization should be higher wages, given the union’s collective bargaining power. The general theoretical argument for union−nonunion wage differentials is illustrated in Figure 6.

This figure shows how unions are able to increase the wages in their sectors by restricting entry into union jobs. The markets for both unionized and nonunion labor begin at equilibrium, at point e in both panels of Figure 6. Thus, union and nonunion wages are initially equal, at W₀. If the union successfully restricts supply to S₁ in panel A, union wages will rise to W₁, but employment will fall to L₁ (point a). The remaining workers, however, have no choice but to move over to the nonunion sector represented in panel B, thus shifting its supply to S₂. Equilibrium in the nonunion sector moves to point b, where more workers (L₂) are employed at lower wages (W₂). The resulting wage differential, W₁ − W₂, is caused by successful collective bargaining in the union sector. Notice that this analysis is substantially the same as that for discrimination in the segmented labor force described in Figure 5 earlier.

299

Union−nonunion wage differentials vary by the union, occupation, industry, and historical period. In general, average union wages are 10% to 20% higher than the average nonunion wage. Union wage effects are most pronounced among blue-collar workers and service employees. These differentials suggest that unionization may tend to reduce the inequities inherent in labor markets.