Labor Union Models

Although the main tool used by labor unions to increase wages and benefits is through collective bargaining, the result of union activities can be understood best through simplified economic models of the union's efforts to raise wages and benefits. These methods increase wages and benefits either by restricting the supply of substitutable labor, such as by restricting immigration, or by promoting benefits that have, as a side benefit, the effect of restricting labor supply, such as restricting the number of hours that each worker can work or by allowing early retirement. In Greece, for instance, many people retire when reaching age 50. People in several European countries retire at 60.

Increasing the Demand for Labor

Unions have used various methods to increase the demand for labor as a way to increase compensation. Sometimes unions help the employer to advertise the products that the business produces, or they may advertise to persuade consumers to buy union products. Unions also lobby politicians to increase spending on services provided by union members, such as when teachers' unions lobby for increased spending on education.

Diagram showing how labor unions can increase the wages of its members by increasing the demand for its labor.
One method unions use to raise wages is by increasing the demand for labor, as shown by the shifting of the demand curve from DC to Du. This increases the quantity of labor from QC to Qu while the wage rate rises from WC to Wu.

Recognizing that firms cannot pay union wages or benefits if they have to compete with cheap foreign competition, unions attempt to increase labor demand by advertising to buy products or services that were made domestically, such as the "Made in the USA" campaigns. Many unions also seek to have tariffs imposed on foreign produced products or services that compete with domestic output.

Sometimes unions try to reduce competition by making labor generally more expensive, such as by raising the minimum wage. If everyone is making more money, then there is less incentive for the unionized firms to seek nonunion labor if the differential between the two is less. Another way that unions try to increase demand for its members is by eliminating competition from nonunionized firms, such as the attack by teachers unions on charter schools that are becoming more prevalent across the country, since many of these schools use nonunionized labor.

Craft and Industrial Unions

Restricting supply can lead to higher wages, but the firms compensate by hiring fewer workers. At the union wage (Wu in the diagram), more workers want to work for the firm than would be the case if competitive wages were paid. However, because a firm will only hire enough workers until marginal revenue product = revenue cost, the firm will hire even fewer workers then if a competitive wage was paid. Hence, the union benefits a few employees at the expense of greater unemployment. Generally, the greater the elasticity of labor supply, the greater the unemployment that results when the union successfully increases wages for its members.

Diagram showing how labor unions can increase the wages of its members by reducing the supply of labor.
Another method unions use to raise wages is by decreasing the supply of labor, as shown by the shifting of the supply curve from SC to Su. This decreases the quantity of labor from SC to Su, causing the wage rate rises from WC to Wu.

Craft unions organize their members by trade, such as printers or shoemakers. They restrict their membership by requiring long apprenticeships and charging high initiation fees. Moreover, many craft unions have successfully compelled firms to hire only unionized labor, so by restricting the supply of their own membership, they increase the wages that they can earn. Craft unions' means of raising wages by restricting membership is often called exclusive unionism.

Many professional organizations use occupational licensing as a means to limit membership, such as laws requiring a medical license to practice medicine or a law license to practice law. Plumbers, electricians, and carpenters, and other members of the construction trade most often require licenses to work in their trade. Even occupations that do not require a lot of skill, such as cosmetology or cutting hair, often requires practitioners to have licenses, and licensing requirements are frequently more onerous than necessary to perform a job well. A primary objective of licensing is to reduce membership, thereby increasing the competition for labor.

Generally occupational licensing requires a certain level of education, work experience of a specific amount of time, and the passing of an examination, which is often administered by a board staffed by union members. Although the professed goal of occupational licensing is to protect consumers, the requirements are usually much stricter than is necessary to accomplish the job. For instance, there are many legal procedures that don't require 4 years of college and 3 years of law school, such as filing for bankruptcy or settling estates. (Indeed, many states do not even require that probate judges be lawyers!) In any case, the assertion that occupational licensing is necessary to protect consumers is often misleading. For instance, most states require a license to practice law so that people are not represented by incompetent people. While this sounds plausible, unauthorized practice of law statutes generally applies to corporations that do specific legal procedures as a routine. Since corporations are considered to have the financial and knowledgeable wherewithal to manage their own affairs, they, nonetheless, may not hire people, such as legal secretaries, to perform their routine legal work, even though lawyers can hire the same legal secretaries to do the same job.

Industrial unions organize workers by industry — hence, the name. Industrial unions attempt to organize workers at various levels of skill, including unskilled and semiskilled workers. Hence, the unionization of an industry is sometimes called inclusive unionism. However, by including unskilled or semiskilled workers, the new union must compete with nonunionized workers who are more numerous among the unskilled or semiskilled. In these cases, the union tries to eliminate the hiring of this substitutable labor by threatening to strike, where no member of the union will be permitted to work until the firm settles the strike by agreeing not to hire nonunion workers.

Bilateral Monopoly

Sometimes a firm and a union form a bilateral monopoly, where the firm is a monopsonist as a buyer of labor and the union is a monopoly as a seller of labor. The monopsonist will seek to pay the Wm wage rate while the union will seek to get the Wu wage rate. Who prevails will depend on who has greater market power or who is a better negotiator. It is possible, however, that the power of the monopsonist will be offset by the power of the union and will instead agree on a wage closer to the competitive wage, Wc, which is higher than Wm but lower than Wu. However, the quantity of laborers employed will probably be less than it would be under pure competition (Qu < Qc).

Diagram showing how wages may be negotiated between a labor union and a monopsonistic firm.