Lecture Labour market economics: Chapter 16 - Dwayne Benjamin, Morley Gunderson, Craig Riddell

Chapter 16 - Union impact on wage and nonwage outcomes. This chapter includes contents: Impact unions have on wages, effect on nonunion wages, increase or decrease level of income inequality, economic inefficiency, effects on labour productivity, effect on profits of firm.

Chapter Sixteen Union Impact on Wage and Nonwage Outcomes  Created by: Erica Morrill, M.Ed           Fanshawe College © 2002 McGraw­Hill Ryerson Ltd Chapter 16­1 Chapter Focus  Impact unions have on wages  Effect on nonunion wages  Increase or decrease level of income inequality  Economic inefficiency  Effects on labour productivity  Effect on profits of firm © 2002 McGraw­Hill Ryerson Ltd Chapter 16­2 Union Wage Impact  Two sector model  higher wages associated with unionization  workers move to the unorganized sector depressing wages  the magnitude of the union-nonunion wage differential depends on: elasticity of labour demand in each sector  the ability of union to raise wages  the elasticity of labour supply  © 2002 McGraw­Hill Ryerson Ltd Chapter 16­3 Two-Sector Model of General Equilibrium Figure 16.1 a Sector A Sector B SA W W SB S’B a Wu W0 W0 WN a DA EA1 EA0 E b B EB0 E DB E © 2002 McGraw­Hill Ryerson Ltd Chapter 16­4 Figure 16.1 b Union Wage Impact with a Threat Effect W Sector B (Threatened nonunion) SB W S’B WBN a W0 Sector C (Unthreatened nonunion) SC S’C S’’ C a b W0 b EB1 EB0 DB E WCN DB EC0 EC1 E © 2002 McGraw­Hill Ryerson Ltd Chapter 16­5 Union Wage Impact With a Vertical Contract Curve Figure 16.1 c Sector A (Union) C SA W Sector B (Nonunion) W Wu W0 SB WN=W0 d DA EA0 E DB EB1 E © 2002 McGraw­Hill Ryerson Ltd Chapter 16­6 Figure 16.1 d Union Wage Impact with a Wait Unemployment Sector A (Union) W c S’A SA Sector B(Nonunion) W Wu SB S’’B S’ B b c W0 DB EA1 EA0 E W0 WN DB EB0 EB1 E © 2002 McGraw­Hill Ryerson Ltd Chapter 16­7 Contrary Perspective  Nonunion firms raise wages to compete with the unionized firms  Employers raise wages to reduce the threat of union  Ignores the supply influx of workers who cannot get jobs in unionized sector  enables employers to offer lower wages  reduces the necessity to compete for labour © 2002 McGraw­Hill Ryerson Ltd Chapter 16­8 Problems in Measuring the Union Wage Impact  Control for  skill differences  labour quality  characteristics of workers  job assignments  Difficult to fully control for differences in productivity-related factors © 2002 McGraw­Hill Ryerson Ltd Chapter 16­9 Empirical Evidence on Union Wage Impact  Early studies   Simultaneity issues of status and impact    variation thought to be due to methodological differences higher wages made unionization more likely impact is smaller when causality is taken into account Longitudinal Studies  Differential smaller than cross-sectional data Chapter 16­ © 2002 McGraw­Hill Ryerson Ltd 10 Variations in the Union Wage Impact  Differential between unions and nonunions vary across  firms  industries  workers  Differential is larger when the jurisdiction is organized Chapter 16­ © 2002 McGraw­Hill Ryerson Ltd 11 Union Power  Elasticity of demand  substitution  Threat  raise reduces the elasticity of demand Effect wages to discourage unionization Chapter 16­ © 2002 McGraw­Hill Ryerson Ltd 12 Union Wage Impact  Evidence of a wage differential  15% in Canada Impact of higher wages in union on nonunion sector is inconclusive  Wage differences for productivity related characteristics are smaller than in nonunion  Differential higher in      private sector smaller firms unionized jurisdictions recessions Chapter 16­ © 2002 McGraw­Hill Ryerson Ltd 13 Unions, Wage Dispersion and Distribution of Income  Less wage dispersion among unions than nonunions  Unions  reduce differentials among workers  standardize wages of similar workers  raise wages of those at lower end of pay scale Chapter 16­ © 2002 McGraw­Hill Ryerson Ltd 14 The Union Wage Impact and Allocative Inefficiency Figure 16.4 Nonunion sector Union sector W W a WU W0 b c d W0 WN E U E U E e g f EN EN E Chapter 16­ © 2002 McGraw­Hill Ryerson Ltd 15 Union Impact on Resource Allocation and Economic Welfare  Altering wages and employment affect the allocation of resources  Deadweight loss - reduction in the total output  Misallocation of labour  Affects other resource allocations Chapter 16­ © 2002 McGraw­Hill Ryerson Ltd 16 Real Output Loss  Union sector  consumers pay for the output above what workers are required to produce  Nonunion sector  output increase is valued less in the nonunion sector than in the union sector Chapter 16­ © 2002 McGraw­Hill Ryerson Ltd 17 Union Impact on Nonwage Outcomes Unions tend to have a greater impact on fringe benefits  Reasons all parties prefer fringe benefits as a form of compensation     workers-not taxed or deferred taxes,economies of scale and administrative simplicity employers-facilitate planning/operation,work incentives, reduce turnover government-reduce pressure for government spending Chapter 16­ © 2002 McGraw­Hill Ryerson Ltd 18 Union Impact  Working conditions  Turnover and mobility  Productivity and profitability and investment Chapter 16­ © 2002 McGraw­Hill Ryerson Ltd 19 End of Chapter Sixteen Chapter 16­ © 2002 McGraw­Hill Ryerson Ltd 20 ... depends on: elasticity of labour demand in each sector  the ability of union to raise wages  the elasticity of labour supply  © 2002 McGraw­Hill Ryerson Ltd Chapter 16 3 Two-Sector Model of General... of General Equilibrium Figure 16. 1 a Sector A Sector B SA W W SB S’B a Wu W0 W0 WN a DA EA1 EA0 E b B EB0 E DB E © 2002 McGraw­Hill Ryerson Ltd Chapter 16 4 Figure 16. 1 b Union Wage Impact with... © 2002 McGraw­Hill Ryerson Ltd Chapter 16 5 Union Wage Impact With a Vertical Contract Curve Figure 16. 1 c Sector A (Union) C SA W Sector B (Nonunion) W Wu W0 SB WN=W0 d DA EA0 E DB EB1 E © 2002 McGraw­Hill Ryerson Ltd Chapter 16 6