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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 have the result of either increasing the
demand for labor or by either 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 retired when reaching the age of 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 wages.
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.

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 (W uin 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 is
equal to marginal 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.

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 referred to
as 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.
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 referred to as 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 that is 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).


Among the three types of union models inclusive or industrial union model is one of
them. Instead of limiting the membership of the unions, all the unions try to
organise all their available workers. This is true for the industrial unions, like in the
case of the automobile workers and the steel workers. Such unions seek their
members in all the available unskilled, semi skilled and skilled workers, in an
industry. A union is exclusive only when all its members are skilled craftsmen, for
whom there are not many substitutes. However, when a union is composed of
unskilled and semi skilled workers, the policy of membership restriction, would
make available to the employers, numerous non-union workers, who are highly
substitutable for union workers.

An industrial union which has virtually all the possible available workers as its
members can pressurise the firms to agree to all their demands. Since the labour
unions have legal rights to go on strikes, the labour unions threaten the firms to
deprive them of their labour supply, if their demands are not met. A firm undergoes
huge losses if the production is put on halt because of the strikes that the labour
unions call for.

We have illustrated the inclusive or industrial union model in the figure below.
Initially, in a competitive equilibrium, where the wage rate is W6, and Q6 is the level
of employment, now suppose an industrial union is formed which demands a higher
above equilibrium of wage rate, Wu. The wage rate Wn creates a perfect elastic
labour supply over the range ac, in the figure below. If the company thinks of
getting any worker in this particular range then they will have to pay wage rate
imposed by the union. If the Company decide anything against meeting the wage
rate provided by the labour union, then the firm will have to face strike from the
labour union. However, if the firm decided that it is a better option to just pay the
higher wage rate and maintain peace with the labour union, and avoid any occasion
of a strike, they will be able to cut back on the employment from the Q6 to Qu.

By agreeing to the unions Wy wage demand, the individual employers become the
wage takers. Since the labour supply is perfectly elastic over the range ac, the
marginal resource of the labour cost is equal to the wage rate Wn, over this range.
The level of employment at Qn is the result of the employers equating this MRC
(which is equal to the wage rate) with MRP, according to the profit maximisation

Note that from the point c on the labour supply curve S that Q6 workers desire
employment at the wage rate Wn. However, as indicated by the point b on the
labour demand curve Dy, only the Qu workers are employed. It results as a surplus
of labour with Q6 Qu.

Inclusive or industrial union model, by organising all the available workers in order
to control the labour supply, the industrial union can impose a wage rate Wu, which
is above the competitive wage arte Wc, this changes the labour supply curve from S
to acS. At the wage rate Wu, the employees will cut employment from Qc to Qu.

In purely a competitive labour market, without the presence of union surplus,

unemployed labours will have lower wages. The wage rate will fall to the equilibrium
level Wc. Where the quantity of labour supplied will be equal to the quantity of the
labour demanded Qc. However, this just dont happen because the labour work
through union, the individual workers cannot work at anything less than Wn, nor can
the employer pay less than that.


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Samuel Gompers[1] (January 27, 1850 December 13, 1924) was an English-born, American labor
union leader and a key figure in American labor history. Gompers founded the American Federation
of Labor (AFL), and served as the organization's president from 1886 to 1894 and from 1895 until his
death in 1924. He promoted harmony among the different craft unions that comprised the AFL, trying
to minimize jurisdictional battles. He promoted thorough organization and collective bargaining to
secure shorter hours and higher wages, the first essential steps, he believed, to emancipating labor.
He also encouraged the AFL to take political action to "elect their friends" and "defeat their enemies".
He mostly supported Democrats, but sometimes Republicans. He strongly opposed Socialists.
During World War I, Gompers and the AFL openly supported the war effort, attempting to avert
strikes and boost morale while raising wage rates and expanding membership.
Featherbedding, labour union practices that require the employer to pay for the
performance of what he considers to be unnecessary work or for work that is not in
fact performed or to employ workers who are not needed. The existence of
featherbedding in any specific instance is usually disputed and depends on what is
considered reasonable. Work rules that require large work crews or that restrict the
amount of work a worker can do in a given time period may be considered

Featherbedding provisions in labour contracts may result from the continuation of

work rules that were once efficient but that have become obsolete because of
changed technology. A union may insist on the continuation of such work rules to
ensure the employment security of its members. In some cases unions have
obtained passage of building codes and other legislation ostensibly designed to
ensure public safety but actually embodying featherbedding practices.