Labor Economics and Unions By Bob Delaney

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The topic of unionism is always hotly debated. There doesn’t appear to be much in middle of the road when discussing unions. The emotions that are conjured up on both sides of the fence are often based on irrational arguments that cloud the debate and entrench the discussant in their long held beliefs.

The purpose of this article is to put forth a rational discussion on some of the issues.

When we think of unions we often think in terms of the image portrayed in the movies: labor thugs that prevent firms form implementing change that may benefit the all constituents.

What we need to appreciate is the fundamental human right of freedom of association. Since America values individualism, we must respect the fact that individualism allows independent choice.

There may appear to be a contradiction between individual choice and a person’s decision to join a union, thereby abdicating their right to negotiate independently with their employer. The perception is that there is a balance of power between the employer and their organization and an individual. Perhaps this perception stems from the legal status of corporations as entities that have certain rights and obligations, similar to the status of individuals.

The above perception of power is to me obviously distorted. When offered the choice between having all decisions made for you unilaterally by a more powerful entity, or having some form of codetermination through collective representation, I think anyone would choose the latter.

If we value freedom of association, what is the difference between seeking union representation and joining a community service club?

Union Objectives
Unions are political organizations whose objective is to represent its members in collective bargaining activities. Collective bargaining activities can be separated into several areas of interest including wages, employment (number of employees) and conditions of work. Usually the importance of these activities is decided democratically by the union membership.

There is a classic trade-off between wages and levels of employment. What this implies is that if unions attempt to maximize wages they may limit the number of members (firm employees). If the union attempts to maximize employment (members) they may limit wages. An alternative objective may be to maximize the wage bill by placing somewhat equal weight to both objectives.

Union objectives are influenced by:

  • Degree of homogeneity of the membership
  • Differing cohorts may have different objectives (e.g. older workers and younger workers)
  • Political structure of the union
  • Availability of information
  • Desire of union leaders to remain in office
  • Labor market conditions
  • Skill levels
  • Availability of labor
  • Availability of substitutes for labor
  • Product market conditions
  • Declining/ accelerating industry
  • Ability to pass on price increases to consumers
  • Individual employer
  • Ability to pay
  • Ratio of labor costs to total costs

Union Wage/ Benefit Differential Unions have been successful in negotiating higher then market wages and benefits for their members. The wage differential (premium) lies between 10% – 20% in the United States. There are naturally some variances across firms, industries, and between the public and private sector. Differentials also exist between union and non-union workers when it comes to the following:

  • Fringe benefits
  • o Better at unionized workplaces
  • Working conditions
  • More structured at unionized workplaces
  • Job control is union’s response to management’s rights
  • Turnover
  • Lower at unionized workplaces

Union Spillover Effect
Unions can have a spillover effect on the wages and benefits of non-union workers, whether they are at the same work location, or in the same industry. For example, blue-collar union wages may have a positive influence on the white-collar wages at the same employer. There are also inter-industry, intra-industry, and public-private sector spillover effects. Negative (lower wage) spillover effects may result from former union workers (who become unemployed due to the rational response of employers) looking for work in the non-union sector, thus increasing the supply of non-union workers at all wage levels.

Rational Employer Response

Inputs To Production
Given the higher cost of labor in the presence of a union, employers may respond in a rational way. If we treat labor simply as an input to production (remember we are thinking rationally not altruistically), we should respond in the same way that we would if any other input’s price increased.

Depending on the ability to use, and the availability of substitutes for labor, a rational employer response may be to replace expensive labor with a relatively cheaper substitute such as machinery (otherwise known as capital). This results in the use of less labor (unemployment in the unionized sector).

An analogy is the current price of gasoline. If gasoline was an input to producing your good or service, given the recent price increases, you may be looking to convert to a cheaper source of energy such as natural gas.

Since most firms operate on a given budget, it is necessary to balance the costs of inputs, through trade offs, in order to meet budgetary objectives


Recruitment and Selection
Since unionized wages are generally higher, a rational response would be to recruit and select higher quality labor. For example you may look for individuals who have several years of experience in an attempt to reduce your training cost and other fixed costs of hiring.

Due to higher union wages, there is an inherent cost to union members if they lose their job. This cost is measured in regards to their ability to find comparable wages and benefits in a non-union setting.

Another rational response would be to try to amortise your fixed costs of labor over a shorter time period through the use of overtime. Also, by working your existing unionized employees longer hours, you reduce the need to hire additional workers thereby avoiding additional fixed cost of hiring.

Your more expensive labor may require more talented supervision. Through the use of higher quality supervisors, who have industrial relations training, you may be able to reduce the inherent conflict in the union-management relationship.

Labor Economics and UnionsThrough the use of higher quality labor and supervision, it is rational to seek out and develop processes that improve the productivity of your workforce. Since you may be paying a premium for the input, you should attempt to make it more productive in an effort to remain competitive.

Management’s Rights
Management retains the right of unilateral control over most aspects of the workplace that are not contained in a collective bargaining agreement.

Unionization has long been viewed as a negative reflection on management. I have said in the past that any management that has a union deserves a union. One of the reason’s why people choose to unionize is the perceived arbitrary nature of management decision-making. Unions attempt to formalize process and remove the arbitrary-ness of decision-making.

It is rarely a single incident that stimulates interest in unionization. Often it is management behavior over time, which highlights the negative aspects of arbitrary decision-making. As I mentioned above, I think any one given the (free) choice would opt for some form of “voice” in determining (bargaining) wages, employment, and conditions.

Though mismanagement and abuse of power may be a stimulus for the demand for unionization, I have matured in my outlook in regards to laying blame on management. It is a common human frailty, which has been exposed in numerous psychological and sociological studies that “power corrupts and absolute power, corrupts absolutely.” How then can we blame anyone for simply being human?

The rational response to a power imbalance is to restore some form of equilibrium. Workers rational response is to seek (demand) union representation.

Given budgetary constraints and the need to remain competitive, management will respond rationally to the rising cost of inputs to production.

When viewed from an economic point of view, unionization can lead to positive benefits to all constituents. Higher wages, better working conditions, high quality labor and management, lower turnover, increased productivity, increased employment due to higher demand for equipment (capital), ect.

One of the problems is: unionism that is achieved in an adversarial atmosphere fosters bad feelings between the parties. If unionism was viewed in a positive light, and codetermination was the norm in the workplace, then much of the fear and loathing between the parties would not exist or develop.

Bob Delaney is a Knowledge manager at Concurrent with his responsibilities at, Bob is an Academic Instructor in a Post-graduate Diploma Program in Human Resources Management. His academic credentials are separately in Economics and Industrial Relations, Human Resources Management, Business Administration and Alternative Dispute Resolution

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WARREN B. CLAYMAN 9402 N. Panfield Road Columbia, MD 21045 (301) 596-4363 (410) 730-2590 (Fax) Diversity Consultant Clayman & Associates Warren B. Clayman has a unique background involved in the challenging task of inventing a better future environment, an experience that has touched every community development issue from urban planning, environment, housing and renewal to civil rights and diversity. Mr. Clayman provides diversity consulting services to a variety of organizations including the Tanenbaum Center for Interreligious Understanding, the Business Women’s Network, Inc., and Diversity Best Practices, Inc. Prior to founding Clayman & Associates, Warren was appointed as a Team Leader with Vice President Gore’s Benchmarking Study, “Achieving Workforce Diversity.” The significant year-long study identifies and analyzes best-in-class workforce diversity practices in public and private organizations for use in achieving workforce diversity. Mr. Clayman’s greatest strength is understanding that effectively utilizing the changing and diverse workforce is part of the equation in being a profitable, successful organization. Finding his true calling in life, Warren was appointed by the Secretary of Energy to the Secretary’s Diversity Council. He was subsequently elected Chairperson of the Council, an independent chartered advocacy group representing 120,000 Department of Energy and contractor employees reporting directly to the Secretary of Energy and working with management and the Union to deal with a broad scope of issues related to diversity. The Council was honored as one of the national leading diversity programs by diversity consultants and practitioners and has facilitated diversity awareness training, upper mobility, disability issues, dialogue on race, mentorship, commemoration of events such as Africa-American History Month, Asian-Pacific Islander Month, Hispanic Heritage Month, the Holocaust and Domestic Violence. Mr. Clayman was awarded an Intergovernmental Personnel assignment with the National Council of Senior Citizens, an advocacy organization of over 5,000 senior clubs and a significant voting block in this country. He led the National Council in its membership and diversity efforts. Warren is a trained urban planner with extensive local, regional and national leadership experience. His proudest moments in urban planning, as Director of Planning and Relocation, Department of Housing and Urban Development, were during the City of Baltimore’s renaissance in the 1970’s.

Mr. Clayman has served in leadership capacities, most notably as President of the American Planning Association, Chairperson of the award winning Secretary’s Diversity Council and, Vice President, Blacks in Government. He has a Master’s Degree in Urban and Regional Planning from New York University; a Master’s Degree equivalent in Anthropology from the University of Colorado; a Bachelor’s Degree in Political Science from Ohio University.

The events of September 11, 2001 have affected the Company in a number of ways. That morning, one of your senior executives was at a business meeting at the World Trade Center. He is still missing. He had an employment contract pursuant to which, among other things, he (i) earned a base salary of $200,000, (ii) received quarterly bonuses averaging $25,000 based on performance (the fiscal year is a normal calendar year), (iii) received 100,000 stock options, 50,000 of which have vested but have not been exercised, another 25,000 of which would have vested on October 1, 2001, and the last of which would have vested on July 1, 2002. His life insurance policy is for $200,000 – his annual compensation. The benefits department wants to know what to tell his spouse about the Company’s position as to what is payable and when.

  • . H.R. 1602, the Rewarding Performance in Compensation Act proposes to exempt non-discretionary bonuses from inclusion for overtime calculations.
    • Fair Credit Reporting Act (FCRA) – H.R. 1543, Civil Rights & Employee Investigation Clarification Act. The FTC has interpreted the FCRA as requiring an employer who brings in an outside consultant to conduct a workplace investigation to have to meet the same notice requirements as are required for conducting pre-employment background checks. The irony is that if an employer is trying to conduct an undercover investigation related to theft or drug use/sales/distribution, giving notice in advance defeats the purpose of the investigation. This bill would exempt workplace investigations related to employee misconduct from the requirements of the FCRA.
    • Emotional Distress Awards in Employment – H.R. 840, Civil Rights Tax Relief Act. Did you know that a plaintiff who wins a monetary award for emotional distress as a result of physical injury pays no taxes on that award, but a plaintiff who wins the same amount of money for emotional distress that is NOT caused by physical injury does? This bill would exempt ANY award for emotional distress from taxation, regardless of the cause.
    • FLSA Reform – S. 624, Workplace Flexibility Act and H.R. 1982, the Working Families Flexibility Act. A non-exempt employee asks his supervisor if he could work overtime this week and take compensatory time off in the following pay period to attend a parent-teacher conference, in lieu of overtime and so he does not have to use his vacation. Even if the supervisor would like to do so, as a private employer, the FLSA prohibits this. S. 624 and H.R. 1982 would permit this flexibility where both the employer and employee agree to the payment of comp time in lieu of overtime. The bills provide different eligibility requirements.
    • FMLA Reform – S. 489, Family and Medical Leave Clarification Act would clarify some of the discrepancies that now exist between the courts and Department of Labor in interpreting the Act including administration of intermittent leave and notice requirements, without expanding the coverage to employers or for purposes not currently covered. Note that on June 25, 2001 the Supreme Court announced that it will review a case that deals with employee eligibility for FMLA coverage when an employer fails to give timely notice of whether or not time off from work will be counted towards FMLA leave.

    RONALD MICHAEL GREEN is a member of Epstein Becker & Green, P.C., a law firm with offices in New York, Chicago, Washington, D.C., Dallas, Los Angeles, San Francisco, Stamford, Boston, Newark, and Atlanta, and affiliations with firms in Mexico, Hawaii, Puerto Rico, England, France, Germany, Japan and Canada.He is an accomplished trial attorney of national reputation and is actively engaged in the private practice of labor law on behalf of multinational and domestic corporations.Mr. Green is also on the Labor Panel of Arbitrators of the American Arbitration Association and the American Bar Association’s Committee on Equal Employment Law and Its Impact on Collective Bargaining.

    Selected as one of the Outstanding Young Men of America, Mr. Green is a native of New York City and received a Bachelor of Science degree in Business Management from New York University School of Commerce.He graduated from Brooklyn Law School with a Juris Doctor degree in 1968, having served on the Law Review and participated in the Honors Program.He also earned an LL.M degree in Labor Law from the George Washington University School of Law and pursued his Ph.D Studies in economics at the University of Cincinnati.

    Mr. Green served in the United States Army Judge Advocate General’s Corps as a war crimes prosecutor, serving as a member of the My Lai prosecution team.Upon his release from active duty, he joined the United StatesDepartment of Labor in Washington, D.C. While serving as the Department of Labor’s Associate Solicitor of Labor for Labor Relations and Civil Rights, Mr. Green was counsel for the Department’s Office of Federal Contract Compliance Programs and was among the authors of that agency’s Regulations, including what is now popularly known as Revised Order No. 4. While serving with the Department of Labor, Mr. Green was also involved in the settlement of the landmark AT&T case and the Steel Industry Consent Decree.

    Mr. Green is on the adjunct faculty of the Cornell University School of Industrial and Labor Relations, where he teaches courses in labor law and equal employment law and policy.He has been a consultant to the United States Secretary of Labor and the American Arbitration Association.Mr. Green has lectured extensively throughout the United States on behalf of public and private institutions, trade associations and corporations.

    Mr. Green has authored various publications, including Negligent Hiring, Fraud, Defamation and Other Emerging Areas of Employment Liability, published by the Bureau of National Affairs; An Executive’s Guide to Equal Employment Opportunity Compliance, published by Hill & Knowlton; The Equal Employment Compliance Manual — A Systematic Approach to Effective Management Practice, published by Callaghan & Company; Laws and Regulations Impacting on the Banking Industry, published by the American Bankers Association; Age Discrimination in the Workforce and Its Implications, published by the Industrial Relations Centre, McGill University; and Personal Liability of Corporate Officials Under Title VII of the Civil Rights Act of 1964:A Doctrine Still in the Formative Stages, published by the Suffolk Academy of Law.  Mr. Green has also co-authored the Employer’s Guide to Workplace Torts, published by the Bureau of National Affairs.