Labor Market

What Is the Labor Market?

The labor market, also known as the job market, refers to the supply of and demand for labor,
in which employees provide the supply and employers provide the demand. It is a major
component of any economy and is intricately linked to markets for capital, goods, and
services.

Labor Markets:
One of the outcomes of unionization is that the union acquires monopoly power over the
labor supply. It doesn’t actually supply the labor, but the contract fixes its price. Unions are
most attracted to employers that have power to influence prices in the product market and/or
wages in the labor market because these are most able to pay higher wages. A contracted
wage elasticizes the labor supply at the negotiated rate.

EMPLOYEE INTERESTS:
Employee interests differ from those of employers. Employers are interested in
accomplishing the organization’s objective, which in the private sector is to maximize long
term profits. Employees want to maximize the long-term return to their investment in skills
and the effort they exert in employment. Investors diversify their risks across a portfolio,
while employees are generally unable to diversify their employment risks because they are
tied to a single occupation. To the extent that employees invest in skills specific to their
current employer, their long-term returns depend on job security and the employer’s ability
and willingness to pay. A variety of job outcomes are important to employees. Union
members want more influence in the workplace, cooperation from management, and union
representation. 11 They are also interested in pay and job security. Their interests probably
vary with the nature of the current employment environment. For example, when layoffs are
rising, job security is more important than wage and fringe benefit improvements.
Employees’ interests often can be met in their employment, but where they are not and when
employees do not have other opportunities, forming a union can create bargaining power by
monopolizing the internal labor supply.
UNION INTERESTS:
Employees unionize to obtain outcomes that they believe they are unable to obtain as
individuals. Member desires have a major impact on union bargaining goals. It has been
suggested that contract demands reflect the preferences of the “median voter” in a unit, 12
thus requiring that the contract be acceptable to at least a majority to be ratified. Local union
officers are often elected by a single bargaining unit. Bargaining success directly influences
their ability to be reelected. Where local unions service several bargaining units, local
officers might be less concerned about the content of individual contracts.
Unions demonstrate their effectiveness by negotiating contracts that improve employment
conditions for their members, attract new members, and organize additional units. As an
institution, the union desires security as the employees’ representative through negotiated
union shop agreements.
Two major goals of unions are higher wages and more members.
Labor is presumed to prefer both, but in dealing with employers, unions often make trade-offs
between them. If wages increase relative to competitors, an employer must reduce
employment (membership). For wages to increase, productivity must grow at least at the
same rate. However, a national union might be willing to sacrifice a small fraction of
employment in a unit to gain higher wages that will increase its organizing leverage in
nonunion units with increasingly lower relative wages.
BARGAINING POWER:
Bargaining power can be conceptualized as “my cost of disagreeing on your terms relative to
my cost of agreeing on your terms.” 14 For example, a grocer in a highly competitive market
may find that agreeing to a wage demand will eliminate its profit margin and eventually force
it out of business. Thus, it would object to a union wage proposal. The employees would
likely pressure the union to lower its demands unless strike benefits were equivalent to
present wages or equivalent alternative employment were available. On the other hand, an
employer that sells products in a less-than-competitive market may accept a relatively large
wage demand because the costs can be largely passed on to consumers, and it might forgo
substantial lost profits or permanently reduced market share if it had to endure a long strike.
The elasticity of demand for products has a major effect on bargaining power. Union
bargaining power is enhanced when the employer has a
monopoly in the product or service market because the demand for its output is relatively
more inelastic than it would be in a competitive market. For example, consumers in a remote
community with only one food store would be at its mercy. As prices increased, they might
buy less of each food group, but total revenues would continue to rise with lower volume
because the community would need to eat.
Unionization elasticizes the labor supply at the contract wage, as long as the wage is above
the competitive market wage. When unions are able to organize an employer in a purely
competitive industry, negotiating a wage increase (other things being equal) will necessarily
lead to a reduction in employment as the employer will be forced to replace labor with capital
or to cut back on employment in the short term to remain profitable. Thus, it is to the union’s
benefit to cooperate in creating a more inelastic demand curve in the employer’s product
market.
A grocery clerks’ union in the remote food store example should be able to gain a large wage
increase because the cost can be passed through to the store’s customers. But how might the
union gain a wage increase in a large city with hundreds of food stores? By bargaining in a
unit that includes all stores, each store will pay the same wage increase and will attempt to
pass the increase through to consumers simultaneously. No store with the same capital-labor
mix would gain a competitive advantage. Less motivation would exist for any single store to
resist a wage increase because all stores would encounter the same wage outcomes, leading to
relatively little impact on the volume of sales if the market demand curve is relatively
inelastic. To gain bargaining power, the union encourages the formation of a multiemployer
bargaining unit, and the employers usually find this to be in their interest because no one is
placed at a competitive disadvantage when contracted wages increase as long as there are no
new nonunion entrants. There generally need to be high barriers to new nonunion firms
entering the market to be able to sustain a multiemployer unit.
Ability to Continue Operations (or Take a Strike):
In addition to being affected by demand and supply characteristics of the product market in
which a firm operates, employer bargaining power is enhanced substantially by its ability to
take a strike. Many conditions influence this ability, including timing, perishability of the
product, technology, availability of replacement employees, and competition.
Timing:
A strike will have less impact on an employer if it comes during off-peak periods.
Facetiously, a strike of Santa Clauses on December 26 wouldn’t faze an employer. If timing
cannot be controlled, it frequently can be neutralized by the company by having large
inventories or accelerating deliveries to customers prior to a strike. However, this strategy
has become less viable as employers have increasingly implemented just-in-time inventory
systems.
Perishability of the Product:
A food processor would be at a relative disadvantage if a strike occurred at the point when
fruits or vegetables ripened for packing. There is a short window during which the produc
must be processed, or it will spoil. Similarly, struck transportation carriers would lose quasi
perishable goods, such as business travel, permanently because the scheduled time to take the
flight will not recur for the customer.
Technology:
If a firm is capital-intensive, frequently it can continue to operate by using supervisors in
production roles. For example, oil refiners and telecommunications providers frequently can
operate for a considerable time period, if struck, given their high levels of automation.
Availability of Replacements:
Strike replacements might come from either of two sources. First and most possible in
capital-intensive firms, supervisors may be able to perform enough of the duties of strikers to
maintain operations. Second, the looser the labor market and the lower the jobs’ skill level,
the easier it will be for an employer to hire and use replacements effectively. In several recent
instances, hiring replacements or the threat of hiring them has influenced negotiations.
Multiple Locations and Staggered Contracts:
An employer with several plants producing the same product and having different contract
expiration dates can continue to produce a large fraction of normal output in nonstruck
plants.
Integrated Facilities:
When output from one plant is necessary for production in several others, there is more
bargaining power in the supplier plant. This situation frequently occurs in the auto industry at
plants producing parts like electrical equipment or radiators for all vehicles in a
manufacturer’s line. Problems associated with strikes in supplier facilities have become more
critical as manufacturers have moved toward just-in-in-time parts deliveries.
Lack of Substitutes:
Ability to take a strike increases if no adequate substitutes for the organization’s outputs are
available. Revenues are not irretrievably lost; they are only postponed until the firm is in
production. Public education is an example of this type of product or service.
Union Bargaining Power:
Just as employer bargaining power is enhanced by its ability to take a strike, union bargaining
power is increased by its ability to impose costs with a strike. Union wage gains in bargaining
are higher where significant barriers to entry exist for new employers, industrial
concentration is high, and foreign competition is low. Within the industry, high union
coverage by a dominant union also facilitates bargaining power. 15 Union bargaining power
has decreased significantly in the past 30 years as barriers to entry have decreased through
mergers and acquisitions that have been facilitated by substantial expansions of investment
banking operations. With increased globalization, industrial concentration has fallen,
decreasing the ability of employers to pass wage increases to customers.
Union bargaining power increases when it exerts some control over the external labor supply
or occupational practices and where rights and benefits are portable between employers and
the occupation establishes performance standards and disciplinary procedures.
BARGAINING STRUCTURES:
The election unit is not necessarily the unit in which bargaining occurs. The parties may
decide a larger negotiating unit would be mutually beneficial. This section explores variations
in bargaining-unit structures presently used for negotiating contracts. Bargaining structures
for negotiation often aggregate employer units, either collecting numbers of small employers
that operate in the same industry in a given region or lumping together various geographically
separated plants or units of a single employer. Less often, unions representing employees
within a single employer have coordinated bargaining. Bargaining units larger than election
size occasionally bargain over wage issues only and leave nonwage issues for local
determination.
Since the decline of corporatist approaches to bargaining, there has been an increase in the
decentralization of bargaining, with a greater likelihood than in the past that economic issues
will be negotiated at the local level.
Given differences in the relative efficiency of plants across a company and choices that
companies can make about future investments, tailoring a contract to fit a particular location
is becoming increasingly important. From a local union’s perspective, job security issues are
often more salient than the national union’s economic goals, and the local may wish to make
certain economic agreements or concessions with the employer that are in the interests of its
members but that go against the interests of the national. Decentralization of bargaining
increases management control because employers can pressure local groups to accept
concessions in return for agreeing not to close plants in a local area. 17 Some employers have
introduced so-called high-performance work organization concepts in their workplaces.
Among other things, these concepts include self-managed work teams and lean production
methods. Competition between and within companies is increased by paying greater attention
to productivity and quality. Bargaining interests increase at the local level to maintain
employment levels. Workers gain somewhat more control at the local level because they are
more involved in making decisions about the production process within their work teams.
Gaining and preserving bargaining power is very important to both parties. Consider an
automobile producer with a number of different types of production facilities. One might
produce engines, another transmissions, and a third cooling and air-conditioning systems, and
three others are final assembly plants. If the company had its way, it would probably want
four different bargaining units: one would include the components plants and the other three
would each cover a single assembly plant. The reasoning would be that a closure of one of
the parts plants would soon shut down all three assembly plants, but the reverse is not
possible.
The company would want to require that all the component plants agree to a strike before it
could occur. The union would probably prefer the reverse from a strictly bargaining-power
viewpoint. The company and union will probably agree to negotiate all economics in one unit
because the union wants to avoid the political problems of different settlements in each plant
and the company wants to avoid being whipsawed by the possibility of strikes at each of the
three supplier plants.
In examining bargaining structures, we will first explore aggregations of employer units,
followed by the union side, including public policy issues influencing the structure of the
negotiating relationship.
Multiemployer Bargaining:
In a given geographic area, many industries consist of large numbers of relatively small
employers. Examples include contract construction, the garment industry, and retail and
wholesale trade. Within an industry, the
issues leading to unionization likely will be relatively common across employers, and one
union is often the bargaining agent for most of the employees in the local industry.
These employers often compete for sales in a local market. Since all employers in the local
industries (e.g., grocers) offer essentially similar goods and services, the demand for each
employer’s products is highly elastic (price-sensitive). Thus, a wage increase would be
difficult to pass on to customers. To remain competitive after a wage increase, an employer
must cut back on its use of labor and also produce less. Figure 8.5 shows why this result
occurs.
For the union, besides the political risks associated with job loss, employer differences in
willingness to grant wage increases will result in a varied wage pattern in the area, and
members in units where wage increases are lower may become dissatisfied with their
representation.
Employers will also be more motivated to compete on the basis of labor cost differences.
To reduce these problems and to gain the monopolist’s advantage in passing wage increases
on to consumers, employers and unions frequently form multiemployer bargaining units. In a
multiemployer unit, a single set of negotiators speaks for all employers, and the negotiated
wage applies to all members of the bargaining association. The contract expires at the same
time for all, so everyone faces the same economic

risk of strikes. Each employer faces a product and service demand curve essentially
equivalent to the market demand curve because wage-related costs will be passed on by all
members simultaneously. Figure 8.6 shows the effects of a wage increase in a multiemployer
bargaining unit. If the market demand for the employers’ goods and services is quite inelastic,
most of the wage increases can be passed through with relatively minimal effects on
employment.
The most successful multiemployer bargaining occurs when employers have roughly
comparable non labor costs, all employers are unionized, and new firms have a relatively
high cost of entry. If so, employers in the bargaining unit would probably not be differentially
affected by a wage increase, nor would the union have to compete against nonunion labor.

Industry wide Bargaining:

While most multiemployer bargaining is done within a relatively small geographic area, it
also occurs on an industry wide basis when products or services are essentially commodities.
In trucking, major unionized interstate truckers are represented by an employers’ association
that bargains with the Teamsters Union, resulting in the National Master Freight Agreement.
However, maintaining an industry wide bargaining structure is a perilous proposition. As
more employers are included, their sizes and abilities to take strikes become dissimilar. In
trucking, employers face significant competition from nonunion sources, with union
bargaining power in general decline since deregulation, as reflected in major wage
concessions.
Where employees change employers frequently and employers are widely distributed
geographically, industrial-level bargaining can occur. For example, the International
Transport Workers Federation represents maritime workers and negotiates pay rates for
workers on “flag of convenience” shippers belonging to the International Maritime
Employers Committee.
National/Local Bargaining:
In some firms, wages and benefits are negotiated on a companywide basis, while terms and
conditions are negotiated locally. Most often, plant managers and local unions negotiate work
rules and other items after a firm-level economic agreement is reached. Work rules may be
negotiated simultaneously, but local-issue strikes are usually prohibited until after a firm
level economic settlement is reached. If the local represents employees in a critical plant
(e.g., a sole supplier of parts necessary for all final assembly products), it has considerable
bargaining power.
Plant labor intensity varies given the production technology used; thus, wage increases have
varied effects on costs across plants. In one plant, a wage increase may push costs over
revenues, leading to its closing. Employees in that local might lose their jobs due to a national
increase. Economic settlements involving concessions are more often being negotiated at the
plant level, especially when problems vary among plants. When both parties perceive
contract difficulties to be related to local problems, or when the union expects to get trade
offs for concessions, organization wide bargaining is more prevalent.
Wide-Area and Multicraft Bargaining:
In construction, bargaining is traditionally conducted locally. In most instances, crafts
bargained separately with employers. Decentralized negotiations led to many strikes as a
result of cross-craft comparisons. Increasingly, construction employers and unions use wide
area and multicraft bargaining. These configurations involve several craft unions in a given
geographic market. If unions have strong national leaders, this arrangement is likely to be
successful because it solidifies their positions through the use of politically appointed
regional staffs to assist in bargaining. At the same time, internal politics at the local level has
become more difficult, because the rank and file may pressure local leaders to match other
settlements instead of concentrating on smoothing the bargaining process. Increased
competition from nonunion contractors has encouraged a more stable labor relations climate
in the unionized construction sector. A major factor in successfully bidding on projects is a
record of finishing on time and within budgets. Project labor agreements involving the
general contractor, its various subcontractors, and craft union representatives help to
guarantee labor costs and eliminate work stoppages.
Pattern Bargaining:
In highly concentrated industries, the dominant union chooses a major employer as a
bargaining target. Negotiations are concentrated on this target firm, which is struck if
agreement is not reached. When agreement is reached, the union moves on to the remaining
firms in turn and usually quickly concludes an agreement along the lines of the initial
bargain.
Pattern bargaining has occurred frequently in companies in highly unionized concentrated
industries. Pattern bargaining was practiced in the auto industry for many years before the
recent GM and Chrysler bankruptcies led to renegotiated contracts that are less favorable than
the one covering Ford workers. Airlines tend toward pattern bargaining. Airlines negotiate
agreements on an occupational basis and at widely spaced intervals both within and across
the unionized sector. Airline negotiations pay particular attention to competitive labor rates
since fares are set on a highly competitive basis, and negotiated rates—both up and down
track closely with recent competitive settlements in other unionized carriers.
While pattern bargaining is not strictly a structural type, it represents a form of quasi industry
wide bargaining.
Some say pattern bargaining broke down during the 1980s due to major variations in plant
efficiency levels among employers with several plants and between old and new plants in
areas with low unionization.
Managers responsible for bargaining increasingly cited firm profitability and labor cost
measures as more important than industry wage patterns in their bargaining stances. Unions,
on the other hand, want to maintain a pattern to avoid internal political problems and to serve
as a base for launching demands for wage increases. Moving away from a pattern results in
more variance in wages across employers. However, evidence suggests that variance
decreased between 1977 and 1983, a period during which substantial concessions were
granted by unions. By the later 1980s, the UAW was able to reestablish patterns within
industries in which it represented employees, with the exception of aerospace and agricultural
equipment. Internal politics within the UAW help to reinforce pattern bargaining. Political
factions coalesce around differences in settlements, serving as a strong motivation for union
officers to maintain a pattern to remain in office.
How, can these differences be resolved?
First, during the late 1970s, inflation increased rapidly at the same time that labor contracts
ran for multiyear periods. Thus, newly negotiated contracts established new patterns at the
same time inflation led to large variances. Second, during the 1980s, waves of concessions
occurred within fairly short periods, resulting in low wage variance as companies and unions
bargained down to lower wage levels. However, large differences existed in other contract
provisions such as early retirement, job security, union-management participation, and profit
sharing.
Pattern bargaining has made a comeback in the office cleaning industry in Los Angeles
following the successful organizing by the Justice for Janitors campaign of the Service
Employees. While no formal multiemployer arrangement has been established, the possibility
of strikes against employers that refused to accept the pattern, and the relative ease with
which customers could switch cleaning services, enhanced the development of pattern
settlements.
Conglomerates and Multinationals
A conglomerate is a business operating in several distinct industries. For example, a firm may
operate a fast-food chain, sell data processing services, manufacture agricultural chemicals,
and produce household appliances. Bargaining differs from that of a firm specializing in a
single industry. The conglomerate often bargains with several unions and has contracts with
different expirations. By its nature, a conglomerate has high bargaining power. No part of its
business is large relative to others, and its parts do not depend on each other for components
or processes. Thus, it could afford to take a long strike at any subsidiary. If a conglomerate is
struck, unions gain less than they would in firms operating in a single industry. On the other
hand, conglomerates do not usually perform as well as firms that concentrate in one or a few
industries since management must be much more sophisticated to understand the nuances of
each.
Conglomerates have evolved substantially over the past 40 years. There are fewer publicly
traded conglomerates than in the past, and where they exist, they tend to actively acquire and
sell units depending on future prospects and performance relative to other units in the
industries in which they participate. Thus, managers in each business unit face strong
pressure to perform and would likely resist economic pressures from unions to avoid having
their units sold. Private equity has also created conglomerates, often consisting of businesses
that have relatively uncompetitive cost structures. Generally, the goal of these firms is to
reduce costs, improve performance, and refloat the businesses through initial public offerings
(IPOs) as independent companies. As a successor organization (see Chapter 6 ), the business
must negotiate with the union representing its employees (if there is one), but it does not need
to continue the current agreement. Bargaining power can be substantial in situations like
these.
Multinational organizations have great bargaining power because unions representing U.S.
employees do not represent offshore employees. Thus, the firm can offset high U.S.
bargaining power by diversifying production across a set of countries in which it has markets
or from which the labor and additional transportation costs would be less than the costs in the
United States. Evidence indicates that location decisions are more strongly related to the
potential market size of a host country than to its wage levels or industrial relations
environment.
Coordinated Bargaining:
Coordinated bargaining occurs where two or more national unions represent employees of a
single major employer. In coordinated bargaining, unions seek comparable agreements with
common expiration dates. Each agrees that others can sit in on bargaining and make
suggestions to the other unions’ negotiators. The largest continuing example of coordinated
bargaining involves General Electric and a coalition of unions led by the Electronic Workers
and United Electrical Workers. Exhibit 8.4 provides information about the unions involved in
the coalition and the coordination involved in bargaining with GE.
More recently, the Communications Workers and the Electrical Workers along with some
smaller unions have started coalition bargaining with the agreement of Verizon Corporation.
This arrangement increases union bargaining power but is also accompanied by an increased
willingness to try innovative solutions to employment problems during a period of rapid
technological change in the telecommunications industry.
Craft Units within an Employer
In railroads and airlines, the Railway Labor Act requires that bargaining units be organize on
a craft basis. This means employers with organized employees will have to bargain with
several unions. Not all of the unions have equivalent bargaining power because the employer
may continue to operate if particular unions strike (and others are willing to cross their picket
lines). In the airlines, with the outsourcing of heavy maintenance work, only pilots have the
power to inflict substantial economic costs by striking.
Centralization and Decentralization in Bargaining:
Increased competition poses problems for both unions and employers not only in structuring
the bargaining relationship between the parties but also within organizations. For employers,
the uniqueness of particular plant and work-group issues and the shifting of responsibilities
for profitability to business units has reduced the involvement of corporate staffs and other
industrial relations professionals in bargaining and administering the contract. With the focus
moving from a corporate to a business-unit perspective, unions have lost leverage on
economic issues.
Tension may exist between a national union and its locals. The degree of control nationals
exert is reflected in the degree to which locals must allow national participation in
negotiations, permissions to strike, and vetoes over negotiated agreements. Control may
extend to process and/ or content issues in bargaining. As noted above, unions must be able to
reduce competition with both nonunion and union workers to improve conditions.
Nonunion competition is reduced through extending organizing, while union competition is
reduced by requiring equivalent pattern agreements. Locals may not have adequate
information to negotiate competitive agreements. The national can provide a means for
gathering and disseminating information across a wide number of units.

Changes in Industrial Bargaining Structures and Outcomes

Major changes have occurred in bargaining structures in several industries that have been
heavily organized in the past and have undergone major changes over the past two decades.
In addition to the public sector, there are a few industries or locations in which a larger share
of employees has been organized recently.
Professional sports is highly organized, with baseball and basketball players exercising
significant bargaining strength. Growing unionization in health care and the consolidation of
health care providers has led to the greater use of organization wide bargaining structures
and, in some cases, multiemployer bargaining, although there also have been cases of
breakups of multiemployer groups as excess capacity has developed among providers in a
given geographic area. The Las Vegas hotel industry has become highly organized, while
Reno hospitality employers are essentially nonunion. Wages and benefits in Las Vegas are up
to 40 percent higher than those in Reno. Unionization has a major effect on this difference
since nonunion workers in other Las Vegas industries earn no premium over their
counterparts in Reno.
In most industries that have been under economic siege during the last 30 years, bargaining
structures have tended to become decentralized, particularly in steel, tires, and trucking. In
telecommunications, overcapacity and declining worker productivity have been problematic.
Jobs are being restructured out of the bargaining unit and into management and professional
jobs. Union coverage at AT&T shrank by 55 percent from 1984 through 1992, and the ratio
of managers to nonmanagers increased from 1:4 to 1:3. 41 In addition, existing hard-wired
communications companies are acquiring or starting wireless and broadband companies and
strongly resisting organizing or accretion in these units. However, recently the
Communications Workers has been able to get some of the major local operators to remain
neutral in organizing campaigns and/or allow card checks for recognition in their wireless
business units. These concessions were extracted by the union in return for agreeing to
support rate-increase requests to state regulators.
Unionization in the construction industry has declined from 50 to 25 percent as employers
have increasingly established nonunion subsidiaries (“double-breasting”). Union power is
also decreased when employers escape previously negotiated prehire agreements. Unions
have responded by “salting” union organizers in nonunion contractors to encourage
unionization.

From Book

Page number 235 to 251 till “ to encourage unionization”

Book: John Fossum Labor Relations 2011 mcgraw hill education