a. Outline the circumstances that make the net effect of unions negative.

(Андреев)

Plan:

Shortly on the net effect of unions (financial and social effect)

Perishable products and spot contracting

Negative financial effects

Negative social effects

Natural monopoly

Occupational communities

State ownership

Answer:

The existence of unions affects firms as well as employees. Most of those effects can be
classified as social or financial. Whenever the effect of these two is negative the overall ratio is negative
too. In this case one may say that costs of union activity outweigh the benefits for employers.

In case of perishable products and spot contracting employer requires unstable number of
employees every period of time, which may be a day, a month or season. The risk related to the labor
demand volatility (kept by the employees) is held by the unions. The limits of labor pool suggested by
unions provides negative financial effect, since usually there are extra workers that have to be paid or
not enough productivity at the peak of demand. Moreover, social effect is negative due to the
management problems and loss of skill. It is much harder to make employees do their job when needed
and keep their skills, when there are no work for them most of the time.

Negative net effect from unions also appears in cases when workers form a natural monopoly
over their skills or services. Such examples may be found in public sector: healthcare, education; or in
private sector: transport, power supply. The latter mean substantial power of unions, which usually is
followed by financial negative effects of increasing wages and costs. Important to mention that wage
increase does not necessary means increase in quality or productivity in monopoly conditions.
Furthermore, employees have less freedom in choice of joining the union. They need to be a part of
union to have a voice and to be promoted. Therefore there is a negative social effect of freedom
reduction.

Occupational communities are related to the industries where the community network is highly
overlapped with employment network. The conflicts between employees and employers usually
becomes conflicts between companies and communities. The negative financial effect is similar to the
natural monopoly, yet increase in wages may not affect productivity due to the conflicting mindsets. At
the same time, joining of the union becomes socially compulsory because one may be either on the side
of the firm or union side. The latter is a negative social effect.

State ownership of the companies face negative net effect from unions because their political
power on the employer. Unions lobby the managers that are loyal to them, spending the resources on
political games. Therefore, union members sacrifice their political views to gain higher benefits. Wages
may increase, but productivity may not because workers believe they made politicians a favor.
 b. Explain the existence of collective action from the Hirschman’s perspective.

Plan:

Explanation through consumer market

Exit and Voice choice

Loyalty and switching costs

Answer:

Hirschman has generalized the framework for understanding of collective actions in labor market,
product and political markets. However, he introduced it using consumer market. Therefore one may
explain his views through it as well.

Hirschman believed that collective actions appear in situations of minor deterioration, when the flow is
seen for consumers of the product but is not for the managers. At this point there are two options for
the client. To Exit or To Voice. The first one refers to switching to the competitor’s product, which is
followed by reduction in the first company profits. Managers notice the reduction and seek for the
problem as well as the solution. The Voice option refers to the direct complaint to management by the
client. In this case there appears the need in instrument to escalate your complaint and indicate your
exiting costs to the company. In this case, both the company and the client win because the problem is
solved, and client is saved. That instrument is a collective action organization.

Hirschman mainly investigated under which condition the exit option prevail the voice option and vise
versa. On this path he introduced the loyalty as having high switching cost. Moreover, he investigated
the problem of costly collective action organization. The first option in this case is that the sunk costs are
so big that setting up a collective organization is worth it. The second option is that there are clients that
do not count their returns from voice as returns minus costs, but rather as returns + costs. (like being
important or needed, a good example is volunteering for good looking CV) Then the third option is
sharing the costs between firm and customer because both benefit from it.