Some objections

An economist who is unfamiliar with the nature of trade unions might object that under the assumptions of this model there is no particular reason why we would end up with 0D workers employed at wage rate 0A after a union monopolizes the labor market. This is true, as far as it goes. In the goods market, a monopolist maximizes profits by increasing production up to the point that marginal cost is equal to marginal revenue. Like the union wage negotiated in this model, a monopoly price in the goods market produces deadweight losses and is socially inefficient. However, while the monopolist’s optimal (from his own point of view) price and output level are determinate, such is not the case with a union in the labor market.

Trade unions are not the same as business firms. A monopolist in the goods market makes a trade-off.  Assuming he is operating on the elastic portion of his demand curve — and he would be foolish not to do so — if he raises his price, he will sell fewer units and give up some revenue; but he will also reduce his total costs by enough to make up for the lost revenue. A monopoly union makes no such trade-off because it represents only those who are actually working in the craft or industry, not people who would like to work in the craft or industry but cannot find jobs.

If trade unions were driven by the same concerns that drive monopolistic firms in the goods market, they would seek to maximize total wage income in the craft or industry. But they are not and they don’t. Unlike the managers of business firms, which (theoretically) are supposed to maximize the return to the firm’s owners, union leaders aim at maximizing the welfare of a majority of the union’s members. Look at Figure 1 again. The 0D workers who would keep their jobs and benefit from the higher wage 0A are more numerous than the DE workers who will get laid off. Even if all those who were working in the industry or craft prior to unionization joined the union and thus gained the right to vote on the contract, if the union follows a seniority rule regarding job security we would expect the 0D most senior workers to vote for the contract and the DEmost junior workers to vote against it.

Some might argue that labor solidarity will provide a check against the senior workers throwing the junior workers under the bus. However, if they are going to insist on a wage rate of 0A, there is no way to avoid laying off DE workers. If they don’t want to go by seniority, then they will have to find some other criterion for deciding who gets pink slips. The only way to avoid any layoffs is to keep the wage rate at its original market equilibrium level, 0B. But if they are willing to do that, then why have a union?

I indicated above that there is no reason to expect a union to seek to maximize total wage income in the craft or industry. In this regard, it is of interest to note that total wage income after unionization, given by the area of the rectangle 0AHD, is less than total wage income before unionization, 0BFE. To maximize total wage income, the union would have to negotiate a wage at which the demand curve for labor is unit elastic, but there is no economic incentive for it to do so.

Monopsony

If you’re born in the mountains, you got three choices: coal mine, moonshine, or movin’ on down the line.

— Lee to Doolittle in Coal Miner’s Daughter

The analysis so far has shown that forcing the wage rate above that which has been established by natural market forces in a competitive labor market necessarily results in a lower level of employment in the affected craft or industry. I dealt with some objections to this in the preceding section, and showed that they are baseless. However there is one objection that cannot so easily be dismissed: that these results depend on the market for labor being competitive. When there is a single employer in the labor market, there is a possibility of raising both wages and employment above the levels that would be determined by natural market forces.

This situation, a monopsony, is not uncommon in small, isolated communities such as are found in Appalachian coal country. Some free market economists, citing the mobility of labor, have tried to sidestep this issue; for example, the late Murray N. Rothbard dismissively asserted that “a ‘monopsony’ cannot exist” in a free market. But “mobility” is a relative term. The difficulty of pulling up roots and moving to another community presents a very real barrier to mobility that can create all the conditions required for a monopsony to exist. A 20th century West Virginia coal miner was about as mobile as an 18th century Scottish Highlander who was forced to emigrate to the American colonies after being evicted from the land he had been farming.