"Are you sitting comfortably? Then I'll begin.
Once upon a time, in a city called Ottawa…."
"I thought it was called Windsor?"
"No dear, that's another story. Once upon a time, the City of Ottawa needed to hire one person to do a job…."
"I thought it was a car factory?"
"No dear, that was the other story. The job needed doing, and it would cost the city $100 per hour if it wasn't done. But it wasn't a very difficult job, and could be done by most people, so the City advertised the job at $10 per hour. Tom, a high school dropout, was the best qualified, so Tom was hired, and did the job well.
After a year, Tom went on strike for higher wages. Nobody would cross Tom's picket line, so the City was losing $100 per hour, minus Tom's wages. Since Tom could have worked elsewhere at $10 per hour, the strike was eventually settled at $55 per hour, with Tom and the City splitting the $90 surplus equally between them."
"Was that fair?"
"I don't know, but it was the Nash bargaining solution, so that's what would have happened.
Many years later, Tom retired, and the city advertised the job at $55 per hour. Lots of people applied. Dick, who had an MA, was the best qualified, so Dick was hired, and did the job well.
After a year, Dick went on strike for higher wages. Since Dick could have worked elsewhere at $55 per hour, the strike was settled at $77.50 per hour, with Dick and the City splitting the $45 surplus equally between them."
"And that was the Nash bargaining solution too, was it?"
"Good girl, you are learning your cooperative Game Theory!
Many years later, Dick retired, and the city advertised the job at $77.50 per hour. Lots and lots of people applied. Harry, who had a PhD, was the best qualified, so Harry was hired, and did the job well.
After a year, Harry went on strike for higher wages. Since Harry could have worked elsewhere at $77.50 per hour, the strike was settled at $88.75 per hour, with Harry and the City splitting the $22.50 surplus equally between them.
Many years later, Harry retired…"
"I think I know the rest of the story, it's the same story you told me last night, about Windsor!"
"Yes dear, that's what's so nice about stories: you can tell them over and over again."
"But what about all the people who didn't have a PhD? Where did they get jobs?"
"Well dear, a lot of them didn't. But some of them got low wage jobs where it didn't really matter if they went on strike. And others saw they had to get a PhD to get a job, even if the job didn't really need a PhD.
Now, it's time for you to go to sleep, so you are ready for your calculus exam in the morning. Good night dear!"
Worthwhile Canadian Initiative 
As one of the 60k students out of the YorkU for a month, I’d say fire the striker and hire someone else, at the same wage…
My daughter quit York a month ago. To be fair, the strike was perhaps not the main reason, but it was the final straw. I feel really sorry for you and the York students. I haven’t been following the York news since then, and would appreciate an update. Are many students quitting and/or transferring? Any danger of a downward spiral (strike, students quit, less revenue from tuition and transfers, deficit, more downward pressure on wages and employment, more strikes,…). Will York survive?
The York case, like other universities, is perhaps a bit different though. The production function is closer to fixed coefficients; even though there is little total surplus in a university, if any one group goes on strike, the university cannot function. So each group has “hold up” power over all the other groups.
On a completely unrelated note, thanks for the “are you sitting comfortably?” link. All this time I thought Platinum Blonde made it up!
It must come from Mark Holmes of Platinum Blonde, since he’s a Brit of about the right vintage. But his “Magic Roundabout” song suggests he’s slightly younger than me; that’s what my kid brother watched. I never knew (till my Googling just now) that Platinum Blonde was a Canadian band. Oh well.
I don’t see that vicious cycle being remedied until there are some restrictions put on unions in this country. For one, it seems nigh-on impossible to get rid of a union once organized short of shutting the whole enterprise. And so enterprises are regularly shut, which would otherwise be profitable and productive if market wages could be paid and productivity-sapping union rules could be eliminated.
Seems to me that where unions might be more appropriate is in those low-wage (often part-time) situations you mention, where the union doesn’t have such a strong bargaining position.
I don’t understand how the qualifications creep ties in with unions. I feel this is simply a byproduct of too many people attending university and creating an over-supply of degree holders then anything to do with unions.
How much is it really unions though, and how much is it the rules and customs surrounding work? For example, in my fairy tale, there is only one worker, so there can’t be a union, and yet the same problem appears.Admittedly, it is rare that a single worker could have the sort of bargaining power that the single worker in my story has, but it is possible in principle.
What is the underlying root cause of the market failure in my story? The restriction on competition caused by the failure of others to cross a picket line? In practice that might be the largest part of the problem, but perhaps even this part of the story could be changed, so that once Tom has started doing the job, he learns some special job-specific skill, so that nobody else could take over from him quickly? What sort of contract could prevent the market failure?
CBBB: we were posting at the same time; my previous post was in answer to Andrew. Now to reply to you: but would so many people be attending university if they didn’t need a degree to get a job, and a higher paying job?
There are two existing explanations of why degree-holders get higher wages: the human capital explanation (you learn stuff that makes you more productive); and the signaling explanation (you don’t learn anything useful or productive, but you prove that you are capable of learning and willing to learn). My story (actually, I don’t know how original it is) adds a third explanation: bargaining power raises wages, creates an excess supply of labour to good jobs, and so employers pick the ones with the highest qualifications, even if those qualifications make a negligible difference to productivity.
The guitarist for Platinum Blonde now designs luxury homes in Oakville, Ont. And he’s good at it.
I see “Magic Roundabout”.
I think “Swindon”.
See, that shows the real consequences of house price bubbles: real resources get allocated away from the music sector into the construction sector!
I see “Magic Roundabout” and I think “Hemel Hempstead”, which has a beautiful one: Hemel’s got 6 mini-roundabouts in one meta roundabout; Swindon’s only got 5 minis (plus a side-road)! I wish Canada had more roundabouts, though we are starting to build them now. Gatineau’s got a couple of good new ones.
Perhaps unions come into play in jobs that requires specific skill that is valuable to the company but otherwise useless outside of the company or industry.
For example say an autoworker, a lot of the assembly jobs are very specific and require very specific skills, but those skills are not transferrable outside of the auto business.
So the union is there to provide job security? I’m not sure myself.
I assume that there is a value in unions in terms of having one entity representing the workers. If I was in management I would rather negotiate with 1 entity than have one-on-ones with all the workers.
In my simple story, the value of the job to the employer (the demand price) was greater than the lowest wage at which a worker could be found (the supply price. That’s what caused the problem. I had just one worker, so it was all-or-nothing. When you have a large number of workers, it’s not all-or-nothing. Assuming the demand price (value marginal product of labour) is downward-sloping, and the supply price is upward-sloping, you get an equilibrium number of workers where the two curves cross.
At the margin, the demand price equals the supply price, and there’s zero surplus for the marginal worker, so nothing to bargain over. In that case unions do make a difference, because if all workers join the same union, it becomes an all-or-nothing game again. The total product is greater than marginal product times number of workers. The total supply price is less than marginal supply price times number of workers. There’s a surplus to bargain over.
Firm-specific human capital (a costly investment in training which is only useful in one firm) also creates (ex post) a gap between demand price and supply price, even at the margin, and a surplus that can be bargained over.
So unions make the problem more likely, but they aren’t essential to the problem; it can happen even without unions.
Picket lines also make the problem more likely, but they aren’t essential to the problem (because maybe you can’t find or train a replacement worker quickly).
Unions could have benefits: lowering transactions costs by having one representative for all the workers; helping solve the free-rider problem in contract-enforcement. My guess though is that, under current circumstances, the losses outweigh the benefits. It is no accident that “yellow dog” contracts (where you agree not to join a union as a condition of being hired) are outlawed.
Unions could have benefits? We are talking about a world in which the US middle class is in relative decline, and has been for some time. As, apparently, a total coincidence, organized labour has also been in decline…hmm.
Economists, geez.
It could be that a decline in union power in the US has caused a change in the distribution of income, or it could be a consequence, or it could be a coincidence. A lot of other things have been changing too, like technology, and the relative decline in manufacturing. Dunno. And there’s also the lower classes to think about: those who are shut out of the union jobs, or who have no bargaining power anyway.
The relative decline in manufacturing did not happen in a vacuum. It happened in the context of policies that forced American labour to compete with cheaper labour elsewhere. Naturally, this erodes any gains unions might make…which erodes the power of labour, and so on and so forth.
Of course, American consumers got cheaper stuff. This is not sustainable and is hitting the wall right now.
My long view of history is this: centuries ago agriculture was the biggest sector. Then increased productivity in agriculture lead to a decline in agricultural prices and employment and a rise in manufacturing output and employment. Then increased productivity in manufacturing lead to a decline an manufacturing prices and employment and a rise in the service sector. Just as agriculture declined due to its own success and to the fact that people only want to buy so much food (albeit of better quality and variety than before), so manufacturing is now declining due to its own success and to the fact that people only want to buy so many cars and refrigerators (albeit of better quality and variety than before).
It was 17th century English farmers that gave us the weekend, not unions. Without the agricultural revolution, we would have to be working much longer hours just to get enough to eat. (Of course, I might be biased on this, given my English farming background).
Taking a shorter-run view, I see an economy composed of many monopolistic firms, each with its own monopolistic union. Each firm/union can raise its price relative to the general price level, and raise its wage relative to the general wage level, by reducing its output and employment, relative to the general level of output and employment. But each union’s wage gain is an increase in prices for all the other workers, and the only aggregate result is a decline in the general level of output and employment, with an ambiguous effect on real wages. With economies of scale, in aggregate, at the margin, real wages could actually go down. Maybe I’ll do a post on this model sometime.
More generally, union power seems to me to be a decidedly uncertain method of equalising the distribution of income. If labour market power were negatively correlated with competitive equilibrium wages, it could work, but I think the opposite is just as likely to be true — a positive correlation. The rich might gain more from union power than the poor.
And if you want to equalise incomes, the income tax/transfer system seems to be a better way. I would much prefer to swap unions and minimum wages for a basic guaranteed income and fully universal benefits for teeth, kids (and maybe throw wage subsidies for low-wage workers into the mix too, but my head’s not quite clear on that).
I don’t see the connection between free trade and what’s hitting the wall right now. True, the sort of balance of trade deficits and surpluses we’ve been seeing aren’t sustainable (China vs US in particular), and would eventually need to be reversed in any case (and would be). But looking at the patterns of where the financial crisis has hit, around the world, I don’t see any obvious correlation with trade surpluses/deficits. There is a correlation with house price bubbles (though not perfect). It looks more like a classic financial crisis than a balance of payments or trade crisis. Iceland had a balance of payments crisis, but this is because its banks had very large foreign currency deposits: a classic bank-run, only where the central bank of Iceland couldn’t act as lender of last resort, because it can’t print Sterling and Euros.