Economics 27Professor Patricia M. Anderson

Economics 27Professor Patricia M. Anderson

Practice Problem Set 6

(ANSWERS)

Multiple Choice Questions

1. Answer is D. Why? In 2000, 13.5% of workers were union members (and 14.9% were covered by unions). Even at its peak in the early 1950’s, only about 25% of workers were union members. Note that the fraction of public sector workers who are union members is 37.5% (and 42% are covered by unions).

2. Answer is A. Why? The bigger the strike fund, the longer the union can provide payments to striking workers, and the longer the union can resist, thus increasing the union’s bargaining power. Each of B, C and D reduces the union’s bargaining power relative to that of the firm.

3. Answer is C. Why? The spillover effect refers to the idea that high union wages reduce employment, making workers “spill over” into the non-union sector, thus reducing wages there. The threat effect refers to the idea that high union wages lead firms in the non-union sector to also pay higher wages, to avoid the “threat” of unionization by their workers.

4. Answer is D. Why? Workers in the South and West have traditionally been less amenable to unions (most right-to-work states are here), as have female workers. Whether these workers see fewer benefits to unionization (decrease in demand) or are more difficult to organize (decrease in supply) is less clear, but it would clearly be one or the other or both. The increase in anti-union tactics would clearly make it more difficult to organize.

5. Answer is A. Why? This is basically the definition of the contract zone under threat of arbitration. What about D? If we interpret “average utility from arbitration” as meaning the utility received from the average arbitrator’s decision, then D will be wrong. If we interpret it as the expected utility from going to arbitration, then it pretty much means the same thing as A, so would be acceptable. What about C? Well, it’s not the whole set between the min and max, but it is between them. This is the problem with swiping a question from a test bank without reading all the answers carefully enough!

Short Answer Questions

1. The simplest model of bargaining would imply that both parties would recognize the inevitable outcome of a strike and agree to save the costs of the strike and settle at that outcome. In the diagram below, we see that as the strike persisted, both the union and the firm would moderate their demands as the costs of the strike mounted. After a strike of length t* they would both be willing to agree on contract C*. Thus, the two parties should simply settle on the contract C* at the beginning of the bargaining process and skip a strike. If GE’s “first and only” offer was C*, it should be accepted.

2. Since firms in Ontario are prohibited from using replacement workers, the costs of a strike to GE would be higher there. Thus, the union in Ontario would have more power relative to GE than the US union would.

3. If the union members had very high levels of firm-specific capital, they would be more difficult to replace making the cost of a strike to GE higher in the US as well. Thus the difference in union bargaining power between the US and Ontario would be smaller.

4. As a result of the higher costs of a strike to GE in Ontario, the firm concession curve would be higher and the inevitable outcome (C*') would be more favorable for the union. Since the “first and only” offer should represent this inevitable outcome, the offer would be better for the union.

Note that in general the difference between C* and C*' should be biggest for unskilled workers that are easily replaced in the US and smallest for the most skilled workers that would be more difficult to replace.

5. The above model assumed that there was no actual need to strike, since the inevitable outcome was known. In reality, we do see strikes. One possibility is that even though GE was truly offering C*, the union was uncertain about the actual curves and thought the offer should be something like C*’. The presence of such asymmetric information could lead to a strike. Perhaps even more likely is the idea that the union leadership has goals other than obtaining a fair and equitable settlement. In particular, the leaders are concerned about being re-elected and hence want to look like they are standing up for the union. They may fear that immediately accepting GE's "first and only" offer will make them look like pushovers and they will not be re-elected. Thus, even if they realize that C* will be the outcome after the strike, it may be worth it. Another possibility is that the union was pursuing the long-term goal of stopping Boulwarism and was willing to bear the short-term cost of a strike to achieve that goal.

6. The NLRB charged GE with failure to bargain in good faith. In order to be seen to be bargaining in good faith, one needs to be seen to be bargaining, not saying take it or leave it!