Vertical Control By Labor Unions

Abstract

Much of the complexity of the collective bargaining process can be conceptually reduced to the choice by a union of some point along a given derived-demand curve for labor. Many union actions often labeled ,restrictive or featherbedding do not, however, easily fit into this framework. Instead they appear to result in a wage-employment combination which lies entirely off the derived-demand curve for labor. They involve either fixing the total amount of employment or fixing the laborcapital (or labor-output) ratio, in addition to setting the wage rate.' Unions have also used more subtle measures, essentially taxes on output or capital, which can have a similar effect to direct controls.2 Analytically, these actions bear a close resemblance to vertical integration, tying arrangements, or other forms of vertical control by firms with market power over a product which can be used in variable proportions as an input in a downstream production process.' For example, suppose that a powerful union in a competitive product industry wishes to increase the earnings per hour of its members, but is unwilling to force up the wage rate because of the output and substitution effects on employment. Vertical control can be used to reverse the substitution effect. Since formal vertical integration by unions is rare, assume the union imposes a tax or royalty on the final product. If the union wishes to increase earnings per worker with no change in employment, it can raise the royalty rate while simultaneously reducing the wage rate. The fall in the quantity of labor demanded due to the effect of the higher royalty rate on output can thus be balanced by the increase in labor demanded due to the effect of a lower wage-rental ratio on the labor-output ratio. Assuming that the elasticity of demand for the product eventually becomes greater than unity, this balancing act can continue until some finite maximum level of earnings per worker (from wages and royalties) is reached. The crucial requirement for the process to work, of course, is that the elasticity of substitution between labor and other inputs be greater than zero, since in the absence of a substitution effect there is no difference between the effects of a tax on labor and a tax on output. This incentive for vertical control by *Assistant professor of economics, Washington University, St. Louis. I would like to thank Charles Berry, Edward Kalachek, Robert Parks, and Lee Benham for helpful comments. I Examples include requiring a minimum number of musicians per theater orchestra; minimum crew sizes and absolute cmployment levels in railroading; and work rules in Pacific Coast longshoring which, until the 1960 Mechanization and Modernization Agreement, required firms to employ a fixed quantity of labor inputs or required that labor be used in fixed proportions to other inputs or outputs. For numerous other examples, see Lloyd Ulman, pp. 53666. 2The United Mine Workers finances its Welfare and Retirement Fund by a royalty on each ton of coal produced in unionl mines; the Mechanization and Modernization Fund in West Coast longshoring is financed on a tonnage basis while the unemployment fund on the East Coast is financed by a royalty on containers proportional to the degree of anticipated labor displacement; airline pilots are paid according to a complex formula which closely resembles a tax on either output or capital: and the Teamsters Union has negotiated mileage-rate differentials based on truck size and cargo capacity, and a royalty payment on the transport of highway trailers on railroad flatcars. Unions may desire such arrangements for several reasons. For example, the airline pilot wage structure has resulted in large benefits to seniority and has facilitated bargaining in an industry with rapid productivity increases. In addition, tying wages to particular equipment may have enabled price discrimination by the union. Some union practices also regularize employment or spread the same amount of work over a larger number of employees. Nevertheless, all these measures can be used to achieve a wage-employment combination off and to the right of the derived-demand schedule for labor. 3For an analysis of vertical control by firms, see the author ( 1974).

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