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Employees sell their labor for wages. If a critical mass of employees get together and demand higher wages, how is this not the same thing as a critical mass of merchants illegally fixing the price of some commodity?

Can't a strong union be considered to have an illegal monopoly on labor?

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I'm not sure if this is the answer you're looking for, but wherever the law forbids unions to operate closed shops, certainly yes a "strong" union (defining strong as, so strong it can operate a closed shop) is considered by the law to be capable of exercising an illegal monopoly on labour :-) –  Steve Jessop Mar 28 at 3:08
I would remove the wording illegal, as it is not up to Economists to define legality; that part is off topic here. –  FooBar Mar 28 at 18:14
Because employers can kill their employees. –  Pete Becker Mar 28 at 18:49
The difference is simple: Workers vote. A politician that actually treated the two sides equally would have a hard time getting reelected. Thus unions get anti-trust exemptions. –  Loren Pechtel Mar 28 at 22:10

3 Answers 3

up vote 14 down vote accepted

This is more of an elaboration of The Almighty Bob's answer:

It is true that if we start from a competitive market (i.e. large numbers of buyers and sellers), then granting market power to sellers (e.g. workers) by allowing the formation of a monopolistic cartel is bad for efficiency. Those sellers will use their market power to increase the price (and reduce the quantity traded), resulting in a deadweight loss. Thus, we tend to look suspiciously upon practices that create market power. Note that here, the policy intervention we have in mind is to break up the cartel and return us to a competitive world.

Why should the labour market be viewed differently? Part of the answer is that the relevant counterfactual has changed. Begin with a world without labour unions. The market will then typically not be competitive because there are often a small number of employers who themselves enjoy market power. Just as a monopolist seller can drive up the price, these monopsonistic (or oligopsonistic) buyers of labour can use their power to drive down the price.

Now we are faced with the following policy problem:

How can we correct for employers' market power and restore wages toward the (higher) efficient level?

Two simple solutions come immediately to mind:

  1. Reduce employer's market power by stimulating competition between employers. This is achieved, to some extent, by antitrust policy. But it's hard to do much more here short of forcing more businesses to hire more workers.

  2. Allow workers to form unions so that both workers and employers have market power. If the firms try to use their power to drive wages down and the workers use it to drive them up then there is a sense in which the two will 'cancel out' and the result can be closer to the efficient wage than a market in which only employers have market power.

Whether the second solution indeed works or not depends upon a whole range of factors. Here are a few:

  • If the employer side of the market is, in fact, quite competitive then the correction will likely be too big and we will end up with wages that are inefficiently high.
  • If bargaining is very costly then it might be more efficient to have one side (e.g. the employers) unilaterally set the wage.
  • If there is uncertainty about the wage that firms are willing to pay/workers are willing to accept then bargaining may inefficiently break down (see the Myerson-Satterthwaite Theorem).
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Thanks for the elaboration (which was clearly needed), however, the reasoning would also hold true for many other markets (everything which is sold via large retailers). So it might be a good idea to allow workers unions but via the same argument in some industries price cartels would be a good idea. –  The Almighty Bob Mar 27 at 14:55
@TheAlmightyBob Indeed, and there are many examples of consumer groups that achieve more favorable prices by collective bargaining as do workers via unions. –  Ubiquitous Mar 27 at 14:59
So, since there are always fewer employERs than employEEs, this gives employers an unfair market position, which unions and collective bargaining helps offset? –  Deane Mar 27 at 16:06
@Deane In a nutshell, yes. But I should mention that there are other factors besides the number of employers that are important. For example, being unemployed is very damaging for workers, which weakens their bargaining position vis-a-vis their employer. Likewise, if there are two employers that demand very similar skill sets then workers can play them off against each other much more easily than if workers make relationship-specific investments in skills that are only useful for one employer. –  Ubiquitous Mar 27 at 16:17
@Deane Most importantly, though, I should stress that (a) it is by no means clear that many markets are sufficiently uncompetitive on the employer side to justify worker unions; and (b) there are also some very good arguments against unions that turn on issues besides market power. So please don't interpret my answer as a decisive defence of unionism. –  Ubiquitous Mar 27 at 16:18

I think your question has two parts:

  1. Is a labor union a cartel?
  2. Is a labor union therefore illegal?

Let me give you the quick answer to both: 1) yes, 2) no.

The longer version is the following:

  1. You are right, there is, from an economical point of view not that much of a difference between selling a good and labor, so a union could (and most times is) considered a cartel.
  2. It is not illegal, because it is explicitly excluded in the antitrust laws (like in the US via the National Labor Relations Act) or not included in the antitrust laws in the first place.

There are several possible reasons why collective bargaining and labor unions could have been excluded from antitrust laws, for example:

  • Firms have more market power in the first place (as perfectly explained by Ubiquitous)
  • Most workers usually can not choose not to work, those workers could be exploited without collective bargaining
  • ...
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So, in theory it is the same thing, but we specifically allow it (or, rather, refuse to disallow it) for vague, poorly-defined reasons? –  Deane Mar 27 at 14:37
@Deane not quite the same thing but very similar. My mentioned reasons are vague and poorly-defined, because there are many possible reasons and I don't which of them was chosen by the government for keeping the law. –  The Almighty Bob Mar 27 at 14:47
@Deane I think "workers can usually not choose to not work" is actually a pretty well defined reason. There are very few products that are absolute necessities. This is a pretty huge difference. –  MHH Mar 27 at 15:40
@MHH Excellent point. –  Deane Mar 27 at 16:04

To complement @Ubiquitous answer, whether employers have monopsonistic power or not in the labor market is still something that is questioned in various corners of the Economics discipline.

The simple observation made in a comment, that in the labor market, most of the suppliers (workers) have an urgent and immediate need to sell, to a degree higher than a firm has in selling its products, I believe goes a long way in rationalizing why the labor market is "special".

A stimulating book focusing on the issue of monopsony power of employers in the labor market is "Monopsony in Motion: Imperfect Competition in Labor Markets" (2005) by Alan Manning.

A review critical of the book can be found here.

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The Kuhn review you link is really great. It gets at the heart of the problem with Manning's book, which is that he hangs pretty much his entire theory of monopsony on increasing marginal costs for recruitment in bigger firms, which is pretty dubious empirically and conceptually & not quantitatively enough anyway. –  nominally rigid May 9 at 21:28
@nominallyrigid Kuhn's review is indeed excellent. The fundamental issue I have with the approach of both Manning and Kuhn is spelled somewhere in the review. Kuhn writes "Further, Manning then decides—explicitly, and in my view correctly—to focus on long-run elasticities throughout this book." I am not sure that the "long-run" characteristics is those that (should) matter more, when we deal with the labor market. –  Alecos Papadopoulos May 10 at 22:11

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