Government engages in the important task of establishing the legal rules
for the economy. We will limit our analysis of the role of government here
to four main topics; (1) the influence of labor relations law on labor
markets, (2) the effects of federal minimum wage laws, (3) OSHA as an example
of direct government intervention in the labor market, and (4) government
laws that create "economic rent".
Table 13-1 provides a summary of basic labor relations laws. The labor
relations laws summarized in that table affect the labor market in diverse
ways, two of which are (1) by influencing the extent and growth of union
membership, which in turn influences the ability of unions to secure wage
gains; and (2) by establishing the rules under which collective bargaining
Labor Law and Union Membership
There can be no doubt that labor law per se can be an important determinant of union membership. This relationship between labor law and union membership is observable in both the private and public sectors.
1) Labor Law and Private-Sector Union Membership Pre-1930 Period
Union organizers and members were legally unprotected against reprisals
by employers or even government itself. Attempts to organize were met with
discriminatory discharge in many instances. Those dismissed often
were placed on blacklists and therefore denied opportunities to
gain alternative employment. Workers sometimes were required to sign
contracts, which were contract clauses that prohibited them from joining
unions. Firms also utilized lockouts as a mechanism to stop union
organizational attempts. Clashes between striking workers and strikebreakers
were common, and government often intervened with police action on the
side of employers during confrontations.
Court hostility toward unionization was a related factor explaining
the low union membership during this period. Court hostility manifested
itself in several ways, including (1) the court's interpretation of antitrust
laws and (2) the use of injunctions against strike activity.
Summary: Prior to 1930, the absence of protective labor legislation
allowed firms and the courts to repress union activity and growth. The
low union membership translated into an ability of unions, in general,
to make a significant impact on the overall labor market.
Post-1930 Period The Norris-LaGuardia Act (1932) and the
Wagner Act (1935) placed a protective umbrella over the union movement
and greatly encouraged growth of union membership. The Norris-LaGuardia
Act significantly reduced the personal costs of becoming a union member
and thus made it easier to organize workers. The Wagner Act had even greater
impact on union membership by promoting the growth of unions by guaranteeing
unions (1) the right to self-organization, free of interference from employers,
and (2) the right to bargain as a unit with employers.
The growing strength of labor unions produced a political backlash against unions, resulting in passage of the Taft-Hartley Act (1947) and the Landrum-Griffin Act (1959), both of which added "unfair labor practices" to workers to "balance" the unfair labor practices of management described in the Wagner Act.
2) Labor Law and Public-Sector Union Membership
The driving force in the organization of federal government workers has been a series of presidential executive orders that provided for the recognition of unions organizing government workers.
The overall body of labor law and specific provisions of the law influence bargaining power independently of effects on the level of union membership. Many provisions of labor law enhance the bargaining power of unions, enabling them to secure higher wage gains; other provisions strengthen the negotiating positions of employers.
1) Limitation on the Use of the Injunction
The Norris-LaGuardia Act of 1932 placed into effect a limitation on the use of court-issued injunctions to enjoin picketing, striking, and related union activities. This prohibition clearly strengthen union bargaining power.
2) Prohibition of Secondary Boycotts
Secondary Boycotts are actions by one union to refuse to handle products made by a firm that is party to a labor dispute. Hot-Cargo clauses declared that trucking firms would not require unionized truckers to handle products made by "unfair" employers involved in a labor dispute (made illegal by the Landrum-Griffin Act in 1959).
The Fair Labor Standards Act of 1938 established a minimum wage.
The Competitive Model
The competitive labor supply and demand model is the best starting place for analyzing the possible labor market effects of the minimum wage.
1) Complete Coverage <figure 13-1>
<click here for slides on figure 13-1>
2) Incomplete Coverage
<figure 13-2> The minimum wage imposed in the covered sector of the low wage labor market reduces employment and the displaced workers seek employment in the uncovered sector.
here for slides on figure 13-2>
The Shock Effect
In chapter 7, the possibility was raised that in some situations an
increase in the wage rate could increase the marginal product of labor
and therefore increase labor demand. This possibility may be applicable
to the imposition of a legal minimum wage.
<figure 13-3> A minimum wage may shock firms out of their organizational inefficiency. As a result, the marginal product of labor may rise, shifting the labor demand curve rightward. Consequently, a portion of the unemployment predicted by the basic model may be mitigated.
here for slides on figure 13-3>
<figure 13-4> Without the minimum wage, this monopsonist will choose
to hire Q0 workers and pay a wage equal to W0. Any legal minimum wage above
W0 and below W2 will transform the firm into a "wage-taker", and the firm
will choose to increase its level of employment. For example, if the minimum
wage is W1, this firm will hire the same number of workers as if competition
existed in this labor market. Thus, it is possible that a minimum wage
might cause employment to increase in some industries.
<click here for slides on figure 13-4>
Two additional considerations concerning the minimum wage merit mention.
1) Union Support
Minimum-wage legislation may promote the economic self-interest of high-wage union labor. The minimum wage increases production costs and prices in the nonunion sector, while leaving costs and prices in the unionized sector unchanged.
2) Efficiency Wage Considerations
The unemployment created by the wage floor of the minimum wage MAY have the beneficial effect of discouraging shirking by low-paid workers throughout the economy.
Investments in Human Capital -- The minimum wage reduces O-J-T.
Some firms may decide against providing general job training if the minimum
wage does not allow them to pay a lower wage during the training period,
and thus the minimum wage may reduce the formation of this type of human
capital. Also, there is some evidence that the minimum wage encourages
teenagers to drop out of school to seek employment.
Income Inequality and Poverty Most analysis indicates that
the minimum wage does not affect the overall distribution of income or
appreciably reduce poverty. About 70% of minimum-wage workers reside in
families with incomes above 300% of the poverty line.
OCCUPATIONAL HEALTH AND SAFETY REGULATION
Government's intervention in the regulation of health and safety is
an important aspect of labor markets. The most important interventions
in this area are the state worker's compensation programs and the federal
Occupational Safety and Health Act of 1970. The former mandates that firms
purchase insurance that pays specified benefits to workers injured on the
job and the latter requires employers to comply with workplace health and
safety standards established under the legislation.
Profit Maximizing Level of Job Safety
Competition will force firms to minimize the costs of producing any
specific amount of output. One cost of production is the cost of accidents
and accident prevention. Figure 13-5 illustrates the optimal level of job
safety. A profit maximizing firm will provide a level of job safety at
which the marginal benefits of safety expenditures equal the marginal cost.
<click here for slides on figure 13-5>
Societies Optimal Level of Job Safety If workers have full
information about possible work hazards and accurately assess the likelihood
of occupational fatality, injury, or disease, then the amount of job safety
offered by employers will match that level required to maximize society's
well being. Where information about job hazards is limited and/or workers
underestimate the personal risk of occupational fatality, injury, or disease,
employers will provide less job safety than is socially optimal.
The Occupational Safety and Health Act of 1970 (OSHA)
OSHA interjected the federal government directly into regulation of
workplace hazards. The act's purpose was to reduce the incidence of job
injury and illness by identifying and eliminating hazards found in the
The Case For OSHA Those who support OSHA contend that the
costs of providing a healthy and safe workplace are legitimate business
costs that should not be transferred to workers. They believe that imperfect
information, underestimation of risk, and barriers to occupational barriers
to mobility keep the market from providing the appropriate risk differentials
for hazardous jobs, so there is a major role for the federal government
to play in "correcting" these market failures.
The Case Against OSHA OSHA's critics claim that the safety
standards and inspections required by the act are unwarranted and costly
intrusions by big government. They assert that the standards often bear
no relationship to reductions in injury and illness. Many of the standards
are trivial and some are even dangerous.
Findings and Implications The controversy has been heightened
by the mixed finding on whether the standards and inspections have reduced
occupational accidents and injuries. Since the passage of OSHA, that rate
of fatal injuries on the job has declined (but why?), and the rate of workdays
lost per year from nonfatal accidents has risen.
Government as a Rent Provider
Government influences the terms of employment in many ways, not just
by establishing laws and regulations. One such method is by providing economic
rent to labor market participants. Economic rent in the labor
market is the difference between the wage paid to a particular worker and
the wage just sufficient to keep that person in his or her present employment.
Remember from chapter 6 that a market labor supply curve is essentially
a marginal opportunity cost curve, that is, it reflects the value of the
worker's best alternative.
Why would the government provide economic rents to specific workers?
Some economic and political theorists argue that the main goal of politicians
is to get and stay elected. They offer and provide a wide range of publicly
provided goods and services that enhance the utility of their constituents,
many of which increase worker's rents.
The concept of rent provision is apparent in some instances of occupational
licensure and in legislation that establishes tariffs, quotas, and domestic
<click here for slides on figure 13-6>
See table 13-3 "Selected Licensed Occupations: State of Washington"
for a list of some of the occupational labor markets that governments
intervene in by requiring licenses to practice.
<click here for slides on figure 13-7>
Tariffs, Quotas, and Domestic Content Rules
Government policies in international trade provide a second major example
of governmental intervention that affects labor markets and ultimately
provides economic rents to specific groups of workers. Figure 13-7 illustrates
the gain in economic rents that tariffs, quotas, and domestic content rules
provide to specific groups of workers at the expense of foreign workers
and domestic consumers.
<click here for slides on figure 13-8>