Labor Law, Economics Of

The Monopoly Model

Practitioners of the traditional monopoly model of unions and collective bargaining commonly make four assumptions in their analysis. First, they assume that union wage increases are a result of labor cartels. Although economists have long acknowledged that employer profits from market power or productive resources could be possible sources of union wage increases, the traditional analysis has consistently focused on the labor cartel as the source of union benefits.

Second, under the monopoly model, it is assumed that employers respond to wage demands by retreating up their labor demand curves, raising the price of their goods to consumers, and laying off workers, who then enter other labor markets to depress wages. In the labor monopoly analysis, there is no bargaining over wages or employment; the union unilaterally sets [Page 895]wages and the employer determines how many workers should show up for work each day.

Third, the costs of collective bargaining are assumed to be simple transaction costs; there is no attribution to opportunism or strategic behavior as an explanation. Even strikes are considered to be merely information costs communicating lack of profitability at a given wage offer and lowering worker expectations.

Finally, although it is not necessary for their analysis, practitioners of the monopoly model commonly assume that unions are violent and undemocratic.

The conclusion of the monopoly model is that unions are inefficient and inequitable. Unions are inefficient in that they cause both inefficient production and consumption. Under the monopoly model, employers respond to union wage demands by laying off productive workers to less efficient uses and inefficiently substituting capital for labor. Unions also instigate inefficient consumption in that they raise the price of their goods above the competitive level and cause consumers inefficiently to substitute other goods. Moreover, the process of collective bargaining imposes deadweight losses on society in the form of employer efforts to avoid organization, strikes, and foregone consumption.

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