May 20, 2024 

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IMPLICIT COST: An opportunity cost that does NOT involve a money payment or a market transaction. This should be contrasted with explicit cost that DOES involve a money payment or a market transaction. The common misconception among non-economists out there in the real world is that the term "cost" is synonymous with the term "payment," that is, all costs are explicit costs, to be a cost you have to give up some money. Well, I'm here to tell you that this isn't true. Cost is opportunity cost. It's the satisfaction NOT received from activities NOT pursued. It's the value of foregone production. And not all opportunity costs involve a money payment.

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An Altogether Look at UNIONS

Hey, look! Is that who I think it is? Yes of course, that's Dan Dreiling the drywall guy. You might recall that Dan repaired a hole in my living room wall back in Fact 7. He's coming out of the Mona Mallard Duct Tape Industries plant with all of the duct tape factory workers. And he seems most distressed. Let's get to the bottom of this. Here's his story. The drywall business sort of dried up, and Dan has taken up employment in the exciting field of duct tape fabrication. The duct tape workers, though, are talking union. Dan's indecisive about this move toward unionization. Perhaps we can help him out. Let's stroll around the often controversial topic of labor unions.


Unions are organizations of workers -- in the same industry, working for the same company, or in the same occupation -- that negotiate with their employers over things like wages, fringe benefits, working conditions, hiring and firing procedures, and most other job related stuff. The formal negotiation, where the union and the company (or "management") seek to work out a contractual agreement on these various issues, is termed collective bargaining,

In recent years, most of these collective bargaining agreements have been pretty straightforward. Unions demand a few things, companies return with their "best" offer, then they haggle back and forth until they ultimately reach a compromise. If this sounds a lot like buying a car or house, it is. It's the same sort of one-on-one negotiation that takes place in many markets.

Occasionally, however, negotiations don't reach a compromise that's satisfactory to both sides. In that case, there are a few alternatives.

  • Mediation. There is where an outsider, like a judge or high-ranking government official, who is acceptable to both sides, tries to work out differences between unions and management. The mediator usually offers a solution that will finalize the collective bargaining agreement. However, neither side is legally compelled to accept the solution.

  • Arbitration. This is a lot like mediation, however, the solution proposed by the arbitrator is legally binding. This is much the same as taking the collective bargaining agreement to a court where a judge makes the final decision. We should also note that arbitration is most often used to interpret an existing agreement rather than to forge a new one.

  • Strike. This is a well-known alternative where everyone in the union decides to stop working, hoping that the loss of production will hurt management more than the loss of wages will hurt the workers. This was effectively used by unions in the past. It also got pretty bloody. More on this in a few paragraphs.

  • Lockout. A company's own version of the strike in which it keeps workers from entering the plant. This is typically used to counteract a planned strike by the union. The company hopes to get a jump on the union before they're ready to strike.

These are a few of the more popular options. Other union stuff includes work slowdowns (don't strike, just don't work very hard) or even occasional product sabotage. Management has been known to speed up production before a strike or hire nonunion workers (so-called "scabs") during a strike.

A Classic Confrontation

While the sorts of things that unions and management do to each other might appear childish, they have a serious and violent history. Their confrontations are as fundamental as the differences between the second and third estates. We can find the seeds of their conflicts growing out of our economy's transition from the simple fabrication methods of blacksmiths, carpenters, and other medieval craftsman to the large factories that marked the onset of the industrial revolution.

In the early years of the industrial revolution, with hundreds or even thousands of workers in a single factory, the balance of market control was tipped to the side of second estate. The handful of employers were pretty much able to dictate wages and working conditions. Workers were inputs -- not people, just inputs. They had about the same status as felled trees, molten steel, or railroad cars filled with slaughter-house bound cattle. If the wheels of industry happened to grind an occasional worker into a bloody mass, well, replacements could be found. As such, wages were extremely low and working conditions were, at best, downright deadly. That's when unions came onto the scene.

The concept of unions had been around since the craft guilds of the middle ages, but it really began to take off for common laborers in the mid-1800s. Workers found that they could risk life and limb in the factory or risk life and limb battling management for higher wages and safer working conditions. The secret to any success, though, was speaking with a single voice -- a "one for all and all for one" sort of strategy. Their goal, whether or not it was fully recognized, was to balance the market control of their second estate employers. Rather than a one-sided slaughter, companies now found a competitive adversary that could battle them on an increasingly equal footing.

The battles often turned bloody. Companies didn't hesitate to use force -- armed security guards and government soldiers -- on the rabble-rousing unions. The unions fought back with an assortment of their own guerilla tactics. Most of this violence ended with laws and court cases in the 1930s that forged a set of collective bargaining rules.

We've now reached a point where both sides tend to negotiate peacefully. Of course, even though life is more peaceful, businesses think that unions have become too powerful, demand excessive wages, eat away company profits, and are a pain in the butt. Unions, however, are always suspicious that the companies are out to destroy them and return to the good old days of low pay and abused workers. Both sides are probably right -- to a degree. Each is in for trouble if the other gets the upper hand in their ongoing game of market control.

A Balance of Power

Let's consider this balancing act. Have unions achieved their goal of protecting workers or have they actually gone to far?

Let's first put things into perspective. From a peak of about 25 percent of the labor force in the 1950s, only about 15 percent of workers in the good old U. S. of A. belong to unions today. That's a shrinking fraction but it still includes around 16 to 17 million people.

Here are a few notable consequences of unions:

  • Unions raise wages and improve working conditions. Few would argue with this. However workers' wages are companies' costs. Some critics argue that unions have appropriated too much pay for too little work. This often means consumers pay higher prices and U. S. companies can't compete with other nations around the world.

  • Higher union wages mean lower nonunion wages. Unions usually keep wages high by restricting the number or workers. This creates a surplus of workers who are driven to find employment in some nonunionized company. With more nonunionized workers, nonunion wages drops.

  • Unions protect the well-being of both union and nonunion workers. Unions have fought for shorter work weeks, safer working conditions, more holidays (such as labor day), and improved health care benefits and retirement programs, that have benefited all workers in the economy.

  • Rigid rules create inefficiencies. Unions tend to create rules that prevent the flexible use of resources. They might specify, for example, that a simple task must be done by only one type of worker, even though anyone could do the job. As you can see in the discussion of depression, these sorts of institutional rigidities can have some serious consequences.
The Bottom Line

So the question remains. Do we advise Dan Dreiling, the former drywall guy, to join the duct tape union or not?

Unions play a valuable role in our economy. Without them, businesses of the second estate would most likely slip back into their abusive ways. Good for business, bad for workers. Unions provide a needed labor market balance.

Yet, some unions have excessive market control. The best way to strike fear into any small business owner, and perhaps send the company into bankruptcy, is for workers to join a large, national union. Like many long-standing institutions, unions are often inclined to expand into areas where they are unneeded.

Unfortunately, there's no way to know which direction Dan's prospective unionization actions will take the economy. Will it tip the balance of power toward unions? Is it a needed move to counteract some abusive problems by Mona Mallard Duct Tape Industries? We can't answer these questions without a great deal more information than we can gather from this trek around the economy. We can, however, propose two question-based tips for Dan and other prospective union members to consider:

Two Unionizing Tips

  • First, what are the costs of joining a union, especially dues and the hardships created by a potential strike? What are the chances that unionization will force your employer into bankruptcy and you into the unemployment lines?

  • Second, what are the benefits of being a union member? Will you be getting higher wages and better working conditions? Do they have neat parties every Friday night at the union hall?



[What's This?]

Today, you are likely to spend a great deal of time searching the newspaper want ads wanting to buy either a green fountain pen or a handcrafted bird house. Be on the lookout for telephone calls from long-lost relatives.
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