South-Western College Publishing - Economics  
Northwest Goes South
Subject Unions, Collective Bargaining
Topic Labor Markets
Key Words Strike, Contract, Union, Contract, Wage Increases
News Story

Northwest Airlines pilots are on strike in pursuit of a 14 percent raise over three years. The company has offered 9 percent over four years. While the union wants an industry-leading contract, the company alleges that it cannot afford it.

The Air Line Pilots Association feels aggrieved because it agreed to major concessions in 1993 when the company was making losses. Since then, the carrier has made record profits for four years. The problem for Northwest is that they realize that other bargaining groups -- the air flight attendants and the ground workers in particular -- will want similar wage increases. The ground workers have already voted down a better deal than that offered to the pilots.

Because of the pilots' determination that they be rewarded for their previous cooperation, and Northwest's concerns over the prospective cost, the strike may last some time. (Updated October 15, 1998)
Questions

1. In 1993, the Air Line Pilots Association (ALPA) agreed to reduce wage levels in an attempt to save Northwest Airlines.
a) Draw a diagram of the labor market for air line pilots. Show the supply and demand curves on the assumption that the supply of pilots is relatively inelastic owing to the training necessary. Assuming that pilots in the industry agreed to be paid the equilibrium wage rate, show their wage and employment levels.
b) Since then, the industry has prospered. Illustrate the consequences for the equilibrium wage and employment level.
c) In fact, contractual wages have not changes in accordance with market forces. Does this help explain the militant stance of ALPA?

2. Another interpretation of the strike is that the Air Line Pilots Association, in demanding an industry-leading contract, is trying to force Northwest Airlines to pay in excess of the equilibrium wage for pilots.
a) On your diagram add a horizontal line showing the wage rate that ALPA would like to negotiate. Mark the number of pilots employed at that wage rate.
b) Why is Northwest reluctant to pay this wage level? Answer in terms of the labor market diagram.

3. Northwest states that it cannot afford such a contract. It is concerned that other bargaining units will want similar deals.
a) Assume that the market for air travel is competitive. Draw a diagram with the vertical axis representing costs and prices and the horizontal axis showing the number of passenger- miles flown. Add the marginal and average total cost curves for Northwest, and draw a horizontal line representing the equilibrium price. Label the equilibrium number of miles flown and the amount of profit.
b) In the event that the pilots win the industry-leading contract they desire, illustrate what will happen to the cost curves, the equilibrium number of miles flown, and the amount of profit. On the basis of your diagram, explain why Northwest is willing to take a strike.
Source Susan Carey, "Looming Over Northwest Talks: Other Unions," The Wall Street Journal, August 31, 1998

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