CHAPTER 9 – MONOPOLY
CHAPTER 12 – LABOR MARKETS AND LABOR UNIONS (6e)
Labor Supply
In Chapter 11 we focused on the demand for labor (which depends on MRP). We also looked at the supply of labor as it relates to the wage rate. In this chapter we will look at labor supply and wage determination in more depth.
1 Labor Supply and Utility Maximization
People seek to maximize utility. How? By choosing the best combination of work (which makes consumption possible) and leisure.
1) Three ways to spend our time:
Market work:
Nonmarket work:
Leisure:
2) Maximizing Utility
Utility is maximized by allocating time among the above activities so that the expected marginal utility of the last hour spent on each activity is identical.
2 Wages and Individual Labor Supply
Suppose you are deciding how much market work you would be willing to supply to the economy next summer. The following table shows various possible wages, the # of hours per week you are willing to work at each wage, and your total weekly earnings.
|Wage per Hour |# Hours Worked Weekly |Total Weekly Earnings |
|$0-6.99 |0 | |
|7.00 |20 | |
|8.00 |30 | |
|9.00 |40 | |
|10.00 |48 | |
|11.00 |55 | |
|12.00 |60 | |
|13.00 |58 | |
|14.00 |55 | |
1) The substitution effect of a wage increase:
In the example above, the substitution effect exceeds the income effect for wages ____________________________.
2) The income effect of a wage increase:
In the example above, the income effect exceeds the substitution effect for wages __________________________.
3) The individual’s labor supply curve
Ex. 1
Plot the quantity of labor supplied at various wages, based on the table above.
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This is a backward-bending S curve of labor:
3 Nonwage Determinants of Labor Supply
Aside from wages, what factors affect the supply of labor?
3) Other sources of income or support
4) Nonmonetary factors
5) Value of job experience
6) Taste for work
4 Market Supply of Labor
The market supply curve of labor = the horizontal sum of all individual labor supply curves. Since different individual S curves bend back at different wage levels, these differences are “smoothed out” for the whole market, so that the market supply curve slopes upward.
Ex. 2
5 Why Wages Differ
Read this section on pp. 266-270. Be able to explain and give examples of how the following factors may cause wages to differ across markets:
7) Differences in training, education, age, and experience
(Study Ex. 3 on p. 267; it should make you feel very good about why you’re here in college! ()
8) Differences in ability
9) Differences in risk
10) Differences in labor mobility
11) Differences in treatment of workers due to discrimination
12) Differences due to union membership or nonmembership
Unions and Collective Bargaining
Labor union:
In the U.S., about 1/7 of all workers belong to a union.
Goals of unions: higher pay and other benefits for members
1 Types of Unions
Craft union:
Industrial union:
2 Collective Bargaining and Strikes
Read on pp. 270-271. Know the definitions of:
Collective bargaining:
Mediation:
Binding arbitration:
Strike:
Union Wages and Employment
Although most unions have various goals (higher wages, more benefits, greater job security, better working conditions, etc.), we will focus on the goal of obtaining higher wages for union members.
Three ways unions might obtain higher wages:
1 Forming an Inclusive, or Industrial, Union
The union negotiates an industry-wide wage for each type of labor within the union.
Let’s do a before-and-after analysis:
1) If there is no union:
Ex. 4, panel (a)
D and S represent the market demand and supply of a particular type of labor. If there is no union, or if the union allows the market wage to prevail, the wage will be W and the quantity of labor employed in the industry will be E.
Ex. 4, panel (b)
Each firm “takes” the market wage and will hire as much labor as it wants at wage W. The firm faces the horizontal supply curve, s, which is also its MRC curve, and will hire labor up to the point where MRP=MRC, which is at point e.
2) If the union negotiates a higher wage:
Ex. 4, panel (a)
If the union obtains a higher wage for its members, W’, no labor will be supplied at any lower wage. W’ becomes a wage floor. The market supply curve of labor becomes W’aS. Due to the higher wage, more workers will supply their labor (E”) but fewer workers will be hired (E’) than was true at the market wage W. There is a surplus of workers (E”-E’) who will have to seek nonunion jobs (driving down non-union wages!).
Ex. 4, panel (b)
For the firm, the higher wage W’ means the firm faces a higher supply curve s’. The firm will decrease the quantity of labor it demands, hiring only e’ quantity of labor.
2 Forming an Exclusive, or Craft, Union
Craft unions seek to restrict the available supply of particular types of labor. This is done by various means: apprenticeship requirements, qualification exams, licensing requirements, high fees, etc. By limiting union membership, the union effectively pushes up the wage and avoids creating a surplus of labor.
Ex. 5, panel (a)
When the union restricts the supply of labor, the supply curve shifts left, the wage rises to W’, and employment falls to E’.
3 Increasing the Demand for Union Labor
If a union can increase the demand for union labor, this will increase wages and increase employment.
Ex. 5, panel (b)
When the union increases the demand for union labor, the demand curve shifts right, the wage rises to W’, and employment rises to E”.
The D curve for union labor could be shifted right by:
1) Increasing the demand for union-made goods.
2) Restricting the availability of nonunion-made goods.
3) Increasing the productivity of union labor.
4) Featherbedding
4 Recent Trends
Read this section on pp. 275-278 for an overview of recent trends in union membership.
END
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