© 2005 thomson c hapter 16 wages and employment: monopsony and labor unions

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CChapter 16hapter 16

Wages and Employment: Wages and Employment: Monopsony and Labor Monopsony and Labor

UnionsUnions

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Gottheil - Principles of Economics, 4e

Economic PrinciplesEconomic Principles

The market supply curve of labor facing the monopsonist

The monopsonist’s marginal labor cost curve

The supply curve of labor offered by the union

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Economic PrinciplesEconomic PrinciplesThe marginal labor cost generated by the union’s supply curve of labor

Collective bargaining between the union and monopsonist over wages and employment

The union’s decision to strike

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Monopsony: When Monopsony: When There’s Only One There’s Only One Buyer of LaborBuyer of Labor

Monopsony

• A labor market with only one buyer.

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Suppose that there is one large mining firm that is buying up all the other mining firms in Harlan County, Kentucky.

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As ownership of a firm changes hands, the workers may notice little difference—their wage may remain the same and the work they perform may also remain unchanged.

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Real change may be imminent, however, as both the firm and the workers realize the number of employers in a region is shrinking.

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Under perfect competition, individual firms must accept the wage rate determined by the market.

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Under monopsony, the firm can choose the wage rate it wants.

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EXHIBIT 1 SUPPLY CURVE OF LABOR FACING A MONOPSONIST

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Exhibit 1: Supply Exhibit 1: Supply Curve of Labor Facing Curve of Labor Facing

a Monopsonista MonopsonistHow many laborers are willing to work at a wage rate of $10 per hour in Exhibit 1?• At $10 per hour, the quantity of labor supplied is 3,000.

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When determining what wage rate to pay, the firm must compare each wage rate and the corresponding marginal labor cost.

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If a firm decides to increase the wage rate in order to attract more laborers, it must increase the wage rate of all employees—even those that were willing to work for a lower wage rate.

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The marginal labor cost includes both the wages of the additional laborers as well as the cost of bumping up the wage rates of all the other laborers.

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As more laborers are hired at a higher wage rate, the labor supply curve and marginal labor cost curve begin to diverge.

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EXHIBIT 2A RELATIONSHIP BETWEEN THE MLC CURVE AND THE SUPPLY CURVE OF LABOR

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EXHIBIT 2B RELATIONSHIP BETWEEN THE MLC CURVE AND THE SUPPLY CURVE OF LABOR

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Exhibit 2: Relationship Exhibit 2: Relationship Between the Between the MLCMLC Curve and Curve and the Supply Curve of Laborthe Supply Curve of Labor

1. Why does the MLC curve lie above the labor supply curve in Exhibit 2?• When the monopsonist increases employment, it must not only offer a higher wage rate to attract more workers but also raise the wage rate of those already working.

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2. What happens when the company increases the wage rate from $6 to $8?• Going from $6 to $8, the firm hires an additional 1,000 miners for a total of 2,000 miners.

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2. What happens when the company increases the wage rate from $6 to $8?• The Total Labor Cost = ($8 × 2,000) = $16,000. This is an increase of $10,000 over the total labor cost at the previous wage rate.

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2. What happens when the company increases the wage rate from $6 to $8?• The 1,000 additional miners end up costing the firm $10,000 or ($10,000/1,000 miners) = $10 per hour per worker. This is the marginal labor cost.

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2. What happens when the company increases the wage rate from $6 to $8?• Even though each worker receives only an $8 wage rate, they each add $10 to the firm’s labor cost.

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Choosing the Choosing the Employment/Wage Rate Employment/Wage Rate

CombinationCombination

In order to determine how many additional laborers to hire, the firm follows the revenue-maximizing rule.

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CombinationCombination

The revenue-maximizing rule:

• Continue to hire laborers as long as MRP > MLC. Stop hiring laborers when MRP = MLC.

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Combination Under Combination Under MonopsonyMonopsony• In competitive labor markets,

the wage rate equals MRP.

• In monopsony, the wage rate is below MRP.

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Combination Under Combination Under MonopsonyMonopsony

Return to monopsony power

• The difference between the MRP and the wage rate of the last worker hired, multiplied by the number of workers hired.

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Combination Under Combination Under MonopsonyMonopsony

Return to monopsony power

• Workers argue that the return would belong to them if the labor market were competitive.

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EXHIBIT 3A DETERMINING THE WAGE RATE, EMPLOYMENT, AND RETURN TO MONOPSONY POWER

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EXHIBIT 3B DETERMINING THE WAGE RATE, EMPLOYMENT, AND RETURN TO MONOPSONY POWER

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Exhibit 3: Determining Exhibit 3: Determining Wage Rate, Employment Wage Rate, Employment

and Return to Monopsony and Return to Monopsony PowerPower

1. Where does MRP equals MLC is Exhibit 3?

• MRP = MLC at $26 and 6,000 miners.

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2. What is the wage rate when MRP equals MLC? • The wage rate is determined by reading the labor supply curve at 6,000 miners.

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• The wage rate at 6,000 miners is $16. This is $10 below the workers’ MRP of $26.

2. What is the wage rate when MRP equals MLC?

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3. What is the return to monopsony power that the firm is able to capture?

• Monopsony returns = (MRP - W) × L = ($26-$16) × 6,000 = $60,000.

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Enter the United Mine Enter the United Mine Workers’ UnionWorkers’ Union

Labor union

• An association of workers, each of whom transfers the right to negotiate wage rates, work hours, and working conditions to the association.

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Labor union

• In this way, the union presents itself as a single seller of labor on the labor market.

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• Workers must agree to not work for less than the prescribed wage rate.

• Therefore, the union’s labor supply curve is horizontal at that wage rate.

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EXHIBIT 4A THE UNIONIZED LABOR MARKET

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EXHIBIT 4B THE UNIONIZED LABOR MARKET

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Exhibit 4: The Unionized Exhibit 4: The Unionized Labor MarketLabor Market

How many laborers will the firm hire under the unionized labor market in Exhibit 4?• The firm will continue to use the revenue-maximizing rule and hire laborers until MRP = MLC.

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Exhibit 4: The Unionized Exhibit 4: The Unionized Labor MarketLabor Market

How many laborers will the firm hire under the unionized labor market in Exhibit 4?• As before, MRP = MLC at 6,000 laborers. The wage rate now, however, is $26. This is the full value of the laborers’ MRP.

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One problem created when the union forces the firm to pay a wage rate equal to the workers’ MRP is that under the higher wage rate, more people are willing to work.

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For example, if 6,000 people were willing to work at the wage rate of $16, 11,000 people may be willing to work for the unionized wage rate of $26.

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The union must find a way to control its labor supply; otherwise the excess supply will undo its collective strength.

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Collective bargaining

• Negotiation between a labor union and a firm employing unionized labor, to create a contract concerning wage rates, hours worked, and working conditions.

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Strike

• The withholding of labor by a union when the collective bargaining process fails to produce a contract that is acceptable to the union.

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Strikes are not pleasant for the laborers or the firm.• The laborers earn no income.

• In the absence of replacement workers, the firm earns no revenue.

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• Neither the laborers nor the firm can survive a strike forever.

• It is only by reassessing each other’s ability to tolerate the damaging effects of the strike that the impasse can be broken.

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Higher Wage Rate Higher Wage Rate Versus More Versus More EmploymentEmployment

Improved technology or an increase in the price of a product may cause the laborers’ MRP curve to shift to the right (MRP’).

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There are two options available with the new MRP′ curve:

• Hire more laborers and increase the wage rate a small amount.

• Hire the same number of laborers and increase the wage rate by a larger amount.

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There are several methods the union can use to control the labor supply:• Discourage replacements for workers who are retiring.

• Create long apprenticeship periods.

• Impose high initiation fees.

• Retrain and relocate laborers.

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The conflict is not only between the hiring firm and labor, but also between nonunion labor and union labor over the issue of employment versus wage rates.

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EXHIBIT 5 UNIONIZED LABOR MARKET: NEW TECHNOLOGY APPLIED

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Exhibit 5: Unionized Exhibit 5: Unionized Labor Market: New Labor Market: New Technology AppliedTechnology Applied

1. Where does MLC = MRP′ in Exhibit 5?

• MLC = MRP′ at a wage rate of $30 and 7,000 laborers.

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Exhibit 5: Unionized Exhibit 5: Unionized Labor Market: New Labor Market: New Technology AppliedTechnology Applied

2. What is the new wage rate if the union holds the labor supply to 6,000?

• At 6,000 laborers, the wage rate is $32.

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• The union sees the firm’s right to hire anyone as a potential threat to its ability to raise the wage rate.

• The firm sees the union’s monopoly on hiring and firing of labor as a barrier to its economic growth.

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Union shop

• An arrangement in which a firm may hire nonunion labor, but every nonunion worker must join the union within a specified period of time.

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Union shop

• Under this arrangement the union can still decide what wage rate to accept and the firm decides how many miners to employ.

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Unions in the United Unions in the United States: A Brief States: A Brief

HistoryHistory• Informal arrangements among workers and employers have always existed.

• The first attempt to organize was a shoemaker’s union started in 1792. That union was declared illegal.

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HistoryHistory• The Knights of Labor tried to organize workers across all skills, industries and regions in 1869.

• They also tried to fight child labor and promote workers cooperatives.

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HistoryHistoryCraft union

• A union representing workers of a single occupation, regardless of the industry in which the workers are employed.

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HistoryHistory• The American Federation of Labor (AFL) was formed as a craft union in 1886 to promote strict economic goals, such as higher wage rates and shorter hours.

• Only skilled labor was represented, leaving many of the nation’s unskilled laborers unorganized.

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HistoryHistoryIndustrial union

• A union representing all workers in a single industry, regardless of each worker’s skill or craft.

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HistoryHistoryIndustrial union

• This type of union was the result of changes in technology that blurred distinctions among crafts.

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HistoryHistoryFor example, workers in the textile industry would organize as a textile union. Members would include fabric cutters, sewing machine operators, pattern makers, shipping clerks and janitors at the plant.

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HistoryHistory• The Congress of Industrial Organizations (CIO) was formed in 1935 to represent many industrial unions.

• The AFL and CIO merged in 1955, bringing craft and industrial unions under one roof.

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HistoryHistory• Up until the 1930s, Congress, the courts, the media, the general population and some workers were antiunion.

• Union membership has varied with economic climate and the attitude of Congress, the courts and the media.

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Exhibit 6: Union Exhibit 6: Union Membership Since Membership Since

19001900How can the percentage of the labor force unionized be described in Exhibit 6?• The percentage increased rapidly from the 1930s through the 1950s, remained fairly stable at approximately 25 percent until the 1980s, and then dropped dramatically to 11 percent by 1993.

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HistoryHistory• During the Depression, the Roosevelt administration and Congress were more sympathetic to labor’s plight.

• A series of prolabor laws were enacted that shaped a new future for unions.

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HistoryHistoryNorris-La Guardia Act of 1932:

• This act outlawed yellow-dog contracts. Firms made workers sign these contracts, stipulating union membership automatically nullified the worker’s employment contract.

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HistoryHistoryWagner Act of 1935:

• This act, formerly called the National Labor Relations Act, legislated that firms must bargain in good faith with unions.

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HistoryHistoryTaft-Hartley Act of 1947:

• The act responded to the union’s abuse of power by outlawing the closed shop and replacing it with the union shop.

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HistoryHistory Labor Management Reporting and the Landrum-Griffin Act:• This act was designed to protect the worker from the union by specifying rules of conduct between the union and its members.

© 2005 thomson c hapter 16 wages and employment: monopsony and labor unions

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