labor market in the long run long run -- a period of time over which firms can enter and leave the...

LABOR MARKET IN THE LABOR MARKET IN THE LONG RUNLONG RUN

Long Run Long Run -- A period of time over which -- A period of time over which firms can enter and leave the market and firms can enter and leave the market and existing firms can change all of their existing firms can change all of their inputs including their production inputs including their production facilities;facilities;

• Supply side -- the period of time over Supply side -- the period of time over which people can change occupations which people can change occupations and/or migrate from one city to another. and/or migrate from one city to another.

LABOR MARKETLABOR MARKET

The market for a The market for a specific occupation in specific occupation in a specific geographical a specific geographical area.area.

• Less labor more leisure Less labor more leisure -- If Lester works 30 hours -- If Lester works 30 hours instead of 36, he gets 6 hours of extra leisure, but still instead of 36, he gets 6 hours of extra leisure, but still earns the same income per week.earns the same income per week.

• Same amount of labor and more income Same amount of labor and more income -- If Sam -- If Sam continues to work 36 hours per week, he gets an continues to work 36 hours per week, he gets an additional $72 of income and the same amount of additional $72 of income and the same amount of leisure time.leisure time.

• More labor, less leisure time, and much more income More labor, less leisure time, and much more income -- -- If Maureen works 43 hours instead of 36, she sacrifices If Maureen works 43 hours instead of 36, she sacrifices 7 hours of leisure time and earns a total of $516.7 hours of leisure time and earns a total of $516.

THREE RESPONSES TO AN INCREASE IN THREE RESPONSES TO AN INCREASE IN WAGEWAGE

($10 to $12 per hour)($10 to $12 per hour)

THE MARKET SUPPLY CURVE THE MARKET SUPPLY CURVE FOR LABORFOR LABOR

• Shows the relationship between the Shows the relationship between the wage and the quantity of labor wage and the quantity of labor supplied for a particular occupation;supplied for a particular occupation;

• The market supply is positively sloped, The market supply is positively sloped, consistent with the law of supply: consistent with the law of supply:

• The higher the wage (price of labor) The higher the wage (price of labor) the larger the quantity suppliedthe larger the quantity supplied

THE MARKET SUPPLY CURVE FOR THE MARKET SUPPLY CURVE FOR LABORLABOR

An increase in the wage affects the quantity of An increase in the wage affects the quantity of nursing supplied in three ways:nursing supplied in three ways:

1. 1. Change in hours per workerChange in hours per worker. Some nurses will . Some nurses will work more hours, others will work fewer hours, and work more hours, others will work fewer hours, and others will work the same number of hours;others will work the same number of hours;

2. 2. Occupational ChoiceOccupational Choice. An increase in nursing wage . An increase in nursing wage will cause some workers to switch from other will cause some workers to switch from other occupations to nursing and more new workers to occupations to nursing and more new workers to choose nursing.choose nursing.

3. 3. MigrationMigration. Some nurses in other cities will move to . Some nurses in other cities will move to earn higher wages.earn higher wages.

SUPPLY, DEMAND AND MARKET EQUILIBRIUMSUPPLY, DEMAND AND MARKET EQUILIBRIUMWagesWages

$ Per Hour$ Per Hour

Hours of nursing per dayHours of nursing per day

1515

1010

8,0008,000 16,00016,000

bb

ee

Market SupplyMarket SupplyCurveCurve

THE LONG-RUN DEMAND CURVE FOR THE LONG-RUN DEMAND CURVE FOR LABORLABOR

• Is derived demand, since firms use labor and Is derived demand, since firms use labor and other inputs to produce goods and services: other inputs to produce goods and services: derived from the demand for the final product;derived from the demand for the final product;

• The long-run demand curve for labor is The long-run demand curve for labor is negatively sloped, consistent with the law of negatively sloped, consistent with the law of demand:demand:

• The higher the wage, the smaller the quantity The higher the wage, the smaller the quantity of labor demanded.of labor demanded.

THE LONG-RUN DEMAND CURVE FOR THE LONG-RUN DEMAND CURVE FOR LABORLABOR

An increase in the wage will decrease the quantity An increase in the wage will decrease the quantity of labor demanded for two reasons:of labor demanded for two reasons:

1. 1. The output effectThe output effect. An increase in wage will . An increase in wage will decrease the quantity of output sold by firms that decrease the quantity of output sold by firms that use nurses.use nurses.

An increase in the nursing wage will increase the An increase in the nursing wage will increase the cost of medical services, causing people to cost of medical services, causing people to spend less time in hospitals, so hospitals won’t spend less time in hospitals, so hospitals won’t need as many nurses.need as many nurses.

2. 2. The input-substitution effectThe input-substitution effect. Firms will . Firms will substitute other inputs for labor. substitute other inputs for labor.

OTHER INPUT-SUBSTITUTION EFFECT EXAMPLESOTHER INPUT-SUBSTITUTION EFFECT EXAMPLES• MiningMining. U. S. firms use huge earth-moving equipment to . U. S. firms use huge earth-moving equipment to

mine for minerals, while some firms in less-developed mine for minerals, while some firms in less-developed countries use thousands of workers, digging by hand;countries use thousands of workers, digging by hand;

• FurnitureFurniture. Firms in developed countries manufacture . Firms in developed countries manufacture furniture with sophisticated machinery and equipment, furniture with sophisticated machinery and equipment, while some firms in less-developed countries make while some firms in less-developed countries make furniture by hand;furniture by hand;

• AccountingAccounting. Accountants in developed countries use . Accountants in developed countries use computers and sophisticated software programs, while computers and sophisticated software programs, while some accountants in less-developed countries use some accountants in less-developed countries use calculators and ledger paper.calculators and ledger paper.

SUPPLY, DEMAND AND MARKET EQUILIBRIUMSUPPLY, DEMAND AND MARKET EQUILIBRIUMWagesWages

$ Per Hour$ Per Hour


1515

1010

8,0008,000 16,00016,000 24,00024,000

bb

ee

cc

Market DemandMarket DemandCurveCurve


MARKET EQUILIBRIUMMARKET EQUILIBRIUMA situation in which there is no pressure to A situation in which there is no pressure to

change the price of a good or service;change the price of a good or service;

• The supply curve intersects the demand The supply curve intersects the demand curve at point curve at point ee, so the equilibrium wage is , so the equilibrium wage is $15 and the equilibrium quantity is 16,000 $15 and the equilibrium quantity is 16,000 hours of nursing per day;hours of nursing per day;

• At this wage, there is neither shortage or At this wage, there is neither shortage or surplus of labor, so the market has reached surplus of labor, so the market has reached and equilibrium.and equilibrium.

CHANGE IN DEMANDCHANGE IN DEMAND

Causes price and quantity to move in Causes price and quantity to move in the same direction:the same direction:

• An An increaseincrease in demand in demand increasesincreases the the price and quantity;price and quantity;

• A A decreasedecrease in demand in demand decreasesdecreases the the price and quantity;price and quantity;

• An increase in demand will shift the An increase in demand will shift the demand curve to the right.demand curve to the right.

WagesWages$ Per Hour$ Per Hour


1515

16,00016,000

ee

Original DemandOriginal DemandCurveCurve


THE MARKET EFFECTS OF AN INCREASE INTHE MARKET EFFECTS OF AN INCREASE INDEMAND FOR LABORDEMAND FOR LABOR

ff1717

19,00019,000

New DemandNew DemandCurveCurve

CHANGE IN DEMANDCHANGE IN DEMAND

Causes price and quantity to move in the same direction;Causes price and quantity to move in the same direction;

An increase in demand increases the equilibrium wage An increase in demand increases the equilibrium wage and the equilibrium quantity of nursing services.and the equilibrium quantity of nursing services.

CHANGE IN SUPPLYCHANGE IN SUPPLY

An An increaseincrease in supply in supply decreasesdecreases the price, but the price, but increases increases the the quantity;quantity;

A A decreasedecrease in supply in supply increasesincreases the price but the price but decreasesdecreases the quantity;the quantity;

An increase in supply will shift the supply curve to the An increase in supply will shift the supply curve to the right.right.

SUPPLY OF NANNIES WITH AND WITHOUT AU PAIRSUPPLY OF NANNIES WITH AND WITHOUT AU PAIR

Wages $ Wages $ per monthper month

800800

3030

DEMANDDEMAND

Hours per monthHours per month

SupplySupply with with

au pair programau pair program

NANNIES VERSUS AU PAIRSNANNIES VERSUS AU PAIRS How would elimination of the au pair How would elimination of the au pair

program affect the wage of nannies ?program affect the wage of nannies ?• The equilibrium wage for child-care The equilibrium wage for child-care

services would, in this example, increase services would, in this example, increase from $800 per month to $840 per month;from $800 per month to $840 per month;

• The number of child-care service hours The number of child-care service hours offered would decrease from 30 to 28.offered would decrease from 30 to 28.

SUPPLY OF NANNIES WITH AND WITHOUT AU PAIRSUPPLY OF NANNIES WITH AND WITHOUT AU PAIR

Wages $ Wages $ per monthper month

840840

800800

2828 3030

DEMANDDEMAND

Hours per monthHours per month

Supply Supply withoutwithout


SupplySupply with with


LABOR MARKET IN SHORT RUNLABOR MARKET IN SHORT RUNUse the marginal principal:Use the marginal principal:

• Increase the level of activity if its Increase the level of activity if its marginal benefit exceeds its marginal marginal benefit exceeds its marginal cost, but reduce the level if the marginal cost, but reduce the level if the marginal cost exceeds the marginal benefit. If cost exceeds the marginal benefit. If possible, pick the level at which the possible, pick the level at which the marginal benefit equals the marginal marginal benefit equals the marginal cost.cost.

$10$10

$10$10$10$10

$10$10 $10$10$10$10 $10$10$10$10

$10$10$10$10

LABOR MARKET IN SHORT RUNLABOR MARKET IN SHORT RUN• A firm will pick the quantity of labor at which A firm will pick the quantity of labor at which

the marginal benefit of labor equals its the marginal benefit of labor equals its marginal cost;marginal cost;

Marginal CostMarginal Cost• If the firm is a price taker, it can hire as many If the firm is a price taker, it can hire as many

workers as it wants at the market wage;workers as it wants at the market wage;• The firm’s marginal cost of labor is its hourly The firm’s marginal cost of labor is its hourly

wage.wage.

LABOR MARKET IN SHORT RUNLABOR MARKET IN SHORT RUN Marginal BenefitMarginal Benefit

The marginal benefit of labor equals the monetary value The marginal benefit of labor equals the monetary value of the output produced with an additional hour of labor;of the output produced with an additional hour of labor;

Marginal Product of Labor Marginal Product of Labor -- The change in output per -- The change in output per unit change in labor;unit change in labor;

Marginal Revenue of Product Marginal Revenue of Product -- The price of the firm’s -- The price of the firm’s output times the marginal product of labor;output times the marginal product of labor;

The marginal benefit of labor is the firm’s marginal The marginal benefit of labor is the firm’s marginal revenue of product (MRP).revenue of product (MRP).

marginal benefit = marginal revenue of product (MRP) = marginal benefit = marginal revenue of product (MRP) = price price ** marginal product marginal product

Marginal revenue productMarginal revenue productor demand curveor demand curve

$ per$ perhourhour

Hours of labor per dayHours of labor per day

MARGINAL REVENUE OF PRODUCT CURVEMARGINAL REVENUE OF PRODUCT CURVE

MARGINAL REVENUE OF PRODUCT MARGINAL REVENUE OF PRODUCT CURVECURVE

The marginal revenue of product curve is The marginal revenue of product curve is negatively sloped because of the principal of negatively sloped because of the principal of diminishing returns;diminishing returns;

Principal of Diminishing ReturnsPrincipal of Diminishing Returns

Suppose that output is produced with two or Suppose that output is produced with two or more inputs and that we increase one input while more inputs and that we increase one input while holding the other inputs fixed. Beyond some holding the other inputs fixed. Beyond some point -- called the point of diminishing returns -- point -- called the point of diminishing returns -- output will increase at a decreasing rate.output will increase at a decreasing rate.

MARGINAL REVENUE OF MARGINAL REVENUE OF PRODUCTPRODUCT

• As the firm adds more workers to an existing As the firm adds more workers to an existing production facility, each worker uses a production facility, each worker uses a smaller piece of the firm’s production facility, smaller piece of the firm’s production facility, so total output increases at a decreasing rate;so total output increases at a decreasing rate;

• As quantity of labor increases, the marginal As quantity of labor increases, the marginal product of labor decreases;product of labor decreases;

• If the marginal product of labor decreases and If the marginal product of labor decreases and the price of labor is fixed, MRP decreases too.the price of labor is fixed, MRP decreases too.


Marginal cost when Marginal cost when wage = $15wage = $15

$ per$ perhourhour


1515

2020


mm

At $15 per hour, the firm couldAt $15 per hour, the firm couldnot hire more than 20 hours, not hire more than 20 hours, because the additional revenuebecause the additional revenuefrom a 21st hour would be lessfrom a 21st hour would be lessthan the additional cost ($15).than the additional cost ($15).


Marginal cost when Marginal cost when wage = $15wage = $15

$ per$ perhourhour


1515

1010

2020 3030

Marginal cost when Marginal cost when wage = $10 wage = $10


mm

nn

If the wage drops to $10, the firmIf the wage drops to $10, the firmwill satisfy the marginal principalwill satisfy the marginal principalat at nn, hiring 30 hours of labor, hiring 30 hours of laborinstead of 20.instead of 20.

SHORT-RUN LABOR DEMAND SHORT-RUN LABOR DEMAND CURVECURVE

The MRP curve is the firm’s short-run The MRP curve is the firm’s short-run demand curve for labor; demand curve for labor;

• It shows the relationship between the It shows the relationship between the wage and quantity of labor demanded wage and quantity of labor demanded in the short run.in the short run.

WHAT CHANGES WOULD CAUSE THE WHAT CHANGES WOULD CAUSE THE DEMAND CURVE TO SHIFT ?DEMAND CURVE TO SHIFT ?

Change in anything held fixed in drawing the Change in anything held fixed in drawing the curve will shift the entire curve;curve will shift the entire curve;

• An increase in the price of the final good will An increase in the price of the final good will increase the MRP of workers, shifting the entire increase the MRP of workers, shifting the entire demand curve to the right;demand curve to the right;

• If workers become more productive, the increase If workers become more productive, the increase in the marginal product of labor will increase the in the marginal product of labor will increase the MRP and shift the demand curve to the right;MRP and shift the demand curve to the right;

• A decrease in price or labor productivity would A decrease in price or labor productivity would shift the demand curve to the left.shift the demand curve to the left.

MARKET DEMAND AND MARKET DEMAND AND EQUILIBRIUMEQUILIBRIUM

The market demand curve for labor is The market demand curve for labor is the sum of the labor demands of all the sum of the labor demands of all firms that use a particular type of firms that use a particular type of labor;labor;

If all firms are identical, multiply the If all firms are identical, multiply the number of firms by the quantity of number of firms by the quantity of labor demanded by the typical firmlabor demanded by the typical firm

SHORT-RUN SUPPLY CURVESHORT-RUN SUPPLY CURVE The supply curve is relatively steep because in the short The supply curve is relatively steep because in the short

run, workers cannot change occupations or migrate from run, workers cannot change occupations or migrate from one location to another;one location to another;

The only response to a change in the wage is that existing The only response to a change in the wage is that existing workers change the number of hours they work:workers change the number of hours they work:

When the wage increases, some workers work more, others When the wage increases, some workers work more, others work less, and others work about the same number of work less, and others work about the same number of hours;hours;

The net effect of these changes in work hours varies from The net effect of these changes in work hours varies from one occupation to another.one occupation to another.

$ per$ perHourHour

Short-runShort-runMarket demandMarket demand

Short-run supplyShort-run supply


1515

1010

2,0002,000 3,0003,000

mm

nn

Market Equilibrium in the Short RunMarket Equilibrium in the Short Run

WHY DO WAGES DIFFER WHY DO WAGES DIFFER ACROSS OCCUPATIONS ?ACROSS OCCUPATIONS ?

Wage for a particular Wage for a particular occupation will be high if the occupation will be high if the supply of workers in that supply of workers in that occupation is small relative to occupation is small relative to the demand for workers.the demand for workers.

WHY WOULD SUPPLY OF WORKERS IN A WHY WOULD SUPPLY OF WORKERS IN A PARTICULAR OCCUPATION BE SMALL ? PARTICULAR OCCUPATION BE SMALL ?

1. 1. Few people with the required skillsFew people with the required skills: :

examples include professional athletes, musicians and actors;examples include professional athletes, musicians and actors;

2. 2. High training costsHigh training costs: :

examples include medical doctors and lawyers;examples include medical doctors and lawyers;

3. 3. Undesirable job featuresUndesirable job features::

examples include jobs with greatest risk of dying, jobs that examples include jobs with greatest risk of dying, jobs that are stressful, dirty, or force people to work odd hours;are stressful, dirty, or force people to work odd hours;

4. 4. Artificial barriers to entryArtificial barriers to entry::

examples include jobs that requires government or examples include jobs that requires government or professional licensing, or union membership.professional licensing, or union membership.

WagesWages$ per$ perHourHour

Market DemandMarket DemandCurveCurve

Market Supply Market Supply CurveCurve


Supply is Low Relative to DemandSupply is Low Relative to Demand

2020

8,0008,000 16,000 16,000

f f

WHY DO WOMEN, ON AVERAGE, WHY DO WOMEN, ON AVERAGE, EARN LESS THAN MEN ?EARN LESS THAN MEN ?

• Women in many occupations have less Women in many occupations have less education and less work experience, so they education and less work experience, so they are less productive and paid less;are less productive and paid less;

• Occupational discrimination:Occupational discrimination:

- Women have been denied access to - Women have been denied access to many occupations, causing them to many occupations, causing them to flood flood a small number of “female-a small number of “female-dominated” occupations;dominated” occupations;

- Given a plentiful supply in these - Given a plentiful supply in these occupations, wages are relatively low.occupations, wages are relatively low.

WHAT ABOUT DIFFERENCES IN WHAT ABOUT DIFFERENCES IN EARNINGS BY RACE ?EARNINGS BY RACE ?

Of full-time workers in 1995Of full-time workers in 1995

• Black males earned 73% as much as white Black males earned 73% as much as white males;males;

• Black females earned 86% as much as Black females earned 86% as much as white females;white females;

• Hispanic males earned 62% as much as Hispanic males earned 62% as much as white males;white males;

• Hispanic females earned 73% as much as Hispanic females earned 73% as much as white females;white females;

WHAT ABOUT DIFFERENCES IN WHAT ABOUT DIFFERENCES IN EARNINGS BY RACE ?EARNINGS BY RACE ?

• For both males and females, part of the earnings gap For both males and females, part of the earnings gap is caused by differences in productivity:is caused by differences in productivity:

-- On average, whites have more education and work -- On average, whites have more education and work experience, so they receive higher wages;experience, so they receive higher wages;

• Part of the wage gap is caused by racial Part of the wage gap is caused by racial discrimination:discrimination:

-- Some black and Hispanic workers receive lower -- Some black and Hispanic workers receive lower wages for similar jobs;wages for similar jobs;

-- Others are denied opportunities to work in some -- Others are denied opportunities to work in some high-paying jobs.high-paying jobs.

WHY DO COLLEGE GRADUATES WHY DO COLLEGE GRADUATES EARN HIGHER WAGES ?EARN HIGHER WAGES ?

In 1982 the typical college graduate earned 82% In 1982 the typical college graduate earned 82% more than the typical high-school graduate. more than the typical high-school graduate.

• The The learning effect learning effect of a college education:of a college education:

Students learn the skills required for certain Students learn the skills required for certain occupations;occupations;

• The The signaling effect signaling effect or or screening effect screening effect of of college:college:

Completion of college provides a signal to Completion of college provides a signal to employers about the skills of a potential worker;employers about the skills of a potential worker;

Colleges indirectly screen job applicants, Colleges indirectly screen job applicants, separating admissible from the inadmissible.separating admissible from the inadmissible.

PUBLIC POLICY AND PUBLIC POLICY AND LABOR MARKETSLABOR MARKETS

• Minimum Wage;Minimum Wage;

• Comparable Worth;Comparable Worth;

• Occupational LicensingOccupational Licensing

MARKET EFFECTS OF THE MINIMUM WAGEMARKET EFFECTS OF THE MINIMUM WAGE

WagesWages$ per hour$ per hour

Hours of restaurant labor per day (1,000)Hours of restaurant labor per day (1,000)

4.004.00

5050

SupplySupply

DemandDemand

ee4.404.40

4949

dd

EFFECTS OF THE MINIMUM EFFECTS OF THE MINIMUM WAGEWAGE

• Good news for workers Good news for workers ----

Some workers keep their jobs and receive a Some workers keep their jobs and receive a higher wage ($4.40 an hour instead of $4.00);higher wage ($4.40 an hour instead of $4.00);

• Bad news for workers Bad news for workers ----

Some workers lose their jobs;Some workers lose their jobs;

If the typical workday for a restaurant worker If the typical workday for a restaurant worker were 5 hours, the loss of 1,000 hours of were 5 hours, the loss of 1,000 hours of restaurant work per day translates into a loss of restaurant work per day translates into a loss of 200 jobs;200 jobs;

• Bad news for consumers Bad news for consumers ----

The increase in the wage increase the cost of The increase in the wage increase the cost of producing restaurant meals, increasing the price. producing restaurant meals, increasing the price.

COMPARABLE WORTH COMPARABLE WORTH The government specifies a minimum The government specifies a minimum

wage for some occupations, typically wage for some occupations, typically occupations with a disproportionate occupations with a disproportionate number of women;number of women;

• Some women in female-dominated Some women in female-dominated occupations would earn higher wages;occupations would earn higher wages;

• Others would lose their jobs;Others would lose their jobs;

• Consumers would pay higher prices.Consumers would pay higher prices.

OCCUPATIONAL LICENSINGOCCUPATIONAL LICENSING In some occupations, the number of workers is limited by In some occupations, the number of workers is limited by

government-sanctioned licensing boards;government-sanctioned licensing boards;

For example a person may be prohibited from working in an For example a person may be prohibited from working in an occupation unless he:occupation unless he:

1. completes a given educational program;1. completes a given educational program;

2. passes an examination;2. passes an examination;

3. has a certain amount of work experience, and/or3. has a certain amount of work experience, and/or

4. has lived in a particular area for some time;4. has lived in a particular area for some time;

Among workers subject to occupational licensing are Among workers subject to occupational licensing are physicians, dentists, beauticians, plumbers, and pharmacists.physicians, dentists, beauticians, plumbers, and pharmacists.

OCCUPATIONAL LICENSINGOCCUPATIONAL LICENSING In principle, the licensing requirements are to protect In principle, the licensing requirements are to protect

consumers from incompetent workers; however, consumers from incompetent workers; however, occupational licensing is criticized on three grounds:occupational licensing is criticized on three grounds:

1. 1. Weak link between performance and licensing Weak link between performance and licensing requirementsrequirements. In many cases, licensing requirements . In many cases, licensing requirements seem arbitrary; seem arbitrary;

2. 2. Alternative means of protectionAlternative means of protection. The government could . The government could provide consumers with information about past provide consumers with information about past performance of workers, or consumers could spread word performance of workers, or consumers could spread word of worker performance;of worker performance;

3. 3. Easy restrictionsEasy restrictions. The licensing requirements increase the . The licensing requirements increase the cost of entering the occupation, decreasing the supply of cost of entering the occupation, decreasing the supply of workers and increasing the wage.workers and increasing the wage.

MARKET EFFECTS OF OCCUPATIONAL LICENSINGMARKET EFFECTS OF OCCUPATIONAL LICENSING

WagesWages$ per hour$ per hour

Hours of Pharmacist labor per day (1,000) Hours of Pharmacist labor per day (1,000)

1515

3232

Initial Supply: 5 yearsInitial Supply: 5 years of educationof education

DemandDemand

ee1717

2424

gg

New Supply: 6 yearsNew Supply: 6 years of educationof education

LABOR UNIONSLABOR UNIONS

An organized group of workers, the An organized group of workers, the main objective of which is to improve main objective of which is to improve working conditions, wages, and fringe working conditions, wages, and fringe benefits;benefits;

Workers in a union do not take wages Workers in a union do not take wages as a given, but try to increase them.as a given, but try to increase them.

UNION MEMBER SHIP IN DIFFERENT COUNTRIES IN 1990UNION MEMBER SHIP IN DIFFERENT COUNTRIES IN 1990

0 0

1010

2020

3030

4040

5050

6060

7070

8080

9090

100100% of workers in Unions% of workers in Unions

UnitedUnitedStatesStates JapanJapan

CanadaCanadaGermanyGermany

BritainBritainItalyItaly

DenmarkDenmarkSwedenSweden

Today, one-fifth of all workers in the United States Today, one-fifth of all workers in the United States belong to a union, down from one-third forty years belong to a union, down from one-third forty years ago. ago. Two Types of Unions:Two Types of Unions:

• A A craft union craft union includes workers from a particular includes workers from a particular occupation, for example, plumbers, bakers, or occupation, for example, plumbers, bakers, or electricians;electricians;

• AnAn industrial union industrial union includes all types of workers includes all types of workers from a single industry, for example, steel workers or from a single industry, for example, steel workers or auto workers.auto workers.

There are also umbrella organizations that include many There are also umbrella organizations that include many individual unions. individual unions.

The largest of these is the AFL CIO (the American Federation The largest of these is the AFL CIO (the American Federation of Labor Congress of Industrial Organizations).of Labor Congress of Industrial Organizations).

LABOR UNIONSLABOR UNIONS

THREE WAYS A UNION TRIES TO INCREASE THREE WAYS A UNION TRIES TO INCREASE WAGES OF ITS MEMBERSWAGES OF ITS MEMBERS

1. Organize and negotiate a higher wage;1. Organize and negotiate a higher wage;• Generates a tradeoff between wages and total Generates a tradeoff between wages and total

employment;employment;

2. Promote products produced by union workers;2. Promote products produced by union workers;• By increasing demand for a final good, demand is By increasing demand for a final good, demand is

increased for labor (derived demand), increasing increased for labor (derived demand), increasing equilibrium wage;equilibrium wage;

3. Impose work rules that increase the amount of 3. Impose work rules that increase the amount of labor required to produce a given quantity of labor required to produce a given quantity of output;output;

IMPERFECT INFORMATION AND EFFICIENCY WAGESIMPERFECT INFORMATION AND EFFICIENCY WAGESAsymmetric InformationAsymmetric Information

• Employers cannot always distinguish between skillful and Employers cannot always distinguish between skillful and unskillful workers and between hard workers and lazy ones.unskillful workers and between hard workers and lazy ones.

• Suppose two types of workers:Suppose two types of workers:– low skill (marginal revenue of product = $100 per day)low skill (marginal revenue of product = $100 per day)– high skill (marginal revenue of product = $200 per day)high skill (marginal revenue of product = $200 per day)

• What is an appropriate single wage ?What is an appropriate single wage ? - Suppose the opportunity cost of high-skill workers is - Suppose the opportunity cost of high-skill workers is $130 and a $130 and a

firm offers a wage of $110;firm offers a wage of $110;

- Only low skill workers will apply for jobs;- Only low skill workers will apply for jobs;

- The firm will lose money because the wage ($110) - The firm will lose money because the wage ($110) exceeds exceeds the marginal revenue of product of low-skill the marginal revenue of product of low-skill workers ($100).workers ($100).

IMPERFECT INFORMATION AND EFFICIENCY WAGESIMPERFECT INFORMATION AND EFFICIENCY WAGES

• To get some high-skill workers, the employer must To get some high-skill workers, the employer must pick a wage that exceed the opportunity cost ($130);pick a wage that exceed the opportunity cost ($130);

• As firm increases its wages:As firm increases its wages:

- It attracts more high-skill workers;- It attracts more high-skill workers;

- the average productivity of its workforce will - the average productivity of its workforce will increase;increase;

- depending on responses of two types of workers to - depending on responses of two types of workers to higher wage, a firm could actually make more profit by higher wage, a firm could actually make more profit by offering a higher wage;offering a higher wage;

Paying efficiency wages Paying efficiency wages

The firm pays higher wages to increase the average The firm pays higher wages to increase the average productivity of its workforce.productivity of its workforce.

HIGHER WAGES AT FORD MOTOR HIGHER WAGES AT FORD MOTOR COMPANYCOMPANY

When Ford raised daily wage from $3 to $5, When Ford raised daily wage from $3 to $5, the average productivity of Ford workers the average productivity of Ford workers increased by over 50%, a result of several increased by over 50%, a result of several change in the workforce:change in the workforce:

• The pool of job applicants improved, so The pool of job applicants improved, so Ford could choose better workers;Ford could choose better workers;

• Fewer workers were fired for shirking;Fewer workers were fired for shirking;

• Fewer workers quit voluntarily;Fewer workers quit voluntarily;

• The rate of absenteeism decreased.The rate of absenteeism decreased.

MONOPSONYMONOPSONY There is a single buyer of a particular There is a single buyer of a particular

market.market.• Monopsonist faces positively-sloped supply for labor;Monopsonist faces positively-sloped supply for labor;• It is the only employer, so its hiring decisions affect the It is the only employer, so its hiring decisions affect the

market wage;market wage;• Monopsinist picks a point along the market supply curve Monopsinist picks a point along the market supply curve

for labor;for labor;• The monopsonist will control its labor costs by picking a The monopsonist will control its labor costs by picking a

relatively low wage, in the process of hiring a relatively relatively low wage, in the process of hiring a relatively small quantity of labor.small quantity of labor.

MONOPOLY VERSUS MONOPSONYMONOPOLY VERSUS MONOPSONY

MONOPOLYMONOPOLY MONOPSONYMONOPSONYSingle seller output;Single seller output; Single buyer input;Single buyer input;

High price output;High price output; Low price input;Low price input;

Small quantity of output;Small quantity of output; Small quantity of input;Small quantity of input;

• A Monopsony leads to an artificially low wage and A Monopsony leads to an artificially low wage and a union leads to an artificially high wage;a union leads to an artificially high wage;

• A market with both union and monopsony will A market with both union and monopsony will have a wage somewhere between the two have a wage somewhere between the two extremes.extremes.

labor market in the long run long run -- a period of time over which firms can enter and leave the...

Documents

hours of leisure time

labor market

quantity of labor

hours of extra leisure

fewer hours

number of hours

wage price of labor

hour hours of nursing