Ch 12 labor markets and labor unions micro econ4

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Chapter 12 ECON4 William A.

McEachern

1

Labor

Markets

and Labor

Unions


Labor Supply• Individual labor supply

– Willing and able– Many possible uses– Over the realistic range of wages– Depends on

• Abilities• Tastes• Opportunity cost

2


Labor Supply & Utility Maximization• Sources of utility

– Consumption of goods and services• Foundation for demand

– Enjoyment of leisure • Normal good• Diminishing marginal utility

3


Labor Supply & Utility Maximization• Three uses of time

– Market work• Time sold as labor

– Nonmarket work• Time spent getting an education or on do-it-

yourself production for personal consumption

– Leisure • Time spent on non-work activities

4


Labor Supply & Utility Maximization• Market and nonmarket work

– Source of disutility– Increasing marginal disutility– Net utility of work

• Utility of the additional consumption possibilities from earnings minus the disutility of the work itself

5


Labor Supply & Utility Maximization• Time allocation process to maximize

utility– Expected MU of last unit spent in each

activity is identical• Implications

– The higher your market wage• The higher your opportunity cost of leisure

and nonmarket work

6


Wages & Individual Labor Supply• Substitution effect of a higher wage

– Increased opportunity cost of leisure and nonmarket work• Substitute market work for other activities• Work more

• Income effect of a higher wage– Higher income

• Increased demand for normal goods: leisure

– Work less

7


Exhibit 1

8

Your Labor Supply Curve for the Summer

S

200 4030 48 6055

Hours of labor per week

$1514

1213

1011

89

Wag

e ra

te p

er h

our

When the substitution effect of a wage increase outweighs the income effect, the quantity of labor you supply increases with the wage. Above some wage, shown here at $13 per hour, the income effect dominates. Above that wage, your supply curve bends backward. Further increases in the wage reduce the quantity of labor you supply.


Wages & Individual Labor Supply• Individual labor supply

– Backward bending– Income effect of higher wage

• Eventually dominates substitution effect

• Flexibility of hours worked– Part-time; overtime– Timing and length of vacation– School– Retire

9


Labor Supply • Nonwage determinants of labor supply

– Other sources of income• Higher income, less incentive to work

– Nonmonetary factors• Difficulty of the job• Quality of work environment• Status of the position

– Value of job experience• Better - the greater the supply of labor

10


Labor Supply • Nonwage determinants of labor supply

– Taste for work• Workers seek jobs in a way that tends to

minimize the disutility of work

• Market supply of work– Horizontal sum of all the individual supply

curves

11


Exhibit 2

12

Deriving the Market Labor Supply Curve From Individual Labor Supply Curves

Wag

e ra

te

Labor0

SA

(a) Worker A

Labor0

SB

(b) Worker B

Labor0

SC

(c) Worker C

Labor0

S

(d) Market supply

The individual labor supply curve in panel (a) bends backward. The market supply curve, however, may still slope upward over the relevant range of wages.


Why Wages Differ• Differences in

– Training, Education, Age– Experience– Ability – Risk

• Geographic differences• Discrimination• Union membership

13


Exhibit 3

14

Average Hourly Wage by Occupation in the U. S.


Exhibit 4

15

Age, Education, and Pay

For every age group, workers with more education earn more. The premium paid for years of experience increases more for those with more education.


Unions and Collective Bargaining• Labor union

– Group of workers– Join to improve terms of employment

• Craft union– Particular skill, craft

• Industrial unions– Unskilled, semiskilled, and skilled

workers in an industry

16


Unions and Collective Bargaining

• Collective bargaining– The process by which union and

management negotiate a labor agreement

• Mediator– An impartial observer who helps resolve

differences between union and management

17


Unions and Collective Bargaining

• Binding arbitration– Negotiation in which union and

management must accept an impartial observer’s resolution of a dispute

• Strike– A union’s attempt to withhold labor from a

firm to halt production

18


Union Wages and Employment• Union desires

– Higher wages– More benefits– Greater job security– Better working conditions

19


Union Wages and Employment• Unions can increase wages

– Forming an inclusive (industrial) union– Forming an exclusive (craft) union– Increasing the demand for union labor

20


Inclusive, or Industrial Unions• Industrial union:

– Negotiate industry-wide wages for each class of labor• Higher wage (wage floor)• Lower employment

• Non-union sector– Increased supply of labor– Lower wages

21


Exhibit 5

22

Effects of Labor Union’s Wage Floor

S

s

Without a labor union, the market wage is W in panel (a). At that wage, each firm can hire as much labor as it wants. The individual firm in panel (b) hires more labor until the marginal revenue product equals the market wage, W. Each firm hires e units of labor, and industry employment is E. If a union negotiates a wage W’, which is above the market wage W, the supply curve facing the firm shifts up from s to s’. Each firm hires less labor, e’, so industry employment falls to E’. At the union wage there is now an excess quantity of labor supplied equal to E”–E’.

(a) Industry

Wag

e ra

te

W’

W

(b) Firm

D

Wag

e ra

te

W’

W

d=Marginal

revenue product

Labor per periode0 e’Labor per periodE0 E’’E’

s’a


Inclusive, or Industrial Unions• More competitive product markets

– Unions are less successful at raising wages

– Manufacturing and retail trade• Less competitive product markets

– Unions have greater success at raising wages

– Government, transportation, and construction

23


Exhibit 6

24

Median Weekly Earnings Are Higher for Union Than Nonunion Workers Unions are more

successful at raising wages in less competitive markets, such as government, transportation, and construction. In more competitive markets, such as retail trade, employers cannot easily pass along higher union wages as higher product prices. Nonunion firms can enter the industry, pay workers market wages, which are below union wages, and attract customers by selling the product for less.


Exclusive, or Craft Unions• Reduce the labor supply

– Restrict union membership• Higher initiation fees• Longer apprenticeship periods• Tougher qualification exams• More restrictive licensing requirements

– Force all employers in the industry to hire only union members

– Higher wage and lower employment

25


Increasing Demand of Union Labor• Increase demand for union-made goods

– Derived demand• Restrict supply of nonunion-made goods

– Derived demand• Increase productivity of union labor• Featherbedding

– Forcing employers to hire more union workers than they want or need

26


Exhibit 7

27

Effect of Reducing Labor Supply or Increasing Labor Demand

D’’

S’ S S

(a) Reducing labor supply

Wag

e ra

te

W’

W

(b) Increasing labor demand

D

Wag

e ra

te

W’’

W

D

Labor

per periodE’’0 E

Labor

per periodE0 E’

If a union can successfully restrict labor supply in an industry, the supply curve shifts to the left from S to S’, as in panel (a). The wage rises from W to W’, but at the cost of reducing employment from E to E’. If a union can increase the demand for union labor, as in panel (b), the demand curve shifts right from D to D”, raising the wage and increasing employment.


Trends in Union Membership• 1955

– 35% of US workers in unions• 2009

– 12% of US workers in unions • 37% of government workers are unionized• 7% of private sector workers are unionized

28


Exhibit 8

29

Unionization Rates by Age and Gender

Unionization rates for men, shown by the green bars, are higher than the rates for women, in part because men work more in manufacturing and women work more in the service sector, where union membership is lower. The highest membership rates are for middle-aged men.


Trends in Union Membership• Declining rates of membership

– More right-to-work states• Workers in unionized companies do not

have to join the union or pay union dues

– Structural changes in U.S. economy• Declined employment in industrial sector

– Growth in market competition• Unionized firms cannot pass on higher labor

costs as higher prices

– Near disappearance of the strike30

Economy & Finance

Ch 12 labor markets and labor unions micro econ4