Chapter 12Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved 1 ECON Designed by Amy McGuire, B-books, Ltd. McEachern

Chapter 12 Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved 1

ECON

Designed byAmy McGuire, B-books, Ltd.

McEachern 2008-2009

12

CHAPTERLabor Markets and Labor Unions

Micro


Labor Supply

LO1

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

• Abilities• Tastes• Opportunity cost


Labor Supply and Utility Maximization

LO1

Utility– Goods and services– Leisure

• Normal good• Diminishing marginal utility

Three uses of time– Market work– Nonmarket work– Leisure


Labor Supply and Utility Maximization

LO1

Market and nonmarket work– Disutility– Increasing marginal disutility– Net utility of work

Maximize utility– Allocate time: expected MU of last unit

spent in each activity is identical


Wages and Individual Labor Supply

LO1

Substitution effect of wage increase– Increased opportunity cost of

• Leisure; nonmarket work– Substitute market work for other activities– Increase Q supplied to market work

Income effect of wage increase– Higher income

• Increased D for normal goods: leisure– Reduce Q supplied to market work


Exhibit 1LO1

Individual Labor Supply Curve for Unskilled WorkS

200 4030 48 6055

Hours of labor per week

$1413

1112

910

78

Wag

e ra

te p

er h

our

Substitution effect outweighs the income effect : quantity of labor a worker supplies increases with the wage

Above some wage, shown here at $12 per hour, the income effect dominates: S curve bends backward. Further increases in the wage reduce the quantity of labor supplied


Wages and Individual Labor Supply

LO1

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


Nonwage Determinants of Labor Supply

LO1

– Other sources of income– Nonmonetary factors

• Difficulty of the job• Quality of work environment• Status of the position

– Value of job experience– Taste for work

Market supply of work– Horizontal sum of all the individual

supply curves


Exhibit 2LO2

Deriving the Market Labor Supply Curve from Individual Labor Supply Curves

Wag

e ra

te

Labor0

SA

(a) Individual A

Labor0

SB

(b) Individual B

Labor0

SC

(c) Individual C

Labor0

S

(d) Market supply


LO2

Why Wages Differ

Differences in

Training, Education, Age

Experience

Ability

Risk

Geographic differences

Discrimination

Union membership


Exhibit 3LO2

Average Hourly Wage by Occupation, U.S, May 2006


Exhibit 4LO2

Age, Education, and Pay


LO2C

ase

Stu

dy

Winner-Take-All Labor Markets

Key individuals Critical to success Richly rewarded Generate a high MRP

Initially Entertainment and

pro sports Now

Management, law, banking, finance, academia


Unions and Collective Bargaining

LO3

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


Collective Bargaining, Mediation, Arbitration

LO3

Collective bargaining

– Negotiation; Mutually agreeable contract Mediation

– If negotiations reach an impasse

– Public interest Arbitration - Neutral third part

– Evaluates

– Issues a ruling Strike

– Major source of union power


LO4

Union desires• Higher wages• More benefits• Greater job security• Better working conditions

Unions can increase wages– Inclusive (industrial) union– Exclusive (craft) union– Increase D for union labor

Union Wages and Employment


LO4

Union: – Negotiate industry-wide wages for

each class of labor• Higher wage (wage floor)• Lower employment

Non-union sector– Increased supply– Lower wages

Inclusive, or Industrial Unions


Exhibit 5LO4

Effects of Labor Union’s Wage FloorS

s

(a) Industry

Wag

e ra

te

W’

W

(b) Firm

DW

age

rate

W’

W

d=Marginal

revenue product

Labor

per periode0 e’Labor

per periodE0 E’’E’

s’a

No union: market wage is W. Each firm can hire as much labor as it wants. The firm hires more labor until MRP=W: e units of labor; industry employment is E.Union negotiates wage W’, above the market wage W; the supply curve facing the firm shifts up from s to s’. Each firm hires less labor, e’; industry employment falls to E’; excess quantity of labor supplied = E’’-E’.


Exhibit 6LO4M

edia

n W

eekl

y E

arn

ing

are

Hig

her

for

Unio

n

Than N

onu

nio

n

Work

ers


LO4

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– Lower employment

Exclusive, or Craft Unions


LO4

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

Increasing Demand of Union Labor


Exhibit 7LO4

Effect of Reducing Labor Supply or Increasing Labor Demand

If a union can successfully restrict labor supply in an industry, the supply curve shifts from S to S’.

Wage: rises from W to W’

Employment: drops from E to E’.

If a union can increase the demand for union labor, the demand curve shifts from D to D’’.

Wage: raises from W to W’’

Employment: raises from E to E’’.


LO4

1955– 35% of US workers in unions

2006– 12% of US workers in unions– More right-to-work states– Structural changes in U.S. economy– Growth in market competition– Declined number of strikes

Recent Trends in Union Membership


Exhibit 8LO4

Unionization Rates by Age and Gender


LO4C

ase

Stu

dy

Dock Unions Thrive

Two longshoremen unions 100,000 members Salary: $120,000/year

Technology Skilled crane workers Computer tracking

Documents

Chapter 12Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved 1 ECON Designed by Amy McGuire, B-books, Ltd. McEachern