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Labor Markets and Labor Unions
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© 2003 South-Western/Thomson Learning
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Labor Supply
As a resource supplier, a person has a labor supply curve for each of the many possible uses of their labor
To some markets, the quantity supplied is zero over the realistic range of wagesAn individual’s labor supply to each market depends, among other things, on their ability, their taste for the job in question, and the opportunity cost of their time, assuming wages in other markets remain constant
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Labor Supply and Utility Maximization
Individuals attempt to use their scarce resources so as to maximize their utility
Two sources of utility are of special interest to us here
The consumption of goods and servicesThe enjoyment of leisure
The utility derived from consuming goods and services is obvious and serves as the basis for consumer demand
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Labor Supply and Utility Maximization
Another valuable source of utility is leisure
Leisure is a normal good that, like other goods, is subject to the law of diminishing marginal utility
Therefore, the more leisure time a person has, the less they value an additional unit of it
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Three Uses of Time
Individuals can use their time in three ways
They can undertake market work selling your time in the labor market in return for incomeThey can undertake nonmarket work using their time to produce their own goods and servicesThey can spend time as leisure all nonwork uses of their time
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Work and Utility
Work is not a pure source of utility, rather it is a source of disutility the opposite of utility
Work is also subject to increasing marginal disutility the more a person works, the greater the marginal disutility of working another hour
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Work and Utility
Net utility of work -- the utility of consumption made possible through work minus the disutility of the work itself – usually makes some amount of work an attractive use of some of an individual’s time
In the case of market work, the individual’s income buys goods and services
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Utility MaximizationWithin the limits of a 24-hour day, seven days a week, individuals can balance their time among market work, nonmarket work, and leisure to maximize utility
The rational consumer will attempt to maximize utility by allocating their time so that the expected utility of the last unit of time spent in each activity is identical MUMW = MUL = MUNMW
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ImplicationsFirst, consider the choice among market work, nonmarket work, and leisure
The higher your market wage, other things constant, the higher your opportunity cost of leisure and nonmarket work
Among those earning the same market wage, people who are handy around the house will do more work for themselvesThe higher the expected earnings right out of high school, other things constant, the higher the opportunity cost of attending college
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Wages and Individual Labor Supply
To explain why an individual will initially increase the quantity of labor supplied and then eventually reduce the quantity of labor supplied, we need to consider the impact of wage increases on the allocation of timeAn increase in the wage affects an individual’s choice between market work and other uses of time in two ways
Substitution EffectIncome Effect
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Substitution Effect
A higher wage provides an individual with an incentive to work more, since each hour of work now buys more goods and services
As the wage increases, you substitute market work for other activities substitution effect of a wage increase
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Income EffectA higher wage also means a higher income for the same number of hours the demand for all normal goods increasesSince leisure is a normal good, a higher income increases the demand for leisure the allocation of time to market work declinesThe income effect of a wage increase tends to reduce the quantity of labor supplied to market work
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Flexibility of Hours WorkedThe model constructed previously assumes that workers have some control over the number of hours they work
All of the following factors support this assumption
Opportunities for part time work and overtimeControl over timing and length of vacationsHow long a person stays in school and when they retire
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Nonwage Determinants of Labor Supply
The supply of labor to a particular market depends on a variety of factors other than the wage
Other sources of income
Nonmonetary factors
Value of job experience
Taste for work
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Other Sources of Income
The willingness to supply time to a labor market depends on income on other sources, including prior savings, borrowing, family support, and similar sources
More generally, wealthy people have less incentive to work
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Nonmonetary FactorsLabor is a special kind of resource
Unlike capital and land, which can be supplied regardless of the whereabouts of the resource owner, the supplier of labor must be in the same place where the work is performed
Because the individual must be physically present to supply labor, such nonmonetary factors become important
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Nonmonetary Factors
Nonmonetary factorsDifficulty of the job the more difficult the job, the higher the wage must be, all other things being equalQuality of the work environment the more attractive the working conditions, the more labor an individual will supply to that particular market, other things constantStatus of the position the higher the status, the more labor an individual will supply to that market, other things constant
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Value of Job ExperienceAll else equal, the individual is more inclined to take a job that provides valuable experience
Some are willing to accept relatively low wages now because of the promise of higher wages later
Generally speaking, the more a job enhances future earning possibilities, the greater the supply of labor to that occupation, other things constant
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Taste for WorkJust as the tastes for goods and services differ among consumers, the tastes for work also differ among labor suppliers
Some prefer physical labor while others prefer desk job
Economists argue that tastes are relatively stable and individuals will supply more labor to jobs they like
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Market Supply of LaborThe supply of labor to a particular market is the horizontal sum of all the individual supply curves adds the quantities supplied by each worker at each particular wage
Since individuals have different opportunity costs and tastes for work, and some individual labor supply curves may not bend backward at all, the market supply curve slopes upward
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Why Wages Differ
Wage differences across markets trace to differences in a number of factors
Differences in training, education, age, and experienceDifferences in abilityDifferences in riskGeographic differencesJob discriminationUnion membership
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Training, Education, Age, and Experience
Some jobs pay more because they require a long and costly training period fewer individuals are willing to incur the time and expense required smaller market supply
However, extensive training increases the productivity of labor increased demand for these skills
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Differences in Ability
Because they are more able and talented, some individuals earn more than others with the same training and education
From lawyers, to executives, to professional athletes, pay differences often reflect differing abilities
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Differences in Risk
Research indicates that jobs with a high probability of injury or death pay more, other things constant
Workers also earn more, other things constant, in seasonal jobs such as construction, where the risks of unemployment are greater
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Geographic Differences
People have a strong incentive to sell their resources in the market where they earn the most, other things constant
As a result, they tend to migrate to areas, regions, or countries where the pay is higher wage differences
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Job Discrimination and Union Membership
Some individuals earn different wages because of racial or gender discrimination in the job market
Other things equal, members of organized labor tend to earn more than nonmembers
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UnionsDespite media attention, only about one in seven U.S. workers belongs to a labor union
The overwhelming share of union agreements are reached without a strike
We need to examine the tools that unions employ to seek higher pay for their members
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Types of UnionsA labor union is a group of workers who join together to improve their terms of employment
Craft unions are confined to those with a particular skill, or craft
American Federation of Labor was a national organization of craft unions founded in 1886 under Samuel GompersIs not a union itself but rather an organization of national unions, with each retaining its autonomy
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Types of UnionsThe Clayton Act of 1914 exempted labor unions from antitrust laws unions at competing companies could legally join forces in an attempt to raise wages
Unions were also tax exempt
Membership jumped during World War I but dropped in half between 1920 and 1933, as the government retreated from its support of union efforts
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Types of UnionsThe Congress of Industrial Organizations (CIO) was formed in 1935 to serve as a national organization of unions in mass production industries
The CIO consists of unions whose membership embraced all workers in a particular industry
These industrial unions included all types of workers in an industry
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Collective Bargaining Collective bargaining is the process by which representatives of union and management negotiate a mutually agreeable contract specifying wages, employee benefits, and working conditions
Mediator is an impartial observer who listens to both sides separately and then suggests how each side could adjust its position to resolve differences
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Collective Bargaining
Mediator has no power to impose a settlement on either party
Binding arbitration is a process whereby a neutral third party evaluates both sides of the dispute and issues a ruling that both parties must accept
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The StrikeA major source of union power in the bargaining relationship is the threat of a strike, which is the union’s attempt to withhold labor from the firm
The purpose of a strike is to stop production, thereby forcing the firm to accept the union’s position
However, strikes also impose significant costs on union members
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Union Wages and EmploymentA menu of union desires includes higher wages, more benefits, greater job security, better working conditions, and so on
To keep the analysis manageable, suppose we look at the three ways that a union can try to increase wages
By forming an inclusive, or industrial unionBy forming an exclusive, or craft unionBy increasing the demand for union labor
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Inclusive, or Industrial Unions
With the inclusive, or industrial approach, the union tries to negotiate an industry-wide wage for each class of labor
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Effect of Union Wage Floor
With the inclusive, or industrial union, which negotiates with the entire industry, the wage rate is higher and total employment lower than would be in the absence of a union
Those who cannot find union employment will look for jobs in the nonunion sector the nonunion wage will be driven downward
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Effect of Union Wage FloorWages are relatively higher in the union sector for two reasons
First, because unions bargain for a wage that exceeds the market-clearing wage
Second, because those unable to find employment in the union sector crowd into the nonunion sector
Unions are most successful at raising wages in less-competitive industries
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Exclusive, or Craft, Unions
One way to increase wages while avoiding an excess quantity of labor supplied is for the union to somehow reduce the supply of labor
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Exclusive, or Craft UnionsWhereas wage setting is more typical of the industrial union, restricting supply is more typical of craft unions
The restrictions used are usually defended on the grounds that they protect the public
In reality, the are little more than self-serving attempts to increase wages and incomes
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Increasing the Demand for Labor
A third way to increase the wage is to increase the demand for union labor by somehow shifting the labor demand curve outward
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Increasing the Demand for Labor
Ways in which unions try to increase the demand for union labor
Increase demand for union-made goodsRestrict supply of nonunion-made goodsIncrease productivity of union labor• Some claim that the efficiency with which unions
structure and monitor the labor-management relationship increases the demand for union labor
• According to this theory, unions increase worker productivity by minimizing conflicts, resolving differences, and monitoring workers
• If this is indeed true, the demand for union labor should increase
Featherbedding
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FeatherbeddingFeatherbedding is an attempt to ensure that more union labor is hired than producers would prefer
For example, union rules require that each Broadway theater have a permanent “house” carpenter, electrician, and property manager
Once the show run begins, these workers appear only on payday
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FeatherbeddingFeatherbedding does not create a true increase in the demand, in the sense of shifting the demand curve to the right
Instead, it forces firms to hire more labor than they really want or need, thus moving the firm to a point to the right of its true labor demand curve
The union tries to limit a firm to an all-or-none choice, either hire the number of workers the union requires, or none
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Recent Trends in Union Membership
In 1955, about one-third of wage and salary workers belonged to unions
Since then, union membership as a fraction of the work force has declined now only one in seven belongs to a union
Government workers make up nearly half of all union members typical union member is a schoolteacher
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Recent Trends in Union Membership
Compared with other industrialized countries, the United States ranks relatively low in the extent of unionization
Exhibit 6 illustrates U.S. union membership rates by age and gender in 2000
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Recent Trends in Union Membership
Union membership rates vary greatly across states
Rates tend to be highest in the Northeast United States and lowest in the South
Decline in union membership is due partly to structural changes in the U.S. economy
Employment in the industrial sector has been declining while increasing in the service sectorAnother factor contributing to the decline has been the growth in foreign competitionThe near disappearance of strikes