chapter 12copyright ©2009 by south-western, a division of cengage learning. all rights reserved 1...
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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
Chapter 12 Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved 2
Labor Supply
LO1
Individual labor supply– Willing and able– Many possible uses– Over the realistic range of wages– Depends on
• Abilities• Tastes• Opportunity cost
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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
Chapter 12 Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved 4
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
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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
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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
Chapter 12 Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved 7
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
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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
Chapter 12 Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved 9
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
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LO2
Why Wages Differ
Differences in
Training, Education, Age
Experience
Ability
Risk
Geographic differences
Discrimination
Union membership
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Exhibit 3LO2
Average Hourly Wage by Occupation, U.S, May 2006
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Exhibit 4LO2
Age, Education, and Pay
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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
Chapter 12 Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved 14
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
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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
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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
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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
Chapter 12 Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved 18
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’.
Chapter 12 Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved 19
Exhibit 6LO4M
edia
n W
eekl
y E
arn
ing
are
Hig
her
for
Unio
n
Than N
onu
nio
n
Work
ers
Chapter 12 Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved 20
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
Chapter 12 Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved 21
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
Chapter 12 Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved 22
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’’.
Chapter 12 Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved 23
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
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Exhibit 8LO4
Unionization Rates by Age and Gender
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LO4C
ase
Stu
dy
Dock Unions Thrive
Two longshoremen unions 100,000 members Salary: $120,000/year
Technology Skilled crane workers Computer tracking