Unions, Monopsony, and Imperfect Information

3. Unions, Monopsony, and Imperfect Information P R E P A R E D B Y Why do janitors employed by law firms earn twice as much as janitors employed by hotels? Economics: Principles, Applications, and Tools O’Sullivan, Sheffrin, Perez 6/e. FERNANDO QUIJANO, YVONN QUIJANO, AND XIAO XUAN XU

4. A P P L Y I N G T H E C O N C E P T S Is there a trade-off between union wages and the number of union jobs? Truckers Trade Off Wages and Jobs How does competition in the product market affect union wages? Competition Reduces Trucker Wages Do firms face a positively sloped labor-supply curve? Pubs and the Labor-Supply Curve When is it profitable to pay an above-market wage? Why do Law Firms Pay More for Janitors and Secretaries? 1 2 3 4

5. LABOR UNIONS 33.1 ●labor unionA group of workers organized to increase job security, improve working conditions, and increase wages and fringe benefits. ●craft unionA labor organization that includes workers from a particular occupation, for example, plumbers, bakers, or electricians. ●industrial unionA labor organization that includes all types of workers from a single industry, for example, steelworkers or autoworkers. ●collective bargainingNegotiations between a union and a firm over wages, fringe benefits, job security, and working conditions.

6. LABOR UNIONS 33.1 A Brief History of Labor Unions in the United States  FIGURE 33.1Unionization Rates in the United States and Other Countries

7. LABOR UNIONS 33.1 A Brief History of Labor Unions in the United States • The states and the federal government have empowered labor unions. The most important labor legislation gave workers the right to form unions, but limited their power: • The National Labor Relations Act (Wagner Act) of 1935 guaranteed workers the right to join unions and required each firm to bargain with a union formed by a majority of its workers.

8. LABOR UNIONS 33.1 A Brief History of Labor Unions in the United States • The Labor Management Relations Act (Taft–Hartley) of 1947 gave government the power to stop strikes that “imperiled the national health or safety” and allowed states to pass right-to-work laws. ●right-to-work lawsLaws that prohibit union shops, where union membership is required as a condition of employment.

9. LABOR UNIONS 33.1 A Brief History of Labor Unions in the United States • The Labor Management Reporting and Disclosure Act (Landrum–Griffin Act) of 1959 was a response to allegations of corruption and misconduct by union officials. This act guaranteed union members the right to fair elections, made it easier for them to monitor union finances, and made the theft of union funds a federal offense.

10. LABOR UNIONS 33.1 Labor Unions and Wages • An increase in the wage decreases the quantity of labor demanded because of the output effect and the input-substitution effect: • Output effect.An increase in the wage increases the cost of production, and a firm will pass on the higher cost to consumers by increasing its product price. Consumers respond to the higher price by purchasing a smaller quantity, so the firm will produce less output and employ fewer workers. • Input-substitution effect.An increase in the wage increases the cost of labor relative to the cost of capital, and the firm will substitute capital for labor, reducing the quantity of labor demanded.

11. 1 A P P L I C A T I O N TRUCKERS TRADE OFF WAGES AND JOBS APPLYING THE CONCEPTS #1: Is there a trade-off between union wages and the number of union jobs? • The deregulation of the trucking industry in the 1980s allowed many small firms to enter the market, and many of the new firms were not unionized. As a result, the demand for union truckers decreased, and unions faced a trade-off between wages and employment.  FIGURE 33.2Deregulation of Trucking and the Trade-Off between Employment and Wages • The entry of nonunion firms decreased the demand for union truckers, shifting the demand curve to the left. • At a wage of $20, the quantity of union truckers demanded would have decreased from 526,000 (point a) to 263,000 (point b). • Union truckers accepted a lower wage of $14, generating total union employment of 439,000 (point c).

12. LABOR UNIONS 33.1 Market Structure and the Wage–Jobs Trade-Off • When will the output effect be relatively large? • Large fraction of costs from labor.If labor is responsible for a relatively large fraction of production costs, an increase in the wage will cause a relatively large increase in the product price and, thus, a relatively large decrease in output and the quantity of labor demanded. • Elastic demand.If the price elasticity of demand for the product is relatively large, a given increase in price will cause a relatively large reduction in output.

13. LABOR UNIONS 33.1 The Effects of Unions on Worker Productivity and Turnover ●featherbedding Work rules that increase the amount of labor required to produce a given quantity of output.

14. 2 A P P L I C A T I O N COMPETITION REDUCES TRUCKER WAGES APPLYING THE CONCEPTS #2: How does competition in the product market affect union wages? • Two sectors of the trucking industry differ in the degree of competition.In the full-truckload (TL) sector, firms transport full truckloads of freight, with direct trips from a shipper to a destination: • Entry is relatively easy in the TL sector because the production process is so simple: All you need to enter the market is a truck and a valid license. • Result: Firms in the TL sector are small and numerous. An increase in the union wage causes a relatively large loss of union jobs, so we expect a small gap between union and nonunion wages. • The less-than-truckload (LTL) sector handles smaller shipments, with each truck delivering multiple shipments: • There is less competition in the LTL market, and the demand facing each firm is relatively inelastic. • Result: An increase in the union wage leads to a relatively small loss of union jobs, so we expect a relatively large gap between union and nonunion wages.

15. MONOPSONY POWER 33.2 ●monopsony A market in which there is a single buyer of an input. Marginal Labor Cost Exceeds the Wage ►FIGURE 33.3The Supply of Labor and Marginal Labor Cost for a Monopsonist To hire more workers, the monopsonist must pay a higher wage, so the marginal labor cost exceeds the wage. To hire the eighth worker, the firm increases the wage from $10 (point a) to $12 (point b). The marginal labor cost for the eighth worker is $26 (point c), equal to $12 paid to the eighth worker plus $14 extra paid to the seven original workers, each of whom receives $2 more per hour.

16. MONOPSONY POWER 33.2 Marginal Labor Cost Exceeds the Wage ●marginal labor cost The increase in a firm’s total labor cost resulting from one more unit of labor.

17. MONOPSONY POWER 33.2 Picking a Quantity of Labor and a Wage M A R G I N A L P R I N C I P L E Increase the level of an activity as long as its marginal benefit exceeds its marginal cost. Choose the level at which the marginal benefit equals the marginal cost. ►FIGURE 33.4The Hiring Decision of a Monopsonist The monopsonist satisfies the marginal principle at point a, where the marginal benefit of labor (marginal revenue product) equals the marginal labor cost, so the firm hires 40 workers. The labor-supply curve indicates that to hire 40 workers, the monopsonist must pay a wage of $4 (point b). The perfectly competitive equilibrium is shown by the intersection of the demand curve (marginal-revenue product curve) and the supply curve at point c. t

18. MONOPSONY POWER 33.2 Monopsony versus Perfect Competition

19. MONOPSONY POWER 33.2 Monopsony and a Minimum Wage ►FIGURE 33.5A Minimum Wage Increases Employment by a Monopsonist With a minimum wage, the labor-supply curve is horizontal at the minimum wage ($7) up to the point where the minimum- wage line intersects the original supply curve. For the first 70 workers, the marginal labor cost for the monopsonist equals the minimum wage. The monopsonist chooses point e, where the marginal benefit of labor (the marginal revenue product) equals the marginal labor cost. The minimum wage increases the quantity of labor hired from 40 workers to 50.

20. MONOPSONY POWER 33.2 Monopsony and the Real World British economist Joan Robinson (1903–1983), a leader in the modeling of imperfect competition, listed several reasons why a firm could face a positively sloped labor-supply curve. With a positively sloped supply curve, the marginal labor cost exceeds the wage, and the quantity of labor will be less than occurs in a perfectly competitive market.

21. 3 A P P L I C A T I O N PUBS AND THE LABOR-SUPPLY CURVE APPLYING THE CONCEPTS #3: Do firms face a positively sloped labor-supply curve? • Labor economist Alan Manning provides some unconventional evidence of positively sloped labor-supply curves. He notes that “people go to the pub to celebrate when they get a job, rather than greeting the news with a shrug of the shoulders. . . .” In other words, a new job is a big deal. • If a pub celebration seems like the obvious response to a new job, consider what happens when each firm faces a horizontal supply curve for labor, with a single market wage. In this perfectly competitive environment, a worker won’t celebrate a new job because the new job pays the same as any other job the worker could get. • Suppose instead that the supply curve facing a firm is positively sloped. To hire more workers, the firm must pay a higher wage. Most workers will receive a wage that exceeds the opportunity cost of their time, so each worker gets a producer surplus.

22. IMPERFECT INFORMATION AND EFFICIENCY WAGES 33.3 The Mixed Market for Labor In a perfectly competitive labor market, competition among firms will bid up the wage to equal the marginal revenue product (MRP) of hired workers.

23. IMPERFECT INFORMATION AND EFFICIENCY WAGES 33.3 The Mixed Market for Labor In this market with asymmetric information, there is actually a second equilibrium wage, equal to $60.

24. IMPERFECT INFORMATION AND EFFICIENCY WAGES 33.3 The Mixed Market for Labor ●paying efficiency wages The practice of paying a higher wage to increase the average productivity of the workforce. • Two other reasons for paying efficiency wages: • Reduce shirking. When a high wage is combined with a policy of firing workers who shirk—putting in less than a full effort—the firm can encourage hard work. The penalty associated with being fired will be much greater if the firm pays a wage above the worker’s opportunity cost. • Reduce turnover. A wage above the worker’s opportunity cost will reduce worker turnover.

25. 4 A P P L I C A T I O N WHY DO LAW FIRMS PAY MORE FOR JANITORS AND SECRETARIES? APPLYING THE CONCEPTS #4: When is it profitable to pay an above-market wage? As we saw in the chapter opener, janitors employed by law firms earn twice as much as equally productive janitors employed by hotels. The same sort of wage gap occurs for other low-skilled workers such as secretaries and truckers. The key difference between a law firm and a hotel is that on average, workers in the law firm are more productive and are paid more than workers in a hotel. In the law firm, supervision of janitors comes at the expense of supervising and managing highly paid legal and financial experts. Paying efficiency wages—wages above the prevailing market rate—for janitors and clerical workers reduces supervisory time by reducing shirking, absenteeism, and turnover among low-skilled workers.

26. K E Y T E R M S labor union marginal labor cost monopsony paying efficiency wages right-to-work laws collective bargaining craft union featherbedding industrial union