5.3. Monopoly in the product market

1. 5.3. Monopoly in the product market • So far firms were “price-takers” and Dccurve was horizontal (at the firm level!) • But under monopoly in the product market Dc will now have (-) slope • What was this supposed to mean? • If Yc goes up Pc has to go down • The MRPL drops because of two reasons: • Law of diminishing returns (as in perfect competition in product market) • Businessmen will have to cut prices down in order to produce/sell more  monopoly entails a social loss (higher P and smaller Y)

2. 5.3. Monopoly in the product market • Given that the monopolist faces a negatively sloped DC, his DL will be less elastic  MRPL < VMPL • This inequality implies a loss of social efficiency, even with perfect competition in the labor market! • We have: • DL of monopolist is less elastic • Still, he behaves as the perfect competitor  MRPL = MWC • Pays same wage as perfect competitor (no unions) • Badly utilized resources (loss of efficiency)

3. 5.4. Monopsony in the labor market • The opposite of PC in the LM • Now  one buyer of L • Before (PC)  workers had lots of choices, as a result firms had to pay We (eq.); now there is one buyer/firm • Other monopsony conditions might arise due to: business loyalty, family obligations, fear to the unknown • Just as the monopolist can increase p, the monopsonist can lower W‒both in relation to PC (in PM and LM)

4. 5.4. Monopsony in the labor market The difference between monopsony and PC is the SL curve for the firm: before it was infinitely elastic; now it has (+) slope The SL of the monopsonist is equal to the market’s, for there is only one firm hiring To attract more L the monopsonist must increase W (“wage-setter”)  the firm will do that as it expands What is the hiring rule?  whenever MRPL > MWC But MWC should be defined  steeper than the SL In hiring more L the firm will have to rise W to everyone

5. 5.5. Minimum wage law A controversial and political issue 1938 in USA, covered 43% of occupations, today 90% approx. Fixed amount per hour ($)  continually eroding Goal: to what extent is it fulfilled? To keep a minimum for health and welfare for workers  “floor” for the “working-poor” BUT… the truth is that a small share of people lives in utter poverty; instead, it might affect “secondary earners” badly (e.g. youngsters, part-timers, first timers)

6. 5.5. Minimum wage law • In PC, who wins and who loses? • Example (regulated and non-regulated sectors) • Consequences: • Wmin will lower the L in regulated sector (scale ef.  labor costs go up)  in the long run L will fall even more (substitution ef.) • Unemployment in the regulated sector follows, albeit not necessarily: out of LF (study, Lh) or work in the non-regulated sector • Workers move to non-regulated sector, leading to a fall of W and an increase of L there • “Winners” are those who keep L earning more in reg. sector (Wmin) • “Losers” are: laid-off workers from regulated sector, consumers, firms making less π, and those workers earning less in the non-regulated sector

7. 5.5. Minimum wage law Therefore, has the minimum wage law accomplished its goal? It will depend on the elasticity of the DL If EDL < 1 (inelastic) then the drop (%) in L will be smaller than the increase (%) of W If EDL > 1 (elastic) then the drop (%) in L will be bigger than the increase (%) of W However, there will always be workers that might lose their jobs  non-regulated sector, W go down (if flexible, if not  unemployment) Other cases: monopsony, efficiency wages

8. 5.6. Union strength • The idea behind unions is that workers sell their labor services collectively • They can raise W in 3 ways: • Increasing DL • Limiting SL • Bargaining W > We • For 1: i) increase Dc, ii) increase py, iii) Δpi, iv) increase m • For 2: i’) limiting n, ii’) ΔYNL • For 3: credible threats (restrict SL, strikes)

9. 5.6. Union strength A simple model can show some things about unionized LM: Long and “chronic” waiting list “Safe” contracts Lower EDL: only in short run  impossible in long run With foreign competition and from other sectors, the sector might suffer (p rises) The DL tends to shift to the right with t, so the result of this “interference” is a lowering of the rate of growth of job opportunities

10. 5.7. Adjustment dynamics • So far, the changes in DL were accompanied by immediate changes in SL  equilibrium achieved instantly • But in reality it might take longer  dynamics • “Spider web model” • Example: DL up  W up  attracts L  W falls  L falls • the cycle repeats itself • Also: 1) another shock of DL “in the way” (a new spider web), 2) the elasticities can bring about a non-stable solution, a situation oscillating between excesses y shortages

11. 5.8. Types of unemployment • Employment rate (%) = 100*employment/EAP • Unemployment rate (%) = 100*unemployment/LF • Natural level of employment consistent with certain output and with a natural rate of unemployment (NRU-NAIRU) • Types of unemployment: • Frictional: the LM never clears completely  frictions due to i) search unemployment or ii) wait unemployment • Structural: part of the NRU. It is like the frictional type but long-lived; there is a severe mismatch between DL and SL • Deficient-Demand (Keynesian): recessions and depressions that cause a “deficiency” in aggregate demand  lay-offs • Classical: when W > We  intervention (Wmin, unions, etc.) • Only 1 is voluntary, 2-4 involuntary