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Monopoly Unions

Monopoly Unions. Here we look at a labor union as a single seller of labor. Remember

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Monopoly Unions

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  1. Monopoly Unions Here we look at a labor union as a single seller of labor.

  2. Remember firms demand labor to help in making output the firm would like to sell and maximize profit. If the firm sells output in a competitive market then the value of the marginal product equals the price taken by the firm for output times the marginal product of each unit of labor. The value of the marginal product is the basis for the demand for labor by a firm. dollars D = VMP employment

  3. The union Here we will assume the union wants to maximize utility and utility depends on wages and employment. Unions would always prefer more of both, so indifference curves are of the usual shape we saw before. In the absence of a union the wage would be determined in the market and say it would be wc in the graph. There is no reason dollars to believe the wage would maximize utility for the union. Here the union would prefer wu. wu wc D = VMP employment Eu Ec

  4. On the previous slide we could think of the firm demand curve as constraining the union. The union would pick the wage it wants for its workers and then the firm would read off its demand curve how many units of labor it desired. The result with the union would be higher wages and lower employment. Now, the whole economy is not unionized so we want to explore the impact of unionization of the economy. On the next slide I will show two general labor markets, one unionized and one not unionized. But in the absence of unions we would expect the wage to be the same in both graphs due to the law of one wage. Call this the competitive wage wc. We will also assume supply curves are vertical lines and the labor employed in both markets will stay the same in total.

  5. s2 s1 A B C D E wu a b c f d e wc wN D2 D1 h1’ h1 h2 h2 + (h1 - h1’) nonunion Union

  6. From the previous slide, in the graph on the left we see the wage start at wc with employment h1 before unionization. After the union picks the wage wu, higher than wc, the firms take less labor and employment falls by h1 - h1’. The labor dislodged from the union sector moves to the non-union sector and lowers the wage there to wn. Employment does rise by h1 - h1’, the amount lost in the unionized market. Remember that the area under the demand curve out to a level of labor employed equals national income because labor is needed to make output and the area represents all the values of the marginal products added up.

  7. before union after union after - before value of output A+B+C+D+E A+B+D -C-E in union value of output a+b+d a+b+c+d+e +c+e in non-union So, in the union area the value of output is lost and in the non-union the value of output rises. The net change is -C-E+c+e = -C-E+c+e+f-f by chicanery :) and since E = c+e+f, check it out, same base and same height, the net change is -C-f. The net change in the value of output is thus negative. Let’s next find out the value of lost output.

  8. Value of lost output C = .5(wu-wc)(h1-h1’) f = .5(wc-wN)(h1-h1’) Now -C-f = -.5(wu-wc)(h1-h1’)- .5(wc-wN)(h1-h1’). Digress -abc-adc = -a(b+d)c. Thusly -C-f = -.5[wu-wc+wc-wN](h1-h1’) = -.5(wu -wN)(h1-h1’) SO, the value of the lost output can be found by the difference in wages and the labor displaced by the union. This could be called the deadweight loss due to unions.

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