ECON

1. Micro ECON McEachern 2008-2009 12 CHAPTER Labor Markets and Labor Unions Designed by Amy McGuire, B-books, Ltd.

2. Labor Supply • Individual labor supply • Willing and able • Many possible uses • Over the realistic range of wages • Depends on • Abilities • Tastes • Opportunity cost LO1

3. Labor Supply and Utility Maximization • Utility • Goods and services • Leisure • Normal good • Diminishing marginal utility • Three uses of time • Market work • Nonmarket work • Leisure LO1

4. Labor Supply and Utility Maximization • 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 LO1

5. Wages and Individual Labor Supply • 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 LO1

6. Exhibit 1 LO1 Individual Labor Supply Curve for Unskilled Work S $14 13 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 12 11 10 9 8 7 Wage rate per hour 0 20 30 40 48 55 60 Hours of labor per week

7. Wages and Individual Labor Supply • 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 LO1

8. Nonwage Determinants of Labor Supply • 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 LO1

9. Exhibit 2 LO2 Deriving the Market Labor Supply Curve from Individual Labor Supply Curves (b) Individual B (c) Individual C (d) Market supply (a) Individual A S SC Wage rate SB SA 0 Labor 0 Labor 0 Labor 0 Labor

10. Why Wages Differ • Differences in • Training, Education, Age • Experience • Ability • Risk • Geographic differences • Discrimination • Union membership LO2

11. Exhibit 3 LO2 Average Hourly Wage by Occupation, U.S, May 2006

12. Exhibit 4 LO2 Age, Education, and Pay

13. Key individuals Critical to success Richly rewarded Generate a high MRP Initially Entertainment and pro sports Now Management, law, banking, finance, academia Winner-Take-All Labor Markets LO2 Case Study

14. Unions and Collective Bargaining • 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 LO3

15. Collective Bargaining, Mediation, Arbitration • 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 LO3

16. Union Wages and Employment • 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 LO4

17. Inclusive, or Industrial Unions • Union: • Negotiate industry-wide wages for each class of labor • Higher wage (wage floor) • Lower employment • Non-union sector • Increased supply • Lower wages LO4

18. Exhibit 5 LO4 Effects of Labor Union’s Wage Floor (b) Firm (a) Industry S a W’ W’ s s’ W W Wage rate Wage rate d=Marginal revenue product D Labor per period E’’ 0 E’ E Labor per period 0 e e’ 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’.

19. Exhibit 6 LO4 Median Weekly Earning are Higher for Union Than Nonunion Workers

20. Exclusive, or Craft Unions • 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 LO4

21. Increasing Demand of Union Labor • 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 LO4

22. Exhibit 7 LO4 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’’.

23. Recent Trends in Union Membership • 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 LO4

24. Exhibit 8 LO4 Unionization Rates by Age and Gender

25. Two longshoremen unions 100,000 members Salary: $120,000/year Technology Skilled crane workers Computer tracking Dock Unions Thrive LO4 Case Study