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Economics: Principles, Applications, and Tools
O’Sullivan, Sheffrin, Perez
6/e.
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Economics: Principles, Applications, and Tools
O’Sullivan, Sheffrin, Perez
6/e.
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O’Sullivan, Sheffrin, Perez
Economics: Principles, Applications, and Tools
Unions, Monopsony, and
Imperfect Information
Why do janitors employed
by law firms earn twice as
much as janitors employed
by hotels?
PREPARED BY
FERNANDO QUIJANO, YVONN QUIJANO,
AND XIAO XUAN XU
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C H A P T E R 33
Unions, Monopsony, and
Imperfect Information
APPLYING THE CONCEPTS
1
Is there a trade-off between union wages and the number of
union jobs?
Truckers Trade Off Wages and Jobs
2
How does competition in the product market affect union wages?
Competition Reduces Trucker Wages
3
Do firms face a positively sloped labor-supply curve?
Pubs and the Labor-Supply Curve
4
When is it profitable to pay an above-market wage?
Why do Law Firms Pay More for Janitors and Secretaries?
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C H A P T E R 33
Unions, Monopsony, and
Imperfect Information
33.1
LABOR UNIONS
● labor union
A group of workers organized to increase job security,
improve working conditions, and increase wages and
fringe benefits.
● craft union
A labor organization that includes workers from a
particular occupation, for example, plumbers, bakers,
or electricians.
● industrial union
A labor organization that includes all types of workers
from a single industry, for example, steelworkers or
autoworkers.
● collective bargaining
Negotiations between a union and a firm over wages,
fringe benefits, job security, and working conditions.
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33.1
LABOR UNIONS
A Brief History of Labor Unions in the United States
 FIGURE 33.1
Unionization Rates in the United States and Other Countries
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C H A P T E R 33
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33.1
LABOR UNIONS
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.
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33.1
LABOR UNIONS
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-towork laws.
● right-to-work laws
Laws that prohibit union shops, where
union membership is required as a
condition of employment.
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33.1
LABOR UNIONS
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.
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33.1
LABOR UNIONS
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.
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1
TRUCKERS TRADE OFF WAGES AND JOBS
APPLYING THE CONCEPTS #1: Is there a trade-off between union
wages and the number of union jobs?
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APPLICATION
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C H A P T E R 33
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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 33.2
Deregulation 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).
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33.1
LABOR UNIONS
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.
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33.1
LABOR UNIONS
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.
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2
COMPETITION REDUCES TRUCKER WAGES
APPLYING THE CONCEPTS #2: How does competition in the product
market affect union wages?
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APPLICATION
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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.
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C H A P T E R 33
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33.2
MONOPSONY POWER
● monopsony
A market in which there is a single buyer of an input.
Marginal Labor Cost Exceeds the Wage
►FIGURE 33.3
The 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.
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33.2
MONOPSONY POWER
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.
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33.2
MONOPSONY POWER
Picking a Quantity of Labor and a Wage
MARGINAL PRINCIPLE
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
►FIGURE 33.4
The 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.
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marginal cost.
t
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33.2
MONOPSONY POWER
Monopsony versus Perfect Competition
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33.2
MONOPSONY POWER
Monopsony and a Minimum Wage
►FIGURE 33.5
A Minimum Wage Increases
Employment by a Monopsonist
With a minimum wage, the laborsupply 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.
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33.2
MONOPSONY POWER
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.
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3
PUBS AND THE LABOR-SUPPLY CURVE
APPLYING THE CONCEPTS #3: Do firms face a positively
sloped labor-supply curve?
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APPLICATION
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C H A P T E R 33
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Imperfect Information
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.
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33.3
IMPERFECT INFORMATION AND
EFFICIENCY WAGES
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.
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33.3
IMPERFECT INFORMATION AND
EFFICIENCY WAGES
The Mixed Market for Labor
In this market with asymmetric information, there is actually a second
equilibrium wage, equal to $60.
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33.3
IMPERFECT INFORMATION AND
EFFICIENCY WAGES
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.
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APPLICATION
4
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.
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KEY TERMS
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C H A P T E R 33
Unions, Monopsony, and
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collective bargaining
labor union
craft union
marginal labor cost
featherbedding
monopsony
industrial union
paying efficiency wages
right-to-work laws
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