Microeconomics Extra Credit Ryan Saab

Airline workers chafe at cuts to pay and benefits, struggle to adjust long-held expectations. Source: The America's Intelligence Wire, March 1, 2005

“The airline industry battered by record fuel prices, low-cost competition, the lingering effects of the Sept. 11 attacks and other problems is squeezing workers long accustomed to generous union-negotiated pay, robust pensions and enviable job security.” “Most of those cuts have been directed at the labor costs that now account for nearly a third of airlines' operating costs.” “United baggage handlers, ramp workers and others shouldered an 11.5 percent pay cut in January, temporary until April and further negotiations. That is on top of an 18 percent cut two years ago.” What’s going on?

“At US Airways Group Inc., flight attendants agreed to pay cuts of about 9 percent late last year, their third cut in 2 1/2 years. The average US Airways flight attendant now makes about $34,000 a year, compared to a range of $45,000 to $52,000 a few years ago.” “When US Airways held a job fair this month outside Philadelphia to sign up new ramp workers, it was offering pay of $9.59 an hour.” What’s going on?

The Economics In this case, there was a decrease in demand for labor It is less profitable for the airlines to hire more workers Puts a downward pressure on wages Lowers the value of the marginal product of labor Gives a new equilibrium

Shift in Labor Demand

The Results Because there was a decrease in demand for labor, the wage equilibrium went down from about $15 to about $9. There was also a decrease in employment as a result of the decrease in the demand. There was a decrease in demand for labor in the airline industry because of lower profits, high competition, and high fuel costs.

Acknowledgments Principles of Microeconomics 3 rd edition. Gregory Mankiw InfoTrac Web: General BusinessFile ASAP. The America's Intelligence Wire Article is available upon request