McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia Appendix to Chapter 14: Market Power in the Labour Market

A14-2 McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia Market Power in the Labour Market  Just as a monopoly firm can restrict output and raise price, so can a monopoly owner of a resource restrict supply and raise price.  The main source of market power in labour markets is a labour union, which is an organised group of workers that aims to increase wages and influence other job conditions.

A14-3 McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia Market Power in the Labour Market  A Union in a Competitive Labour Market  Unions try to restrict the supply for union labour and raise the wage rate.  But this action also decreases the quantity of labour demanded.

A14-4 McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia DcDc A Union in a Competitive Market DuDu SuSu ScSc Labour (hours per day) Wage rate (dollars per hour) Figure A14-1

A14-5 McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia Market Power in the Labour Market  How Unions Try to Change the Demand for Labour  A union tries to make the demand for union labour inelastic and to increase its demand  This lowers the employment lost from a higher wage rate  Unions try to increase the demand for union labour by making them more productive through training schemes, apprenticeships and other on-the-job training activities.  Unions action increase the supply of labour in non-union markets.

A14-6 McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia Monopsony  A monopsony is a market with a single buyer.  The employer determines the wage rate and pays the lowest wage at which it can attract the labour it plans to employ  A monopsony makes a bigger profit than a group of firms that compete with each other for their labour  The ability of a monopsony to cut the wage rate and employment and make an economic profit depends on the elasticity of labour supply

A14-7 McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia MRP = D A Monopsony Labour Market MCL S Labour (hours per day) Wage rate (dollars per hour) Competitive equilibrium Monopsony equilibrium Figure A14-2

A14-8 McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia Monopsony  Monopsony and a Union  Sometimes both the firm and the employees have market power when a monopsony encounters a labour union, a situation called a bilateral monopoly.  In bilateral monopoly bargaining determine the wage rate

A14-9 McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia Monopsony  Monopsony and the Minimum Wage  The imposition of a minimum wage may actually increase the level of labour hired by a monopsony.  Figure A14.3 shows why.

A14-10 McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia Minimum wage MRP Minimum Wage Law in Monopsony MCL S Labour (hours per day) Wage rate (dollars per hour) Increase in employment Figure A14-3

A14-11 McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia END CHAPTER 14 Appendix